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home ownership and paying off sister

#1
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7/20/05 at 1:04pm
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I need help. Here is the situation. In 1997 my sister and I purchase a home together for the price of $92k which appraised for $97k. We both occupied the home for the six 6 years. I then moved out. My sister continued to occupy the home solely for 1yr afterwards. At the end of that 1 year living on her own my sister moved out and my wife and I took over the home. No upgrades were made to the home prior to my wife and I taking it over. We spent roughly 15k in upgrades including a full kitchen remodel. My wife and I then refinanced the home which now appraises for 140k. Now we want to pay off my sister. How do I calculate her payoff?

Donnie

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#2
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7/20/05 at 1:24pm
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That's a tough one. Obviously, in hindsight, you should have had the home appraised before the reno. Since it is easy to breed bad blood on these kinds of transactions, I would try to be liberal in your payout. What does she think is fair?

A lot too could depend on how much each of you invested initially, and what (if anything) you agreed to come time for the sale. This stuff should always be done up front, but if it wasn't, hopefully both you and your sister can work out something fair. No offense intended to your wife, but if she wasn't party to the original deal, I would leave her out of the negotiations.
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#3
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7/20/05 at 1:45pm
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hmm...definitely a dilemna. is it at all possible to get an appraiser to give you an estimate *minus* the upgrades? also, it looks like you have enough equity in the house now that you could be even-keeled to your sis.

btw, how well do you and your sister get along?
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No offense intended to your wife, but if she wasn't party to the original deal, I would leave her out of the negotiations.
jeff ... you're not married are you.

 

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#4
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7/20/05 at 1:47pm
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Considering you moved back in (and your sis moved out), why didn't she have it appraised then? Was she expecting you to pay her off right away or what?

What about having someone look at your upgrades and see if they can appraise it based on what the house was before your renovations? (if that's even possible).

p.s. I see that theTed got a response in before I posted about the appraisal.
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jeff ... you're not married are you.
LOL - It actually sounds like he is. Only a married man would know enough to not get a wife involved with family negotiations.
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#5
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7/20/05 at 1:51pm
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I'd guess current appraisel, minus initial appraisal, minus upgrade costs divided by two....$19K? I guess property prices haven't escalated as much in your area as they have here.

Mort
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#6
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7/20/05 at 2:10pm
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My wife is staying out of it, but I do get and ear full from her. My sister and I get along fairly good, but she is already flustered over this situation and wants someone to figure out everything for her. She isn't in any rush for her money and doesn't care when she gets her money as long as she gets it. Of course, looking back an appraisal should have been done when she moved out or when I did, but it didn't happen.

Advice: avoid this situation at all costs.

Master Poe: Close your eyes. What do you hear?
Caine: I hear the water. I hear the birds.
Master Poe: Do you hear your own heart beat.
Caine: No.
Master Poe: Do you hear the grasshopper, which is at your feet.Caine: Old man, how is it that you hear these things?Master Poe: Young man, how is it...

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#7
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7/20/05 at 2:19pm
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$50,000 sounds fair to me.

- Colton
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#8
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7/20/05 at 2:44pm
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Quote:
Only a married man would know enough to not get a wife involved with family negotiations.
and only a married man would know that's an impossibility!

 

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#9
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7/20/05 at 3:22pm
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Make sure your sister agrees with your figures and estimates.

Then if the worth of the house is $140k now, and you spend $15k upgrading it (and she didn't spend any before, nor you), then the value without the upgrade is $140k - $15k = $125k.
So you need to pay your sister $62.5k.

Again: if there are no other (significant) costs involved and you all agree on the estimates.


Cees
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#10
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7/20/05 at 4:05pm
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I figure upgrades are usually worth about 70% or so of what you spend on them for pricing, so $11k for your improvements. Using that and assuming a 50/50 split is agreeable:

140 - 11 = 129 / 2 = $64.5K total

But since your sister doens't care to run the math herself, use Cees' numbers
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#11
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7/20/05 at 5:36pm
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I think you have to split this up three ways:

1) How much did your sister bring to the table when you initially bought the house? This contribution to down payment / closing costs should be reimbursed. Let's say for this discussion it's $10,000.

2) How much did the property go up in value while you were BOTH in the house? You should share that down the middle. Let's say the property went up in value over that 6 year timeframe some $20,000. She should get half, or $10,000 of that.

