Playing House Fairly

December 7, 2007 1:10 PM

I'm planning on buying a house with my SO. We will contribute different amounts to the down payment and the monthly payments. How do we calculate how much of the resultant property each of us owns, especially when we don't know how the property will (or will not!) appreciate?

The amounts we contribute to the down payment will probably be pretty different, maybe even zero for one person, and that person will probably pay less of the monthly payment, too. We will probably draw up some sort of contract, to be terminated by marriage if there is one, and will probably end up being jointly and severally liable for the mortgage or mortgages. Also assume that we will work out all the legal issues. We're just trying to decide if we should go with some formula that will describe what percentage of ongoing non-mortgage costs each party is required to pay, and then go from there. Are there any elegant ways of dealing with this?

We communicate and get along very well (I know, the best laid plans...) so I am not really worried abour reaching an agreement about this or managing things, even if things fall apart. I'm just not sure what a fair way of arranging this is.

There is no need to provide "DTMFA" or "it's a bad idea' advice, and I know that YANAL, YANATA or atleast you are not mine. Assume that we will appropriately document whatever we agree to (with appropriate counsel) so that it is enforceable against us.

posted by iknowizbirfmark to home & garden (29 comments total)

Why not simply track how much money each of you is putting into the property, and divvy up ownership according to that. If one of you is paying twice as much as the other, than they'd have 2/3 of the house while the other owns 1/3.
posted by chunking express at 1:17 PM on December 7, 2007

a contract is a perfect way to go. It's probably safe to divide this in half, if you each plan to provide nearly the same amount and see this as a long-term arrangement. That way you won't get into unnecessary disputes about who gets 60%, etc.

If one person is paying significantly more than the other, I would consider having that person pay for the whole thing, and have the other person pay "rent."

However, if the two payments are anywhere near the same (within a few thousand dollars a year) I would divide it down the middle.
posted by Pants! at 1:19 PM on December 7, 2007

If this relationship does not result in marriage, in the end (end of relationship, or end of ownership) you could just add up how much each party has paid for the house at that point. Let's say person 1 has paid $30000 and person 2 has paid $20000. Then person 1 owns 60% and person 2 owns 40%. If you sell the house you split it up that way, or these figures also give you your buyout amounts.

I've always thought that ideally, if I were to buy a house with a person, I'd actually just buy the house myself, and have the other person pay me rent. (Or vice versa.) If we end up marrying, then it's all ours. If we split, then there's nothing to sort out. (Of course, both parties would have to be OK with that arrangement.) From having to split things up in the past I know that I never want to have to do that again. :)
posted by iguanapolitico at 1:24 PM on December 7, 2007

Well, in this situation the person paying less wants to have some ownership rights, and the other person agrees and thinks that is fair.

The main issue seems to be accounting for appreciation and then differentiating between interest, principal, property taxes, improvements, etc. And, if there is a split and one person moves out, and the other person remains, what portion of the costs related to ultimately selling the house should the person moving out be responsible for. And does the person moving out get paid interest or appreciation on the money put in? For example, if Person 1 pays in $50k total and Person 2 pays in $30k total, and the house is worth $300k at first and $350k when moving out, does person 2 get $35k back? Should we differentiate between interest and principal paid to the mortgages. That would result in person 2 getting $5k (ignoring TVOM) for living there, while all the money that person 1 paid for interest, property taxes, etc., is just lost.

We also thought that this was simple at first until we looked at all the different amounts of money you pay for a house and the different things those amounts go to.
posted by iknowizbirfmark at 1:31 PM on December 7, 2007

Well, my now wife and I weren't married when we bought our house a year and a half ago. Financially we both contributed to the down payment, but I pay the mortgage and have since we bought the house. A couple of things I will say, buying a house can be stressful as can getting married, doing these things can disrupt the best laid plans. Going with a contract is not a bad idea but I'd split it along the lines of the monetary contribution in association with how much of the down payment/etc is being contributed by each. Don't focus too much on the contract, just make sure the understanding and intent is clear. Enjoy the house hunting/buying!
posted by iamabot at 1:34 PM on December 7, 2007

We also thought that this was simple at first until we looked at all the different amounts of money you pay for a house and the different things those amounts go to.

So keep track of the running grand total that each of you have paid, and figure the proportion based on that.
posted by goethean at 1:35 PM on December 7, 2007

For example, if Person 1 pays in $50k total and Person 2 pays in $30k total, and the house is worth $300k at first and $350k when moving out, does person 2 get $35k back?

