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June 10, 2002, Revised March 1, 2004
"I am involved in a domestic partner relationship and we are considering purchasing a home together. Her parents are
giving us the down payment. What things do we need to know when speaking to a
lawyer about the arrangement?"
Congratulations for dealing with this
question now. Most unmarried couples purchasing a house together do it blindly.
When they split, issues that should have been foreseen but weren�t may prevent
a clean and amicable separation.
My mailbox is clogged with letters about such
issues. In trying to answer them, I sometimes feel like Dear Abby instead of the
Mortgage Professor. Shifting the focus to prevention is a welcome change.
Here are the major issues to resolve with
your partner before you buy. Then see a lawyer.
Should Split Mean Sale? There is
much to be said for an agreement that the house must be sold if either partner
aborts the relationship. This avoids the thorny issues, discussed below, that
can arise when one partner stays with the house.
If a split leads to sale, the only issue is
how the proceeds are to be divided. Equal shares may or may not be equitable. In
your case, your partner is paying the down payment and deserves a larger share
of the proceeds. In other cases, one of the partners may be responsible for a
larger share of current expenses than the other.
One approach is to divide the net proceeds by
each partner�s contribution to the equity in the house when it is sold.
Suppose, for example, that the partners pay $100,000 for a house, take a
mortgage of $80,000, pay $20,000 down plus $3000 in settlement costs, and sell
it after 5 years when the loan balance is $74,000. Total contributions of the
partners to equity in the house at the time of sale consist of $23,000 in cash
at purchase, plus $6,000 in reducing the loan balance. If one partner
contributed 60% of the cash and paid 40% of the expenses, that partner�s share
of net proceeds would be [.6(23,000) + .4(6,000)]/ 29,000, or 56%.
In some cases, this rule would not be fair.
For example, one of the partners might unilaterally work on improving the house,
which would call for a higher share. The point is that the partners ought to
agree at the outset on the terms of the split. If they can�t agree, they
should reconsider whether they really want to cohabit.
When One Partner Stays: Most of
the problems I encounter arise when one of the partners remains in the house.
The terms of settlement are more complex than if the house is sold. There is no
sale price, so the partners must agree on an appraisal procedure and on who will
pay for it. They should also agree on whether a real estate sales commission
should be deducted from the valuation used in the settlement. If they wait until
the event, this is invariably contentious.
Another problem arises if the partner
remaining in the house doesn�t have the money to pay off the partner who is
leaving. The more equity they have in the house, the more cash the resident
partner needs to raise. A home equity loan is not possible unless both partners
become responsible, which is the last thing the departing partner wants.
Much the largest problem, however, is the
departing partner�s continuing responsibility for the first mortgage. Many
departing partners believe that they are off the hook because the partner
remaining in the house has agreed to assume full responsibility for the
mortgage. They (and evidently their lawyers) overlook the fact that the lender
was not a partner to their agreement. Departing partners who remain liable for
their mortgages often are unable to get new mortgages on their own.
Lenders have no incentive to remove one
partner from the note. Some can be induced to do it if the partner remaining
with the house has a perfect payment record and can document that they are
solely responsible for the payments. But in the best situation this takes time,
perhaps a year. If the lender refuses, the only way to get the departing partner
off the note is for the remaining partner to refinance in her own name.
If I were drafting an agreement for a loved
one, not knowing whether they were more likely to be the remaining or the
departing partner, it would grant the remaining partner 14 months to make the
settlement payment, and to remove the departing partner from the note.
Otherwise, the house must be sold and the mortgage paid off.
"I bought a house 5 years ago with a
buddy who split shortly thereafter, and I haven't heard from him since. I have
paid all the expenses, including the mortgage. Now, I would like to sell but I
can't without his signature. What can I do?"
According to Bob Bruss, this is a
common problem among co-owners who cannot agree if and when to sell. The answer,
he says, is a "partition lawsuit" where the owner who wants to sell
sues the one who doesn't. Bob says that unless the court finds some compelling
reason not to sell, which happens very seldom, it will order the sale and the
proceeds split between the co-owners.
Copyright Jack Guttentag 2004
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