3) How much did the value of the property go up in value the year she was solely in the house? She should get that outright. Let's say that is $30,000.

So $10K + $10K + $30K. Your numbers, of course. But the concept should be the same. Once you are the sole owner of the house, she does not get anything else out of it. Sorry...

- Steve
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#12
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7/20/05 at 5:44pm
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Did you and your sister pay cash, or is there a mortgage involved ?

Also - don't kitchen and bath improvements return better than others (i.e - deck, new paint, finished basement, etc)....

May be helpful to break apart exactly how much was spent on the kitchen versus other improvements with minimal return.

Good luck, I'm sure it seemed like a great idea at the time
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#13
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7/20/05 at 7:01pm
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Quote:
140 - 11 = 129 / 2 = $64.5K total

That's assuming there is no lein (i.e. mortgage) on the property. You should only be using the equity in the home as a basis for what you owe your sister.

The house as appreciated $43k in value since you purchased the home. Personally, I would subtract the $15k in improvements that you made, which means there is now a $28k increase in value to divide up. I would add whatever downpayment your sister made and half of the principle paid on the mortgage while you two held the title jointly (your mortgage statements should give you this information). This, of course, assumes that you were equally sharing the mortgage payments.
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#14
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7/21/05 at 12:51am
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Donnie,

IMO, who lived in the house and who didn't is irrelevant for attributing an increase in value during that period to that party. Both were co-owners all the time and should benefit from the total increase in price caused by the market.

If there's a significant portion of a higher selling prise caused by additions or improvements it should be attributed to the party who paid those changes.

Also, I wouldn't make it too complicated by trying to split it into too many components, just use the original down-payments and mortgage to establish the ownership ratio.


I suggest four simple steps:

1. Establish (and agree upon) the amount of ownership of each party.

2. Establish and agree upon the price you would reasonably get if you sold the property to a third party. (The fact that in practice you are that third party is irrelevant here.)

3. From that price "pay" each party the costs they made to substantially improve the house.

4. Split the rest according to the ratio established under #1.

The total amount your sister would get that way (#3 + #4) is what you'll have to pay her.


Your figures:

(1) Each owns exactly half.
(2) It would be sold for $140,000.
(3) You paid $15,000 for a substantial improvement (or perhaps, as Joe suggested, worth slightly less), your sister paid $0.
So, $15,000 of the $140,000 goes to you, $0 to your sister, leaving $125,000 to be split according to the ratio in #1.
(4) Your sister would receive $62,500.


Of course, there may be some additional costs, like the costs of transferring the house to you, which you may have to split. And it's VERY important to establish the ratio of ownership, based on initial downpayments and mortgages (and or, even more important: legal documents).

Part (or all) of your payment to your sister could be evened out with a formal transfer to you of her share of the mortgage, if that's applicable.

Also, remember this: value of real estate will most probably still (moderately?) rise in the near future. You are getting a good deal anyway, achieving the whole property: be kind to your sister. If you value a good and lasting relationship, that is.
Or if you just love her.


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#15
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7/21/05 at 1:14am
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I'd say IMHO that Cees's analysis is spot-on.
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#16
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7/21/05 at 9:14am
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Only if the house is fully paid for. Otherwise, computing the payout should be based on the equity, which changes the payout amount quite a bit. But, I've been known to be wrong.
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#17
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7/21/05 at 10:13am
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Here is what my wife and I came up with last night. We are deducting the cost of the improvements + the average ROI of those improvements from the last appraised value (I will be providing documentation to back this up.). No maintenance was done during the time she occupied the house on her own, so we are deducting $3k because the house was not in sellable condition. It was a wreck. The equity is being split 50/50. The principal is being split equally for the time we both occupied the house, but she is getting the additional principal for the year she was there alone.

How does this sound?

Master Poe: Close your eyes. What do you hear?
Caine: I hear the water. I hear the birds.
Master Poe: Do you hear your own heart beat.
Caine: No.
Master Poe: Do you hear the grasshopper, which is at your feet.Caine: Old man, how is it that you hear these things?Master Poe: Young man, how is it...

