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daveg
Investor/Rehabber
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Partner Buyout
Friday, December 28 2007 07:04 AM
REA professionals - I have a rental property that I owe with my brother. He would like to opt out and is proposing me to buy him out of his position where I would become 100% owner of this money making rental condo unit.
Could someone advise me on a typical buyout strategy? Specifically wondering about an equitable formula for coming to a buyout figure of his equity in the property...Thanks.
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Randy Hughes
Master Advisor-39 years of experience
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Re:Partner Buyout
Saturday, December 29 2007 09:51 AM
DaveG,
The variables are many. But, if it were me and i was asked to buy someone out of a project that had not sold to a willing able third party buyer...i would tread lightly. It is always easier to "estimate" value for a buyout and then get caught with a smaller true value upon final sale of the project (which means you end up with the short end of the stick and possibly lose your past partner's friendship forever!).
I would suggest you use a note with little cash. Then, if the final value is what you two estimated...pay the note in full. If not, discount the note proportionately.
Randy Hughes
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daveg
Investor/Rehabber
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Re:Re:Partner Buyout
Sunday, December 30 2007 10:06 AM
Randy, thank your for responding. Can I reclarify my original questions based on your reponses; in order to get your accurate response?
We are not trying to sell at all-my partner only wants out of the landlord business.
My partner is suggesting an appraisal to ascertain value.
The remaining balance is 42k, the mkt value today is 200k.
His initial buyout formula is to use appraised value, less balance to arrive at equity divided by 50% = 80k. He will take a 10% discount (or 72k) as his buyout amount.
I will refi the property to pay him his 72k. At this point I own the property 100% with a mort bal of approx 114k. Current rent is $1250 p/mth and rising with great tenants in an excellent area.
Do you still suggest me carrying a note?
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Randy Hughes
Master Advisor-39 years of experience
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Re:Re:Re:Partner Buyout
Sunday, December 30 2007 11:23 AM
DaveG,
We are not trying to sell at all-my partner only wants out of the landlord business. THIS IS FINE BUT YOU SHOULD NOT PAY THE PRICE FOR HIS DESIRE TO GET OUT OF THE BUSINESS. THE MARKET IS IN FLUX RIGHT NOW AND VALUES ARE VERY HARD TO DETERMINE!
My partner is suggesting an appraisal to ascertain value.
The remaining balance is 42k, the mkt value today is 200k. IF YOU DECIDE TO BUY HIM OUT I WOULD GET AT LEAST 2 APPRAISALS AND THEN HEAVILY DISCOUNT THE AVERAGED VALUE.
His initial buyout formula is to use appraised value, less balance to arrive at equity divided by 50% = 80k. He will take a 10% discount (or 72k) as his buyout amount. IN THIS MARKET A 10% DISCOUNT IS PROBABLY NOT FAIR TO YOU. KILLER DEALS ABOUND AND YOU COULD MAKE MORE WITH YOUR MONEY BY GOING OUT AND PURCHASING A NEW DEAL FOR MORE THAN 10%
I will refi the property to pay him his 72k. At this point I own the property 100% with a mort bal of approx 114k. Current rent is $1250 p/mth and rising with great tenants in an excellent area.
Do you still suggest me carrying a note? NO, I SUGGEST THAT YOUR PARTNER CARRY A NOTE FOR ALL OR PART OF HIS EQUITY. SAY, 50% OF HIS EQUITY WITH NO INTEREST AND NO PAYMENTS FOR 5 YEARS (OR UNTIL YOU SELL THE PROPERTY...IF SOONER)
STAY TOUGH ON THIS...THE TRUE MARKET VALUE OF PROPERTY IS VERY HARD TO DETERMINE AT THIS TIME!
Randy Hughes
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Marty Couch
Investor
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Re:Re:Re:Re:Partner Buyout
Sunday, December 30 2007 09:47 PM
Hi daveg,
Just thought I would put my two cents in.
1) Does your brother need money now? Does he need a specific amount?
2) If you do "buy him out" and the property is in Illinois, this is a transfer for consideration. In this case you are required (but often people don't) to pay transfer taxes. This is 50 cents per thousand dollars for the county and 1 dollar per thousand to the state. Many municipalities also require transfer stamps/taxes to be paid. Some require city inspections as well. Now it is your decision to declare the transfer. Just letting you know.
3) Any money you give your brother will likely fall under long term or (worse yet) short term capital gains. Just keep that in mind.
The solution to all this would seem to be to use an option.
1) If your brother needs an amount of money now, you could pay him an option fee for that amount with the option to buy the property at the time you sell to a 3rd party for 1/2 of the profit of the sale (applying the option fee to that amount). In turn he could give you all cash flow to the property. This way you will get more cash flow, he will benefit from appreciation and there will likely be no awkward moments at family gatherings in the future.
2) There is no transfer and therefor no consideration so no stamps are required.
3) The option fee is not a taxable event at this point (though taxes will need to be dealt with when you eventually sell the property).
A couple of lessons on this situation:
1) Make sure in the future EVERY possible scenario is dealt with in writing and up front.
2) Make sure the property is in a land trust so that if anything happens to either one of you the property will pass to the other or your family the way you want, without probate.
If you haven't already, get Jim and Randy's courses on Land Trusts and Options. They will help with this situation as well as being a great resource for future investing.
Hope this helps.
Marty Couch
http://www.PPLChicago.com
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daveg
Investor/Rehabber
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Re:Re:Re:Re:Re:Partner Buyout
Monday, December 31 2007 06:21 AM
Thanks and thanks again. No, he doesn't need money, just tired of landlording. Randy, I see the logic in taking money and buying another property vs giving away 72k, and a note would allow him to be out of the picture (and responsibility) but still getting his money; but the fees, cap gains, stamps, etc to transfer the prop/title!
Marty, notwithstanding a note, I could and would propose an option. I have been preparing/learning about LTO this year and will prepare and propose this to my partner. Please allow me to discuss this again in the coming year. thx a bunch.
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