Deducting closing costs in off-market home sale

November 19, 2017 12:13 AM

In working out the details of a real estate sale between siblings, should closing costs be considered in the price?

My sister and I inherited a house together, and we're trying to work out how I can buy out her share of the equity. We have different ideas about the transaction amount: I believe I should pay her the same amount she'd get, after all closing costs, if the house sold on the open market for the appraised value. She thinks she should get a straight 50% of the appraisal, without any deductions for closing costs.

How is this normally handled? Is one opinion more defensible than the other?

posted by lalas to Work & Money (20 answers total)

In my area closing costs are 100% the responsibility of the buyer (I believe it may be different elsewhere). In that case, yes I would expect her to get 50% of the appraised value.

Looked at another way, is it worth damaging your relationship over a few thousand dollars?
posted by saucysault at 12:21 AM on November 19, 2017

Response by poster: Forgot to include: in my area, closing costs are paid by the seller. And the housing market is unfortunately crazy here as well, which makes the difference more significant than I wish it was.
posted by lalas at 12:23 AM on November 19, 2017

If the house is worth $200,000 and you each own 50%, you would pay her $100,000 to buy out her share. If you were then to sell the house, the buyer would pay the closing costs, but you don't get that money: it goes to the lender, as a fee for processing the mortgage.
posted by Violet Hour at 12:23 AM on November 19, 2017 [2 favorites]

I am assuming that these are real out-of-pocket closing costs. (Not like an agent's commission that you don't have to pay because it is a family sale and you aren't using an agent).

One way to look at this is to see if you jointly sold the house to a stranger and split the proceeds, how much would you each get? In this deal, you should be paying her half of that amount.

(this might be a little unfair to you if some of those are fixed costs per transaction instead of proportional to the selling price but it is an approach that is very simple to explain.
posted by metahawk at 12:37 AM on November 19, 2017 [1 favorite]

Response by poster: There would be no significant out-of-pocket costs for the family sale, only if agents are used on the market.

As an example, with $100k appraised value and 6% closing costs for an on-market sale:

On-market: Each sibling gets ($100k-6%) / 2 = $47k
Family: One sibling pays the other $50k or $47k?
posted by lalas at 12:49 AM on November 19, 2017

The 6% is what an agent would get if you sold the house on the market, but you aren't using an agent so that 6% is NOT being paid out? In that case, yeah, I feel even more strongly that she should get the full 50% of the value of the house. Otherwise aren't you suggesting she gets $47,000 and you get $53,000 plus the house?
posted by saucysault at 2:49 AM on November 19, 2017 [4 favorites]

You’re getting the full value of the house, so you pay her 50% of that. If you sold it the next day privately you would receive a cheque for the whole thing. The closing costs are a service fee and you are not using that service.

If you were jointly selling it, you would get 50% of the total proceeds because you would have both used the service, but that’s not what you’re doing.

However if you just want to negotiate and it won’t ruin your relationship you could suggest you cover half of theoretical service fees, so 3% - but I’m still with your sibling on this.
posted by warriorqueen at 3:39 AM on November 19, 2017 [7 favorites]

You're being cheap. If it weren't connected to this other person, then yeah 50% ex their market transaction costs is reasonable, but in this case do what's truly fair.
posted by JPD at 4:44 AM on November 19, 2017 [4 favorites]

I think the totally fair thing is to give her 47% of the current value. If you sold it on the open market tomorrow, you would get 47% of the house's value, your sister would get 47% of the value, and the real estate agents / lenders would get 6% of the value.

That said, is it possible that your sister doesn't understand the subtlety here? Does she not understand that you wouldn't get 100% of the value if you were to sell it on the open market?

There is also the family harmony side to this: given that you're in a hot market where the cost is likely to increase, could you just absorb the 3% and pay her 50%? I think 47% is fair, but if she doesn't think that, it may make her feel that she's being cheated.
posted by Betelgeuse at 5:00 AM on November 19, 2017

Why would you want to deduct a cost that you're not going to bear? You buy her share at 50% of the property's current value, minus her half of any costs (e.g. for the valuation) that you actually incur.

