Q: I inherited 20% of a home with a mortgage. The person who owns 80% wants to keep the house. How do we divide the property? Should I get 20% of the appraised value or 20% of the equity of a house? There are enough other assets in the estate to pay me either way.
A: Thank you for the question. You didn’t give us much detail or background information, but we’ll make a few assumptions so that you’ll understand at least the basic options and opportunities.
Let’s start by saying that it would be quite unfair for you to get 20% of the appraised value of the home unless there was no mortgage on the home. Even then, the whole process can be more complicated than simply dividing the total value of the property between the two heirs.
To illustrate, imagine the property is worth $100,000 and the mortgage balance is $100,000. Technically, the home has no value and if this were the situation, you and the other owner sold the home, you both would have to put money into the sale to get rid of the home.
Why? Well, selling a home costs money. There are brokerage commissions, transfer fees, closing costs and the various other costs that come into play. Let’s say those costs are $10,000.
If you sold the property for $100,000, and there was a $100,000 mortgage to pay off, you’d have to pay 20% of those costs and the other heir would pay 80%, or the estate would cover all of the costs, if it has the assets.
Now, in an opposite scenario, if the home has no mortgage and you sold the home for the same $100,000, the two of you would split the proceeds from the sale according to your percentage interests. If the costs of sale were $10,000, the net proceeds from the sale would come to $90,000 of which you would get $18,000 and the other owner would get $72,000.
Now in your particular situation, the home has a mortgage and the other owner does not want to sell the home. Well, you now have to agree on what the home is worth and how you’re going to come to that value. Some people simply agree on a value and use that. Others may need real estate agents to come see the home and give them an analysis of what they think the home would be worth if it was sold in the current marketplace. Other heirs may want to hire a professional property appraiser to come in and provide their determination of the value.
Whichever method of valuation you choose, you and your co-owner will have to agree on a value for the home. Once you agree, you’ll then have to determine the balance owed on the mortgage. Lastly, you’ll have to determine what costs to deduct from the “sale” of your 20% ownership of the home.
Let’s say the value of the property is $100,000, and the balance of the mortgage is $50,000. You should figure out what the closing costs would actually be on the property. Once you have that information, you can do the math and then see if your co-owner wants to buy you out of the property. Here’s a simple equation: Use the value of the home ($100,000), less the mortgage ($50,000), less the closing costs (10,000). In our example, that leaves $40,000 from the sale of the home. Your share of the proceeds would come out to $8,000.
Of course, we know that there are other factors that go into figuring out what the property is worth and how you might be able to get more out of the property. For example, if you choose to keep a 20% ownership share of the property and the co-owner puts money into the property for repairs, maintenance fees or other items, your share of these expenses should come off of the amount that is paid to you in the end.
Our suggestion is to ascertain a rough estimate of the value of the property and how much it would cost to sell, and then allow the estate to simply pay you that value. You may find that the estate is willing to eliminate some of those expenses that would have to be subtracted from your share to save the trouble of doing the work, and you’ll net more than you would otherwise.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)