The typical way one acquires one third of a house or one quarter of a 5 acre lot is by the death of a parent. If the siblings get along well, there is, usually, a simple agreement to sell the property and split the sale proceeds. We all know that life is not always that simple and, over many years, I have been involved with many situations where one of the siblings was rebuffed in their desire to have the property sold and “cash out”. Sometimes with fighting siblings, one or two of the stronger ones will emotionally overpower the other. “No, we are not selling and you only own 1/3 anyway …”
The same situation sometimes develops with the death of one of the partners in a real estate venture: the surviving spouse needs the money and the partner never got along with the spouse in the first place. Sometimes the stronger party(ies) will offer a token of what the share is worth … “Take it or not; we are not selling the property.”
This is NOT a hopeless situation and owning less than 50% of real estate is NOT an issue. ANY owner can, if necessary, FORCE the other owner/s to sell the property. There is a fairly simple lawsuit called an “action for partition” and the court will sell the property if the partners can’t agree amongst themselves. Yes, there are attorneys and a lawsuit involved and it is a lose/lose situation because the court ordered sale will usually NET the owners far less than a proper marketing in the first place
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What Are the Options?
There are two other options. A fractional interest in real estate can be sold without the partners’ permission if the property is held in the names of the individuals and not an LLC or Corporation. Over the years, we have purchased fractional interests and many interesting stories resulted.
The other option, that few people are aware of, is that a person can borrow money secured by the fractional interest WITHOUT the permission of the other owner/s. This again assumes that the title is held in the individual names.
The decision to sell or borrow against a fractional interest is basically a simple math problem. The fractional interest is worth significantly less than the actual owner’s percentage of market value. Let’s assume the property has a market value of $2 million, has no mortgages, and is owned by two people. It is easy to “assume” that the half-interest is worth $1 million – not so fast.
To start with, the one-half interest is not 1 million because of the selling costs of the property. For simplicity’s sake, let’s assume the realtor fees and closing costs equal 7% of 2 million (i.e. $140,000), therefore the 50% equity is $930,000. If the 50% owner really NEEDS to cash out, a fractional-interest buyer would probably pay anywhere between $825,000 through $875,000 for that fractional interest. On the other hand, if the 50% owner only needed $200,000 or $300,000, it would make much more sense to borrow against the fractional ownership in lieu of suffering a discount on the entire amount. The actual costs to borrow the $200,000-300,000 will depend on several variables including the required length of the loan.
The V.I.P. Factor Table
In this day and age, figuring the monthly payment on a real estate loan is ridiculously easy IF you have a $40 financial calculator or a smartphone. HOWEVER, many of my customers/ readers are ancient, like me, and the computer age may not be their forte.
In the mid 70s, real estate brokers used a Realty Blue Book and it took approximately 5 minutes, with several calculations, to figure out the monthly payment of a $187,000, 30 year loan at 9% interest. For those of you who remember those days, Texas Instruments had just come out with a small calculator that could ONLY add, subtract, multiply and divide. It cost $250. This factor table enabled me to be the one realtor in a hundred who could give an accurate monthly payment with ONE simple multiplication. At that time, I carried three or four factors on the inside of my wallet. The table below is extremely easy to use and covers common mortgage loan durations with many number of interest rates.