In a house with 3 shared ownership, one moves out and the other assumes payment. How do we determine a fair payment amount to the person that moved out? The 2 were a married couple who put down 50% of down payment and the third party put the other 50% down payment. In a matter of 2 years the third party moves out. The house is being sold for $150k more than what the initial cost of the house was. Is there some type of formula to figure out a fair split?

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    During the 2 years were mortgage payments and other costs split evenly, or did the married couple pay 2/3 of those? – Hart CO May 15 '17 at 16:46
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    If the married couple paid half and the mortgage payments were split in half then the married couple will proabably be treated as one party, and the profits should be split in half. Are all three properties on the deed? The split will probably need to be decided in order to sell the house. – D Stanley May 15 '17 at 17:15
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    Unfortunately, fair is whatever everyone involved agrees is fair. You all probably should have made an agreement up front, but definitely make an agreement before you sell. People's opinion of how fair their position is typically changes over time, especially when/if actual money differs from expected money in events like a potential sale. – quid May 15 '17 at 20:07
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    Unfortunately, without more information and without an agreement no one on the internet can work out appropriate calculations for you. – Victor May 15 '17 at 22:21
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    The OP is asking for a formula to figure out a fair spit but has not provided enough information to do so. It is like saying here is your formula: a + b + c + d + ? x #, where a and b are known but c and d are not known and ? and # - well we don't even know whether to include them or not. – Victor May 16 '17 at 2:14

Without any other sort of agreement in place, they own the amount of equity that they did when they first purchased the house, according to how much of the downpayment they spent. Changing the amount paid on the mortgage changes nothing, the lender is only concerned that it gets paid, but doesn't care who pays it.

If all parties agree it can be fair to make adjustments in equity based on the amount paid towards the mortgage, but that should be agreed on in advance. The fairest agreement would still end up being approximately 50% for the couple and 50% for the third party, because even though the couple was paying the whole mortgage for several years, that is effectively equivalent to them paying half the mortgage and the other half in rent to the 3rd party (who then forwards that towards the mortgage). If it was a standard mortgage and the payments were approximately equal to what the house could rent for, the 3rd party getting 50% is as fair as it gets.

If the house could be expected to rent for significantly more than the mortgage payment in its market (on average throughout the years the 3rd party didn't live there) it would be fair for the 3rd party to receive a bit more than 50% since a little more than half that mortgage payment can be thought of as having been forwarded through the 3rd party.

If the house could only be expected to rent for significantly less than the mortgage payment (again, on average throughout the years the 3rd party didn't live there) it would be fair for the 3rd party to receive a bit less than 50%.

Either way, 50% for the couple, 50% for the 3rd party, is pretty close to a fair situation. Remember though, what's fair doesn't matter, it's what was agreed upon that matters (see paragraph 1).

  • that is effectively equivalent to them paying half the mortgage and the other half in rent to the 3rd party (who then forwards that towards the mortgage) Interesting POV – RonJohn May 16 '17 at 3:53
  • Regarding the first paragraph, wouldn't the lender be equally unconcerned (and uninvolved) in the disposition of any gain after the loan is paid off? – chepner May 16 '17 at 12:09
  • @chepner Yes, obviously. That's none of the lender's business. – Paul May 16 '17 at 14:46
  • This answer is the most correct so I don't know why it has been downvoted. In fact if there is no agreement then by law each party is owed whatever percentage ownership is on the title deed. If this is 50% then each party is owed 50% of the proceeds at sale. – Victor May 16 '17 at 22:58
  • In fact, in Australia, tax law specifies that you will pay tax on any proceeds (income or capital gains) based on the ownership percentage in the title deed, no matter who actually makes the payment. This might be similar in other countries? – Victor May 16 '17 at 23:05

The couple payed 50% of the mortgage for 25% of the time of ownership, and 100% of the mortgage for 75% of the time. Thus, morally, they should get 50% * 25% + 100% * 75% = 87.5% of the profit.

But that might not be what the law says.

EDIT: I'd be interested to know why it was down-voted.

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    @RonJohn, for the 6 years one party paid 100% of the mortgage their equity allocation should not be 100% because it ignores the loss of utility of the property of the other owner. As an example, the non-resident, non-paying owner should get maybe 10% of the equity allocation over that time period for consideration of their loss of utility of the property. The issue here is property has more costs and expenses than payment of the loan and we're not privy to any agreements or any repairs. A simple mortgage payment ratio calculation split is too simplified. – quid May 15 '17 at 22:34
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    I don't see a lack of utility when there's no additional expense. Still benefiting from increased equity, just at a decreased rate. – Hart CO May 15 '17 at 22:40
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    "so you don't think the 3rd party was due any rent". Correct, because the 3rd party didn't do anything. – RonJohn May 15 '17 at 22:43
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    @RonJohn - yes they did, they paid a 50% deposit and paid 50% of expenses whilst living there for 2 years - so if not living there they are due compensation (rent) for allowing someone else to live there. As I said without an agreement you cannot make any calculation and the one you have made is very simplistic and incorrect. – Victor May 15 '17 at 22:50
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    @RonJohn, your answer indicates that a 50% owner should receive no consideration for their ownership, over the 6 years they were not residents. Victor and I disagree with you. It could very well be that everyone involved is comfortable with the non-resident owner receiving $0 consideration for their ownership of the home during the time they did not contribute to the mortgage, but I don't think that is defacto "fair." I don't think this is a fair rate of equity dilution. – quid May 15 '17 at 23:20

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