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.
Revised March 1, 2004