Seems to me that P1 should get 62.5% of the proceeds (or equivalent) from the sale of the house and P2 should get 37.5%, since that is what they contributed.
posted by goethean at 1:38 PM on December 7, 2007

Goethean, I'm not sure that is fair to the person paying a higher portion of down payment. We have thought about dividing the payments into three categories: principal (downpayment and later principal payments), maintenance (interest, property taxes, insurance, utilities, repairs, etc.) and improvements (we don't expect there to be too many that would add any value, but we might do a few). Then, upon the sale of the property or moving out of one of the people, the person paying less would not be entitled to get the full maintenance payments back, but some percentage of that based on how much the property has appreciated. Each person would be entitled to get back the principal paid and a reasonable rate of return on that as calculated based on the appreciation of the house.

We also have to figure out how to calculate the benefit of the the mortgage interest deduction, which we may structure to go to the person with the higher income.
posted by iknowizbirfmark at 1:52 PM on December 7, 2007

iknowizbirfmark, you can make things as complicated or as simple as you like. As I pointed out above, tracking how much money you are each paying a month is probably the simplest way to go. Anything more than that is probably more trouble than it is worth.
posted by chunking express at 1:55 PM on December 7, 2007

Check your state laws. Domestic partnerships may supercede contracts for a house. It probably will be best to just start out with a real estate lawyer who can guide you through the process for your location.
posted by JJ86 at 2:15 PM on December 7, 2007

Take each person's cashflow for the whole of the ownership (downpayment, all monthlies, etc.)

Calculating the NPV of each cashflow at a predetermined discount rate. Maybe 5%. Then do a straight-up proportion with these numbers.

The advantage of this is that the person who makes the down payment gets slightly more credit for that money than the person who paid money 2 years later, which offsets the cost of having it all tied up.

The downside of this is that the other person might think you're trying to cheat them with fancy math if they don't understand the logic behind it.
posted by Tacos Are Pretty Great at 2:18 PM on December 7, 2007

Why treat contributions to different expenses (mortgage, tax, repairs) differently? If you can agree in advance how much each party will contribute, and won't need to know what the proportional ownership of each party is unless you sell out, you could simply keep track by date of how much each has contributed, and then when you have a sale price or appraisal at the end of the deal, figure what the overall rate of return was on owning the property. Take that rate, apply it compounded to each contribution of party A, sum the results, do the same for each contribution of party B, and the ratio of the sums would be a fair ratio of ownership. This approach would take account of the time value of money, but it ignores rent the lesser partner might owe to the greater--"friends hold all things in common," no? And if you wanted a rough idea what the ratio of ownership was at any given time, guess at an appreciation rate and estimate using the same procedure.
posted by diodotos at 2:27 PM on December 7, 2007

Set up an account for each of you, on paper only. Keep track of EVERYTHING either one of you spends on the house, improvements to the house, taxes, insurance, etc. Be sure to debit any tax deductions that accrue from payment of interest or property taxes. At the end of each year, credit yourself with some reasonable amount of interest (say 5%) to make up for what you could have had had you not spent the money on the house. Then, when you finally sell, divvy up the profits according to the account proportions.

Example: Buy a house for $100,000, with payments (including escrow and interest) of $900 per month. You pay all of the $10,000 down payment, and $600 of each monthly payment. You take all the tax advantages, which work out to a tax savings of $2000 the first year.

Year 1: (10000+7200-2000)*1.05 = 15960 in your account, and (0+3600)*1.05 = 3780 in your SO's. Your share, should you sell, is approx. 80%

Year 2: (15960+5270)*1.05 = 22291.50 in your account, and (3780+3600)*1.05 = 7749 in your SO's. Your share, should you sell, is approx. 74%

etc.

If you REALLY want to be fair, the interest rate could vary, and could be calculated more often. The nice thing about a plan like this is that it automatically accounts for changes in circumstances (say your SO gets a raise and you lose your job, and she starts picking up the lion's share of the payments).
posted by ubiquity at 2:32 PM on December 7, 2007 [1 favorite]

I think Tacos has the right approach. It doesn't matter which part of the housing expenses people are paying for. What matters is how much they paid and when so you can determine the present value of the money each person put in.

10K contribute 10 years ago to the down payment is worth more in today dollars than 10K contributed last year to the new roof. It doesn't matter that one is for the down payment and one is for a roof. Imagine A pays $1000 towards the mortgage, while B pays $500 towards maintenance. Realistically, $1500 have been spent, covering both the mortgage and the maintenance, 2/3 of it by A and 1/3 by B. If A had written a $666 mortgage cheque and B had written a $333 mortgage cheque, while A wrote $333 more maintenance and B wrote $166 for maintenance, the result would have been the same -- both bills got paid, and the total proportion was 2/3 to 1/3. The same would also be true if A had paid $500 to the mortgage, $500 to the maintenance and B had paid $500 to the mortgage. It doesn't matter who actually writes a cheque for what, it only matters how much the cheques add up to.

