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In the event of selling the property, how would the proceeds be divided when one person covers the down payment, and the other is responsible for the mortgage payments? Thank you.

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    Some factors to consider: how much down payment (10% of the property cost, 90%) Term of the mortgage? How much of the loan is paid off? How competitive was the mortgage rate? (Was it low because one had a good score, but not the other?). If this is an after the fact or a question about a future plan? @NatySparks, please provide more info. Oct 16, 2023 at 17:32
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    Was the down payment a gift, as is often done and allowed under FHA? Is it actually co-owned, or is a parent insisting to get his money back?
    – user26460
    Oct 16, 2023 at 23:27
  • Based solely on the wording of your Post, why would the down-payment share not shrink in proportion as the regular payments grew? Oct 16, 2023 at 23:45
  • The down payment constitutes 26% of the total property acquisition cost. The remaining party won't be able to contribute to the down payment due to financial constraints. Consequently, they intend to cover the entire mortgage payments. The mortgage term is 30 years with a 5% interest rate. The property is anticipated to be sold approximately 30 months after its acquisition. The down payment is not a gift. @chux-ReinstateMonica
    – NatySparks
    Oct 17, 2023 at 1:41
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    are you trying to split it evenly? because then you can just calculate the present value of what each party put in, pay each their respective amounts, pay the remainder of the loan and then give each party half of the remaining amount.
    – Aequitas
    Oct 17, 2023 at 4:21

5 Answers 5

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In the event of selling the property, how would the proceeds be divided when one person covers the down payment, and the other is responsible for the mortgage payments?

This is just one of the issues that need to be discussed, resolved and documented in writing before making the investment. Putting it in writing lets both parties see the numbers. Resolving it before any money is at risk will reduce a disagreement later.

Other issues that need to be resolved in advance: special assessments, repairs, upgrades. What happens if somebody wants out earlier than the other?

There is no solution that is right, but there are solutions that are numbers based. The complexity comes from the additional tasks, assuming this is a income producing property: time to search for the property; time to find a tenant; and time to handle the tenant issues.

Note: even if the other stuff is ignored the percentage split will change over the lifetime the property is co-owned. The split if it is sold 6 months after purchase shouldn't be the same as the split decades later.

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    The set of available options is a very long one. You really have to decide what factors matter to you. You could simply split it in the ratio of money invested by each person. Or you can allow for the "opportunity cost" if not investing the money elsewhere, in which case $100 in the first month is worth more than $10 for each if the next 10 months; you need to agree upon how much more is reasonable. And so on. Seriously, sit down with your partner, talk this through, and decide what you two consider the best formula, and get the agreement written down as a legal contract.
    – keshlam
    Oct 16, 2023 at 22:56
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    @keshlam: There's a natural choice here for the opportunity costs: the 5% interest rate mentioned here in the comments. (0.4%/month).
    – MSalters
    Oct 17, 2023 at 9:16
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    Depending on where you are and how property transactions are handled in your jurisdiction, it may be worth discussing these issues with your purchasing agent (for example if you are using a lawyer), as they may have additional expertise in the kinds of things that will come up, and how to draft a document that covers everything. Oct 17, 2023 at 12:26
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    Why would the percentage split necessarily change over time?
    – ibonyun
    Oct 17, 2023 at 23:05
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    @ibonyun Say we want to split based on nominal value of dollars put in. You put in $10k up front; I put in $1k/month. Initially, the split is 100% you. After a month, it's 10:1 you:me. after 10 months, it's 50/50.
    – fectin
    Oct 18, 2023 at 1:20
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There is no "right way". It's whatever the two of you agree is fair, based on how much money each of you has put into the purchase.

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    While you may be intending "how much money each of you has put into the purchase" as a placeholder to mean the net total value of each party's contributions and benefits to/from the property, there's a huge amount of additional things which should reasonably be accounted for than just what most people would consider as part of "how much money each of you has put into the purchase". In addition to all the other potential monetary contributions and benefits, there are also non-monetary costs and benefits which are reasonable to account for (generally by assigning a monetary value to them).
    – Makyen
    Oct 16, 2023 at 16:03
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    @makyen: That's why I left it as "you have to negotiate this yourselves.". Preferably before any investment is made. And preferably in writing.
    – keshlam
    Oct 16, 2023 at 17:06
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Ideally this would be discussed before making the investment.

If it were me.

I would add up the total that each party has invested into the property.

Downpayment + the interest, stock gains, or some other value that takes into accouunt tha added value of money over time. vs monthly payments, totaled and including that same factor.

So you invested this years ago then Bob spend down payment + 10 years of bank interest..

and john spent monthly downpayments + interest calculated from when each mortgage payment was made, 120 payments + 120 adjustments for interest with the most valuable payment made the longest ago. Or if using an averaged return rate... take the averaged interest value (pretend the payments were made 10 years ago, but give 1/2 the interest).

After the total has been calculated, split the net profit based on the percentage share that you both have invested.

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I'll outline a few methods in mostly decreasing order of complexity.

Any of these can be "fair", and they only differ by a small amount in the conclusion.

Interest

You have a 30 year amortization 5% interest loan. That is a reasonably fair way to calculate time value of money here.

Down payments and monthly mortgage payments both change the remaining debt total in exactly the same way.

For each payment P that was M months ago, its current value is P * 1.05^(M/12) (or P * (1.05^(1/12))^M).

On the time scales you are dealing with, using 1.004 for 1.05^(1/12) may be simpler, giving you P * 1.004^M as the "current share value" of investing P dollars M months ago.

Now this is hard to deal with when there are dozens of monthly payments. Luckily there is a short cut.

