Profile picture for user0851701

My brother and I inherited our mother's house upon her death.

The house has been appraised at $300,000.00 and there is a mortgage of $150,000.00 with a bank.  I want the house and my brother wants me to buy him out.  How much do I have to pay him to buy him out of his half considering we are both responsible for the mortgage?
  • May 03 2013 - Hayward
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Answers (7)

Profile picture for Randall Ortiz

That's definitely between you and your brother and whatever the two of you are willing to agree upon.  I would think a fair agreement would be $75,000 for your brother.  If the house appraised at $300k and $150k is still owed, then there is only $150k in equity in the house. If you split that, then you would each get $75k. So you could take over the mortgage for $150k and give your brother an additional $75k. That sounds fair, once again, that's between the two of you.

  • May 05 2013
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Here is the way I would work through this situation...

First of all, let's start by acknowledging the obvious... you guys are brothers, and this is a big transaction. You want to KNOW that the numbers are correct, to try to mitigate as much as possible, any possibility for animosity into the future. So this is what I would do if I were you...

It all begins with the value of the home. You mentioned that it has been appraised at $300,000. But - pricing a home is part science and part art. Two other appraisers may come in at 290k & 285k. Then again, they might place the value at 315k & 325k. I would start by getting a total of 3 appraisals. Some people may think that is overkill. But again you are dealing with family, and for this transaction to be as objectively FAIR as possible - the price HAS to be as accurate as possible.

Before getting the extra 2 appraisals, I would have a discussion with my brother and establish a threshold for eliminating an appraisal that my be WAY out of whack, which sometimes happens these days. For example, you might say that if one appraisal is more than 5% off from the other two, you will discard it. In that case, you would take the average of the remaining 2 appraisals to determine the value of the home. If all 3 were within 5% of each other, you could take the average of all 3.

NOW we have the value of the home - and we know that we exercised due diligence in getting a price that was objective & fair.

The next step is to determine the equity in the home. This is where I respectfully disagree with my peers who have previously answered this question. Yes, I do agree that the loan remains with the home. But what I didn't see in anyone's comments were any mention of closing costs. I know that right now, you want to keep the home. But EVENTUALLY, you WILL sell it, and WHEN you do - you'll have to pay ALL the closing costs. Your brother is selling RIGHT NOW to you, and as such, he should pay the closing costs (for his half, 150k) by deducting them from his equity. After all, if the two of you sold the home to a complete stranger, each of you would pay half the closing costs on the entire 300k. And since he is selling the home (his half) to you, he should have to pay the closing costs for 150k. If he doesn't pay that now, you'll be stuck paying for his share (150k) of the closing costs when you sell... and to me, that would not be equitable.

So here is how it shakes out...

$300,000 (Fair Market Value)
-----minus-----
$10,000 (rough estimate of closing costs to sell a 150k home)
-----minus-----
$150,000 (outstanding loan balance)
----equals----
$140,000 (equity in the home)

So to buy your brother out - ASSUMING that 300k is a fair market value of the home, you should pay your brother $70,000.

Does that seem fair? I think so.
  • May 04 2013
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Profile picture for wetdawgs
The person who gets the house gets the debt that goes with the house. So, if you purchase the house from your brother, you will owe the entire mortgage of $150,000.  Your brother will not owe 1/2 the mortgage as he doesn't end up with any of the house.

In other words, you'll need to get financing from $225,000.  If you aren't able or unwilling to get that amount of financing, then you will need to sell the house and split the proceeds with your brother.

Think through your proposal:

Brother gets $75,000 and owes 1/2 mortgage at $75,000  = net zero.
You get $75,000 equity and owe $75,000 on the mortgage plus you get the house.  = net you purchased the house for $150k!   Bargain for you, rip off for your brother.   Don't tell your brother that you even thought about this if you wish to maintain good relationships!


  • May 03 2013
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Profile picture for user0851701
Thank you.  I understand the 50/50 split of the equity and have the cash to purchase is half.  Since we both own 1/2 of the equity, do we also both OWE 1/2 of the mortgage?  Thanks again.
  • May 03 2013
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Hi -
Assuming all numbers are agreeable to all - if they are not, get another appraisal - you have $300,000 asset with a $150,000 mortgage encumbrance.  300 - 150 = 150(K) in equity.  Half of the equity each will be 150/2 = 75(K) each.  So, $75,000 each in equity for you and your brother.  If you want his equity and he wants to sell it to you, 75K is the starting point.

You have 50% loan-to-value at the number you gave.  So, you could conceivably get a new loan and use the proceeds to buy him out if oyu do not have the cash and he is not willing to "carry paper" (give you a payment plan to him).

Hope this helps.  Cheers!
  • May 03 2013
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Profile picture for Pacita Dimacali
Sincerest condolences on the passing of your mother.

As far as buying out your brother....

Whatever you do, I hope you engage professionals to help you execute the sale and the transfer of title. There may be other associated fees pertaining to the transfer, and should probably also be taken into consideration in addition the balance of the mortgage.

Blood is thick....but sometimes, money can interfere with good relations, even with the best of intentions.

Best of luck and best wishes.
  • May 03 2013
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Profile picture for wetdawgs
If the two of you agree that the fair market value is $300,000 and there is a mortgage of $150,000 - the equity (the amount you inherited) in the home is $150,000.    Therefore, this is the amount the two of you should split so you'd owe him $75,000. 

I am assuming 50:50 split and for the purpose of simplicity didn't mention various costs of selling/transfer.

If the mortgage is in both your names, you'll have to refinance in your name only.

Sincere condolences on the passing of  your mother.


   
  • May 03 2013
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