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#18
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7/21/05 at 10:21am
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one other thing about the upgrades. even though you only paid 15k, it's possible the house appreciated for more then that initial 15k.

iow, since she didn't pay any of the 15k, why should she get the upgraded value. not saying she should or shouldn't get paid ... just food for thought.
Quote:
so we are deducting $3k because the house was not in sellable condition.
then the total that was spent to upgrade was six grand? if not, how did you get that figure?

 

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#19
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7/21/05 at 11:21am
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Donnie,

Quote:
How does this sound?
Sounds good.
Ask your sister. Perhaps she has a point you didn't think of.
If the two of you are on speaking terms, you will certainly come to deal.


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#20
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7/21/05 at 11:30am
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Quote:
even though you only paid 15k, it's possible the house appreciated for more then that initial 15k.
I was gonna post that before. The house could have very well only apprasied for 100K before the upgrade. The 15K in 'upgrades' could be the main reason why the house appraisal was boosted to 140K.

Can you find an appraiser who can determine how much of your 'upgrades' figured into the 140K appraisal? They may even be able to give you a ballpark figure as to the worth of the home before the additional work.
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#21
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7/21/05 at 11:44am
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That wouldn't make a formal difference, because it only cost him $15k and no more, to achieve that.

It's the other possibility that's more problematic: if the effect was less than spent (money "wasted"). But from Donnie's post, I understand that this is not the case.

Better keep it simple anyway. Doing "business" with family is always tricky.


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#22
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7/21/05 at 11:46am
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Another way to deal with the reno cost is to charge your sister half, then simply work out your equity.

The main thing is to settle on something that isn't going to cause conflict later on.
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#23
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7/21/05 at 11:59am
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Quote:
That wouldn't make a formal difference, because it only cost him $15k and no more, to achieve that.
But if you're basing your "50/50" payout on the appraisal, that 15K does make a difference.

In other words, why should his sister make money (i.e. half the current the appraisal price) on a home that she didn't invest fully in? She should only be allowed half of the pre-renovated appraisal.
Quote:
Another way to deal with the reno cost is to charge your sister half, then simply work out your equity.
That's a good idea too.
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#24
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7/21/05 at 12:21pm
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I'm going to presenting this offer tonight. This purposed deal is more than fair in our opinion, but opinions do vary. We do get along, but we couldn't be in two more completely different places in our lives. 27 and single vs. 37 and married. I suspect the 3k will be an issue. However, there are several upgrades noted in our break-down which we intentionally did not itemize as a gesture to her.

Master Poe: Close your eyes. What do you hear?
Caine: I hear the water. I hear the birds.
Master Poe: Do you hear your own heart beat.
Caine: No.
Master Poe: Do you hear the grasshopper, which is at your feet.Caine: Old man, how is it that you hear these things?Master Poe: Young man, how is it...

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#25
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7/21/05 at 12:28pm
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Quote:
Another way to deal with the reno cost is to charge your sister half, then simply work out your equity.

I agree - this is the most equitable approach.
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#26
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7/21/05 at 12:44pm
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That IS what's happening.
Just calculate both methods, it will come out the same.
(In the example: $62,500 + $7,500 = $70,000)



Donnie,

Good luck!


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#27
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7/21/05 at 1:21pm
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Quote:
In other words, why should his sister make money (i.e. half the current the appraisal price) on a home that she didn't invest fully in? She should only be allowed half of the pre-renovated appraisal.
i'm kinda in that camp as well. she didn't participate in the reno, why should she reap the rewards.

of course, she is your sister.

 

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#28
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7/21/05 at 1:39pm
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Quote:
IMO, who lived in the house and who didn't is irrelevant for attributing an increase in value during that period to that party. Both were co-owners all the time and should benefit from the total increase in price caused by the market.


Unless the person living in the house was making mortgage payments and the person not living in the house wasn't.
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#29
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7/21/05 at 1:46pm
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Not really. If the person living in the house payed the other owner's mortgage payment as a sort of "rent", you could argue that the other still payed his/her half of the mortgage (but also received rent).

Just don't make it too complicated, I'd say!


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#30
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7/21/05 at 2:29pm
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"Then if the worth of the house is $140k now, and you spend $15k upgrading it (and she didn't spend any before, nor you), then the value without the upgrade is $140k - $15k = $125k.
So you need to pay your sister $62.5k."

I agree. Sounds very fair to me.
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