If you have been paying mortgage payments for N months, and just made the Nth one, the present value is:

X * 1.004^0 + X * 1.004^1 + X * 1.004^2 + ... + X * 1.004^(N-2) + X * 1.004^(N-1)

we can simplify this to:

X * (sum(i from 0 to N-1) 1.004^i)

then using a famous (in the world of mortgages) trick:

X * ((1.004^N-1)/ (1.004-1))

or

250 * X * (1.004^N-1)

So if you sold it after 30 months, the monthly mortgage payments impact on the debt would be 31.81x the monthly payment ("average interest" including compounding would be 6% or so).

Meanwhile, the initial payment would be 1.05^2.5 = 1.130x its base value.

Simpler "Cheater" math

As you are planning on selling within a few years, we can use a linear approximation and get a reasonably good result. You'll note that the above 13% return is very close to 5% per year times 2.5 years.

Similarly, the 6% average interest on the monthly payments is about half that amount.

So you can get an answer within a few percent by simply doing:

Initial Investment times (100% + Yearly Interest * Number of Years)

for the down payment, and

Monthly Payment times Number of Months times (100% + (Yearly Interest * Number of Years/2))

This short cut - this linear approximation - undervalues the initial investment by less than 0.5%, and overvalues the monthly payments by 0.2%.

The longer the period of time, less accurate this cheater method becomes.

Keep it Simple

Just add up the amount invested. At the 30 month mark it overvalues (compared to the Interest method) the value of monthly payments by about 6%.

Present Value

Instead of using the Interest, we use some other discount factor for the time value of money. Maybe you use the fed prime rate, or the cost of borrowing unsecured debt, or anything else.

You can negotiate what is a fair rate. I simply used the Interest rate originally for a few reasons. It is what a bank (or other professional) judged the cost of loaning you money to be, and the bank is a disinterested 3rd party.

Also because if, if the mortgage allowed you to pay extra in a month (like many do), the Interest would actually describe the results on the total debt owed.

It isn't quite a slam dunk, because imagine if the value of the property soared. Someone who threw a bunch of money into the property after it soared would be getting a great deal, as they aren't taking nearly as much of a risk as someone who invested before it soared.

Similarly, if the person making the monthly payments defaults and you sell, the person who made the first investment doesn't get to choose to ramp down their investment. In a purely financial calculation, that person should seek to default and force a sale if the value of the property goes down, and if the value of the property goes up they should seek to put off selling - meanwhile, the down payment provider should seek to sell as soon as possible if the value of the property goes up to protect their share from being diluted.

Under this semi-adversarial model, we need a clear description of how the decision to sell the property will be made, and what actual consequences there are for default by the person making monthly payments if they fail to make the payments.

What I would do

Assuming I'm not that worried about adversarial strategies, I'd use my first option. I would also draft a contract about how selling the property in question is decided, and what happens upon default of the mortgage payments.

I'd take this plan to a lawyer I respected, and have their paralegals draft an agreement. In doing so it is likely they'll actually have a variation on how to price the investments that is legally common - and I'd probably end up using that, instead of the bespoke math based version I mentioned above, simply because other lawyers and judges and the like will be familiar with the common version.

This is an agreement about life-changing sums of money. In the event that relationships break down I would want firm legal grounding.

If this is a purely financial agreement with a stranger, I'd probably pass on the entire thing; this kind of bespoke finance is hard to get right.

If this is a mere friend or acquaintance, my rule is don't get involved in financial entanglements with friends unless you are willing to write off the money in question, or write off the friendship and go to court and still probably lose most of it.

If this is a partnership situation, then I'd be looking into local marriage (common law and not) laws. Buying a home with someone you cohabit with often works very differently than you would think.

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  • Thank you. The goal is to keep things as simple as possible. It’s a domestic partnership, neither party wishes marriage. Considering the property's value increases rather than decreases, my question is, should the party responsible for the mortgage receive a full reimbursement of the payments, including the property tax portion? I am uncertain about the allocation of mortgage payments to determine their ownership % as payments are made. Once I clarify this, I can calculate the percentage that the mortgage-paying party should receive from the property's increased value as well. @yakk
    – NatySparks
    Oct 19, 2023 at 3:25
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    @NatySparks If you don't pay property taxes, you lose the property. I'd treat property tax payments to keep the mortgage viable as having the same "share impact" as payments on principle or on interest. The downpayment person could choose to pay a share of property taxes or interest or whatever, and money is money is money; the monthly payments are the cost to keep the house. I will repeat that "common law marriage" and the house you live in can have very different rules than other assets and situations: you need to see a lawyer, as this is a many 100,000$ situation.
    – Yakk
    Oct 19, 2023 at 14:55
  • Understood,thank you again! @yakk
    – NatySparks
    Oct 19, 2023 at 20:50
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This should be agreed on before anyone puts any money into the property.

IMO the fair way to do it retroactively would be that, if the downpayment was x% of the purchase price of the house (disregarding the loan), then they should get x% of the sale price, and the rest should go to the person paying interest.

My logic is this:

Suppose you buy a 500k house, X pays 100k and Y pays 400k. Then you sell the house for 600k. It's not hard to see why X should get 120k (600*1/5) and Y should get 480k.

But what if Y had to get a loan for the 400k, and ends up paying a total 200k of interest. Since Y paid a total of 600k of the total 700k spent, shouldn't X get only 14k (100*1/7)? Well, money now is worth more than money later, so it's not fair to compare X paying 100k immediately to Y paying 800k over a number of years. However, clearly Y has already decided that paying 600k over several years is of equal value to paying 400k right away. Otherwise, they would not have agreed to the loan. Therefore, if a 600k loan is equivalent to a 400k lump payment, we can still use the same proportion as if they had both paid with a lump sum.

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