When you buy a house with someone, you usually imagine you’ll remain on good terms for the duration. If you’re sharing a mortgage, chances are the person is your spouse or significant other, but in some cases, two buddies or relatives buy a home together. Whatever the situation, if the two of you have a falling out, one of you will want to exit the agreement at the same time you’re walking out of the house. You’ll have to sign some paperwork and go through some legal formalities, but buying out your co-owner’s share is much easier than buying a house.
TL;DR (Too Long; Didn't Read)
To buy out the rights of your home’s co-owner, you’ll need to refinance the mortgage and sign closing paperwork.
Buying Out a Co-Owner of a House
The first step in splitting up a home is deciding who stays and who goes. Ideally, this happens amicably, with one of you agreeing to walk away and the other wanting to stay. If you can’t come to that kind of agreement, though, you may find the best solution is to simply sell the property and split the proceeds. However, if your co-owner agrees to hand the house over to you, obviously he won’t want to remain on the property deed.
Buying out a co-owner is a watered-down version of the process you went through when you originally purchased the home together. If you’re going through a divorce, your attorneys will usually handle this for you. If you decide to sell the property, you’ll work with a real estate agent, and you’ll need to get your mortgage company to deal with the financial aspects. If the situation isn’t part of a divorce, though, you can go straight to your mortgage company to work out all the details. They’ll help you line up the professionals you need to legally separate your co-owner from your mortgage and property title.
Legal Reasons for a Buyout
Obviously, the biggest reason for a buyout is that without it, your co-owner will lose the money she put into the house during the course of living there. Whether she paid half the mortgage for those months and years or not, when you finally do sell the house, she won’t enjoy the benefits of that money as she would have if she’d stayed there for the duration. The protocol for such a split is for the remaining owner to buy out the new owner’s interest in the property to make up for that loss.
Buying out a joint owner of a house doesn’t just benefit her financially. She’ll also be protected legally. If she keeps her name on the mortgage and you stop paying, she’ll then be responsible for paying on a house in which she no longer lives. If her name remains on the deed, the house is still technically hers as well as yours, which means that when you try to sell it, you’ll need her to sign off on all that closing paperwork. In other words, if you’re taking over the house, it’s in the best interests of both of you to handle things now rather than run into issues down the line.
Determining the Home’s Value
Buying out jointly owned property isn’t just as simple as taking the other person’s name off the mortgage, unfortunately. When you choose to stay in the house you once owned together, technically your co-owner is selling the home to you just as he’d sell it to a third party if you weren’t involved. The process is speedier, though, as long as you stick with the same lender. You won’t have to go through all the hoops you went through when you first bought the house, since you’re presumably already established as a customer who pays your mortgage on time every month. You will, however, need to prove that you have the income and credit to qualify for the mortgage on your own, but refinancing may be able to reduce your monthly payments, especially if you have substantial equity in the house.
You’ll need to determine how much to pay your co-owner to buy out his share of the equity in the home. To do this, you can look at comps for the area, which is a real estate term for the recent sale amounts of similar properties nearby. You’ll then determine how much you would have made if you’d sold the house for that price, based on what you owe, and use that to negotiate with your co-owner. However, your co-owner may not be willing to agree to that amount. He has every right to ask for an appraisal to determine exactly what your home is worth and base negotiations on that amount. Make sure you request that they factor in the cost of any upgrades or repairs that would need to be made in order to put it on the market at that price.
Partition of Jointly Owned Property
In some cases, buying out a joint owner of a house becomes complicated. If you want to remain in the home and your co-owner wants to sell, your co-owner can sue for custody of your home, just as married couples petition for custody of a child. This is called requesting a partition of jointly owned property. In most cases, a partition will be granted as long as both parties have the documentation necessary to resolve any information being disputed by the other party. However, partitions can be handled differently from one jurisdiction to the other.
With a partition, the court splits the property between co-owners, assigning each person a value. You will then be forced to sell the property and split the proceeds. The court will consider any hardships such a sale will cause, but in most cases, the partition will be granted and a sale will be ordered. In this case, buying out jointly owned property won’t be an option.
Closing on Property Buyout
If your co-owner agrees to a real estate buyout agreement, your lender will walk you through the process. You’ll have a closing date where you’ll both sit down and sign papers. One of those papers is called a quitclaim deed, which essentially quits the claim on your co-owner’s deed and transfers the property from jointly owned to singly owned. A quitclaim deed takes the other person’s name off the home, leaving you as the single owner moving forward.
It’s important to note that a quitclaim deed does not remove the other person from the obligation of paying the mortgage. For that, the closing process will involve buying out a joint owner of a house, which usually means refinancing the loan and putting it in your name. This will close out the previous loan and make all future payments your responsibility. The majority of the paperwork at closing will be related to this loan, so the owner taking over the mortgage will have the most extensive closing process. The person leaving the mortgage will simply have to sign off on closing the mortgage and deal with paperwork relating to the quitclaim deed.
Pros and Cons of Co-Ownership
Although buying out jointly owned property can be time consuming, it protects both of you. If only one person has her name on the mortgage and deed, the person who isn’t named will be shortchanged if the relationship doesn’t work out. That person will have possibly put thousands of dollars into a mortgage only to find that the other party gets the full amount of any equity earned over that time. Co-ownership also means you’ll have two people paying on the mortgage each month, making it easy to meet income and credit score qualifications when you’re buying the home.
There are downsides to co-ownership, including the fact that the other party could fail to live up to her end of the agreement. Maybe she originally agreed to pay half the mortgage but loses her job soon after moving in. In that case, you’re saddled with the full amount while still co-owning the property. There’s also the fact that you’ll need to go through the real estate buyout agreement process if things don’t work out. It’s important to look at all factors before agreeing to share a home with someone.
- DivorceNet: Negotiating a House Buyout at Divorce
- Nolo: Who Gets the House When an Unmarried Couple Splits Up?
- FreeAdvice Legal: Partition of Jointly Owned Property
- Disinherited: Joint Property Owners Can Force Sale
- Bankrate: Divorce and Your Mortgage: Here’s What to Know
- MyMortgageInsider.com: Co-Owning a House with Friends, Relatives and Others: Facts You Absolutely Need to Know
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.