Keep a spreadsheet that records each of your contributions to bills you consider to be 'house' bills -- insurance, taxes, mortgage, maintenance, heat, whatever -- and use that spreadsheet and an interest rate or the cost of inflation to calculate the Net Present Value of that money when you sell the house. Divide the money you make from selling the house up based on the percentage each person's NPV represents of the total you got back out of the house.
posted by jacquilynne at 2:38 PM on December 7, 2007

Get a real estate lawyer, period. You don't want us to tell you how stupid an idea this is, so I won't. But you need to be aware of all the legalities involved both now or in the event the relationship goes south or economics changes, etc.

(hubby is in the real estate biz and I am hyperreactive to all the ways things like this can turn into utter hell even with the best of intentions.)
posted by konolia at 2:42 PM on December 7, 2007

What about sweat equity? Shouldn't that count, too? If Party A pays 67% of the costs, but does only 10% of the maintenance, should Party A get 67% of the proceeds?
posted by Monday at 3:08 PM on December 7, 2007

I've always thought that ideally, if I were to buy a house with a person, I'd actually just buy the house myself, and have the other person pay me rent. (Or vice versa.) If we end up marrying, then it's all ours. If we split, then there's nothing to sort out. (Of course, both parties would have to be OK with that arrangement.) From having to split things up in the past I know that I never want to have to do that again. :)

This is great for the owner, who built up equity from the rent payments of the tenant, and awful for the tenant, whose money went down the drain. I would try to never let a friend agree to this arrangement, and I hope that someone who's supposed to love them as even more than a friend wouldn't even suggest it. To me this would only be remotely just if, after the split, the owner would have to pay back the rent paid, with appropriate interest.

In terms of tracking money and ownership, when you're living in a partnership, it's really hard to keep things separate. Eg, maybe part of the reason that one person can afford to pay more than the other is because the other one can do yard work and repairs that the other would otherwise have to pay for. There's also the benefit to the wealthier one that, despite their greater wealth, they couldn't have afforded *this* house and wouldn't have bought it without the contributions of the other (if they could, they should just buy it on their own and not charge their partner rent - really, would you charge your mother rent?)

That's why it seems to me that the simplest thing to do is to make some kind of ballpark estimate of the long term overall division of costs, and own the property 60/40, 70/30, 80/20, etc, preferably on the generous side, in the spirit that the relationship and buying a house together is worth the potential of a bit of financial unfairness. Also presuming the estimate is off but the relation is still good, that can always be adjusted down the line.
posted by Salamandrous at 3:22 PM on December 7, 2007 [1 favorite]

Honestly, you're going to see a real estate attorney anyway. You're going to pay them a lot for their advice in this matter. While I guess it's a good idea to get ideas from others, their opinion is going to be the best. So don't get tied to any one strategy. The attorney will suggest what is probably the best way to go forward.
posted by General Malaise at 3:26 PM on December 7, 2007

Just document every payment each of you makes (date, amount, what it was for) and worry about sorting out how much you own later on if it comes to it. All the information will be there.
posted by hjo3 at 5:13 PM on December 7, 2007

Chris puts in 60,000; Jay puts in 40,000. Renovations, repairs and mortgage payments are split 60/40. Chris and Jay make every attempt to not sweat the small stuff. Chris, who makes more $, kicks in for a few extras. Ownership is split 60/40. Appreciation, if any, is split 60/40. Get a lawyer to sit down with you and help you document the plan, whatever it is. Mortgage interest has a tax benefit; a tax accountant can help you plan for the best tax scenario.

Doing this successfully is good practice for a successful marriage.
posted by theora55 at 5:26 PM on December 7, 2007

me: I've always thought that ideally, if I were to buy a house with a person, I'd actually just buy the house myself, and have the other person pay me rent. (Or vice versa.) If we end up marrying, then it's all ours. If we split, then there's nothing to sort out. (Of course, both parties would have to be OK with that arrangement.) From having to split things up in the past I know that I never want to have to do that again. :)

Salamandrous: This is great for the owner, who built up equity from the rent payments of the tenant, and awful for the tenant, whose money went down the drain. I would try to never let a friend agree to this arrangement, and I hope that someone who's supposed to love them as even more than a friend wouldn't even suggest it. To me this would only be remotely just if, after the split, the owner would have to pay back the rent paid, with appropriate interest.