What else it might cost to transact in different circumstances with someone entirely different doesn't come into it.
posted by rd45 at 5:09 AM on November 19, 2017 [8 favorites]

Best answer: You can also think about it this way: who gets to keep the notional 6% in the case where no agent has earned it? You'd split it in half, right?
posted by rd45 at 5:11 AM on November 19, 2017 [1 favorite]

You’re not incurring the closing costs at all, so there’s no reason to consider them in the transaction. She gets 50% of appraised value.

If you want to turn around the next day and sell the house on the market and incur closing costs that’s entirely on you.
posted by lydhre at 5:36 AM on November 19, 2017 [5 favorites]

Best answer: I think maybe there's some confusion with terms? What you're calling "closing costs" is what everybody in my market calls the commission. What we call "closing costs" are loan origination fees, taxes, title insurance, and recordation fees, and they are the buyer's responsibility. Some sellers will offer to pay the buyer's closing costs as an incentive, but that's a separate offer, not a standard part of the sale.

You're not paying an agent's commission, so there's no 6% taken from the sale price, and thus she's entitled to half of the market value.
posted by fedward at 6:46 AM on November 19, 2017 [10 favorites]

The 6% is a figure that doesn't relate to this transaction. Its theoretical, not actual, and you getting a reduction based on it is a windfall to you. Now if you think you're going to pay 6% when you do sell on the open market, you still are expecting your sister to be involved in costs incurred after you buy her out.

After the buyout, you will have homeownership expenses, but you will also have the opportunity to profit from a sale. Who knows, if you wait till spring you might be able to sell it for 7% higher. Are you going to give your sister half of future profits? You wouldn't be expected to. Similarly, you don't get to ask for half of future costs that don't relate to the current transaction.
posted by charlielxxv at 7:59 AM on November 19, 2017 [3 favorites]

Best answer: If you're selling it NOW, then yes, you are right. Sell it and split what's left over after costs/fees.
Otherwise, if you're keeping the property, then no. She gets 50% now.

What you're proposing would be (kinda) similar to walking into a car dealership and saying "I know I'm going to sell this $30,000 car in 5 years for only $10000, so let's split that difference now and you sell me the car for $20000." Doesn't work that way.
posted by SquidLips at 8:29 AM on November 19, 2017 [1 favorite]

Honestly, if the real estate market is crazy right now, your sister is getting a bad deal anyway, because your half, now made whole, will appreciate, and her half will stay the same. And she has no obligation to do this, so she can just say no and take her ball and go home. With 50% interest you can’t sell the house over her objections, just your half-interest in it, which no one sane is going to buy.

I would pay her the 50% both because it is fair and also because otherwise you are just plain not going to get what you want.
posted by corb at 9:27 AM on November 19, 2017 [2 favorites]

There are no closing costs because you're not selling the house. Having a hard time seeing how you think you're owed money for a possible future expense you may incur.

Also you're conflating closing costs and real estate agent fees.
posted by so fucking future at 9:36 AM on November 19, 2017 [1 favorite]

By taking on the 3%, you're taking on the risk of loss (if you wanted to sell tomorrow), but you're also getting exclusive rights over the prospects of gain (if the property appreciates in the future). That's what makes it fair.
posted by praemunire at 10:06 AM on November 19, 2017 [1 favorite]

(Although I will say that, in the commercial world, a fractional property interest might not get bought out at full appraisal value because its illiquidity would give the purchaser some leverage. But in this case you're stuck with your own equally illiquid share, so you really both benefit from the sale's going through.)
posted by praemunire at 10:08 AM on November 19, 2017 [1 favorite]

Response by poster: The internet has spoken, I'm on the wrong end of this. Thanks for the feedback everyone!
posted by lalas at 11:04 AM on November 19, 2017 [1 favorite]