Person A owns a property. Let's say it's worth £1 million. Person B also lives there.

The property would benefit from some expansion, and this could add some value to the property.

Person A doesn't have the capital, so Person B agrees to pay for the improvements (cost very vague at this point), in exchange for a stake in the property. At this point, without knowing how much the work will cost or how much the property value will increase, it would seem impossible to determine what stake Person A should get.

The work ends up costing £200k, and the property goes up in value by £400k as a result of the investment.

What is a fair share of the property for person A to give to Person B?

-edit 2- If the numbers are known in advance, then they can agree on a percentage (say 20%). But what if neither Person knows ahead of time how much the investment will be?

  • Is either person A or person B living in the property? Is either person spending money or time to maintain and repair it? – Grade 'Eh' Bacon Jul 31 '17 at 15:11
  • Also - get these things figured out in writing before you pool your money with someone. To do otherwise often spells disaster, and breaks family/friend bonds, no matter how strong they were previously. – Grade 'Eh' Bacon Jul 31 '17 at 15:11
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    Seems like the numbers should be known in advance, so that edit2 doesn't make any sense. You have enough money that you don't care about the odd 100k pounds? – Joe Jul 31 '17 at 15:26
  • Ugg, this now sounds more opinion based than it did before. You should rephrase the question to not ask what should you be doing in this specific case, because it's really just opinion. Ask how to come up with an equitable result, perhaps, that's not opinion based. – Joe Jul 31 '17 at 16:00
  • If I were making this investment, I'd want my returns prioritized up until I recouped cost of improvements, because I'm taking on the bulk of the risk. After that, how the excess was divided would be up for debate, if I were paying rent, I'd want a more even split of the return on the improvements, if I was living there rent free, I'd understand getting a smaller portion of the return, but make it too low and I'd just take my money elsewhere. – Hart CO Jul 31 '17 at 17:03

They should split the profits based on whatever they agreed to beforehand. And yes, they should absolutely have agreed on something beforehand. No matter how vague things are, there should be an agreement defining what B is expected to put in and what B is expected to get out of it. That agreement could be a percentage, it could be "you can get your investment back plus the first X% of value increase", whatever; or it could be that B gets nothing back. It all depends on why A and B are making the agreement and what the incentives are on both sides.

If they for some reason didn't, then I imagine a judge if asked in a court of equity would probably give 16% (or specifically, 1/6th) of the profit to person B based on the proportion of initial value contributed. But it's entirely possible that if there are no documents whatsoever, a judge in a court of law would give 0 to person B. You ask for "fair", so I suppose 16% seems correct.

But really any time entering into an arrangement like this, you should always agree ahead of time. Person B might be critical to the investment, so critical that person A might be willing to split 50% of the profit. Especially if person A was living in the property, and so had more benefit from it than the investor did. Who knows; that's why you agree ahead of time, so it's clear.

On the other hand if both Person A and Person B live in the property, then perhaps Person B is entitled to less than 16%, because they got equal benefit from living there (50%). If it was a decade or something, that could be a huge benefit - perhaps more valuable than their 16%. 20k a year in rent for half of a $1.2M property sounds eminently reasonable, after all. And if the improvements specifically benefited Person B - say they were to add a second bathroom and a second patio deck on Person B's side of the house - then again Person B is gaining benefit above and beyond the increase-in-value.

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    I'm not sure 20% is the "obvious" share. Person B hasn't bought 200k's worth of property; Person A with £1M (or property) has joined with Person B with £200k (in cash/services) so should "start" with 5/6th and 1/6th. This joint £1.2M object is then worth £1.4M but would still be split 5/6th and 1/6th. – TripeHound Jul 31 '17 at 15:35
  • @TripeHound The original question seemed like it was 200+800; the edit has modified this to be otherwise. I will adjust the answer in a bit. – Joe Jul 31 '17 at 15:55
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    Interesting, 20% vs 16% depends on semantics. On a 1M valuation, A could sell 20% ownership to B for 200K. A then spends the 200K in upgrades and the new valuation is 1.4M. Or, as @TripeHound suggested, B "joins" his 200K with A's 1M to get only 1/6 instead of 1/5. Both would be valid and fair transactions depending on the contract. – TTT Jul 31 '17 at 16:33
  • @TTT I'd say if A sold 1/5th and then A spends 200k on improvements then B effectively gets the gains for nothing. – TripeHound Jul 31 '17 at 16:37
  • @TripeHound 200k capital investment is nothing? It's cash Person A doesn't have. – Hart CO Jul 31 '17 at 16:40

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