Oh don't worry, if you love the person that much, you'll end up married and the point will be moot. ;)

But seriously, this might not be as ridiculous as you think it is. Firstly, I've known plenty of home owners who rent rooms to their friends. That is simply the arrangement, agreed upon by both parties, and there is nothing lecherous about it.

Secondly, this is all a very individual matter. I *personally* know that if *I* were to enter a shared-dwelling arrangement again, one of two scenarios would follow. If we end up living together for a long time, we will end up married. (That is, I'm not living with someone for ten years without marriage entering the picture.) As part of the contract, we would then each own 50% of the house. Otherwise, it will be a rather short arrangement, and not worth the legal/financial effort to either purchase together or to divide at the end. (Example: after a year or two we realize it's not going to work. I *personally* am at a place in my life that it won't take longer than that to figure out.)

And if you have ever had to divide up property before, you might agree (but you might not -- this is all individual) that paying a couple years' rent to the other party is far preferable to tears, grudges, or any sort of legal activity. The owner of the house would be in charge of any upkeep, after all, as well as property taxes, and interest on the mortgage, etc., so it's not as if the homeowner is automatically making some sort of huge profit on the deal. You buy a house for $X and you pay several times that amount in the end.

If the arrangement is driven by financial reasons on behalf of both parties, then a renter/owner scenario would not be the right choice. But if it's a "let's try living together" thing, then for me, based on my own experiences, the renter/owner scenario would be preferable. (Yes, even if I'm the renter.) That whole paragraph started with "I've" after all ... it was stated as my personal preference. And I still don't think it's ridiculous.
posted by iguanapolitico at 6:42 PM on December 7, 2007

I would set up a limited liability company to own the house. Allocate membership interests according to the percentage you both agree to. In the event of a later disagreement, the structure is already in place and can be legally enforced. If you marry, you can convey the house from the LLC to H&W as tenants by the entireties, or whatever equates in your state.
posted by yclipse at 7:27 PM on December 7, 2007

Tenancy by the entirety is good because if one of you has individual pre marriage debt that you default on they can't take the house! It's also the only actual right that is denied to gay people by not being allowed to marry, which makes it very interesting, but that is a discussion for another day.
posted by whoaali at 7:42 PM on December 7, 2007

What about sweat equity?

Sweat equity is a made-up term. Unless documented.
posted by Blazecock Pileon at 10:26 PM on December 7, 2007

There was another thread on this (with more details than what you're providing), and iirc, three or four different people provided intense math to show that you could easily calculate it in three or four different ways. Do you discount the future payments against the down payment (since that money would've earned 4 years' interest in the bank, while the mortgage payment I made recently would've only had time to earn 3 months' interest)? Etc. You might look for that thread, but my takeaway was -- don't buy houses with people I'm not married to because there are always different ways to do the math. Alternatively, I suppose you guys could compare the various potential equations now and decide what philosophically feels right ("oh, I wouldn't have put that downpayment in an interest-earning account, I would've just wasted it, so let's pretend all money spent is put in at the same time"). This isn't the one with all the equations in it, but it's also good.
posted by salvia at 2:11 PM on December 8, 2007

Sorry, don't mean to discourage you. I'm sure you'll work it out. But do look for that thread and see the various philosophical issues the finance geeks were debating to make an informed choice about your choice of equations and how it will impact your future equity, in case any portion of this stops working out at some point.
posted by salvia at 2:13 PM on December 8, 2007

Thanks for all the great advice. I was not saying we are not going to appropriately document things or consider the right form of things; we are. We are both lawyers and one of us will handle all the negotiations and closing for the house, just as I have for properties I have purchased in the past. It would not really make sense for us to go to a real estate lawyer for figuring this out; another lawyer would just document whatever we were willing to agree for the financial terms. My question was an accounting question, not a legal one.

I also appreciate the fact that this can be a tricky situation, but all the "don't do this, it's a bad idea advice" is unwarranted. People get married and deal with issues like this all the time, but usually there is an outcome determined by the property laws of that state. There is no reason two informed people can't enter into a contract that resolves these issues ahead of time in case this relationship doesn't end in marriage, and the fact that it's somewhat complex to do so is not a reason not to do it or not move in together and buy a house.
posted by iknowizbirfmark at 5:08 PM on December 9, 2007

You know, it really would have helped if you had said you were both lawyers to start with.

That having been said, are either of you REAL ESTATE lawyers?
posted by konolia at 5:31 PM on December 9, 2007

My husband (a real estate broker) wants to know if you are in a common-law marriage state and/or are you in a common property state?
posted by konolia at 5:34 PM on December 9, 2007