What Is a House Buyout Agreement?
House buyouts are increasingly common agreements between co-owners of property to reacquire exclusive rights to an asset. Particularly in the areas of divorce mediation and estate planning, buyouts allow property transfers amongst family members and loved ones without dragging the parties through the hassle of the courts. Consider that in the event of a divorce where you have no choice but to sell your house and divide assets, you may not wish to sell your home at all . A buyout agreement allows you to sell your share of the property to your partner, thus providing a new negotiation which could save significant financial resources and time for everyone involved.
As you can imagine, buyouts can occur between many types of co-owners. Siblings in the process of dividing up inheritance or estranged parents seeking new ownership arrangements in the case of split custody can benefit from signing a buyout agreement. Any time you are faced with property co-ownership, a buyout agreement can help you and your co-owners avoid extended court battles and cash lengthy arbitration fees.
Elements of a Buyout Agreement
There are certain terms that should be included in a house buyout agreement to ensure that the transaction goes smoothly. Some of the most important components of a buyout agreement are:
*Title/Ownership of Property
*Valuation of Property
*Payment Terms
*Date for Completion of Buyout
*How additional costs will be handled
*Payment of any mortgages, debts, taxes, and other liens
*Provisions regarding the costs of the sale should a sale of the property occur while the former spouse has not been paid out in full. This is how the value of the house will be divided in case of this situation.
*If one spouse is living in the home and is to be compensated later, the parties can agree to a reduction in the buyout price. An example would be allowing the former spouse who still lives in the house to live there for a specific time (perhaps 1 month for each $1000 owed) and then to pay an amount in recognition of the rent that the ex-spouse gained by living in the residence.
*Credit for money already paid to the former spouse (up front.
*That the remaining spouse will retain the right to the tax incentive for owner occupied properties in the event that the mortgage or debt is paid off.
*The party with more income may be able to have the payments made periodically over a longer term.
With so many details that need to be worked out in a buyout agreement it is extremely important to have the help of an experienced lawyer to help with this process. Your lawyer will also ensure that the documentation is properly prepared and all legal requirements are satisfied.
How to Make a Buyout Agreement
Like any other agreement, it is critical to have a house buyout agreement drafted as soon as possible so that both parties are legally protected and the terms are set out clearly in writing. Drafting this type of agreement will generally involve the following steps:
• Appraise the property or properties: A house or real estate appraisal will almost always be necessary before drafting an agreement, so both parties can get a fair price for the property. In some cases, you may need to use a recognized appraiser to help establish the fair value of the property.
• Bargain with your spouse: Once you have a fair price in mind, your attorney will help you negotiate with your spouse for the buyout agreement. If the two of you can agree upon a price, you will then be able to divide the money and comply with all federal income tax laws in the process.
• Ensure compliance with state laws: You and your attorney will follow state laws related to the separation of marital property and how the terms of the buyout are set up within these laws.
Once all agreements are made, an experienced attorney will draft the buyout agreement as a legal contract. This agreement could also be incorporated into the final divorce decree if the terms are transparent and the parties are able to proceed under a divorce.
Legal Implications of House Buyouts
The stakes are high when it comes to house buyouts, as these agreements carry financial and emotional weight. That being said, it is always recommended to hire an attorney to draft up these buyout agreements or affirm that your agreement is legal under the law.
A few things to consider when entering into a buyout house agreement are the following:
- Contractual Language – Any written divorce settlement as well as an agreement between co-owners of a particular asset can legally be binding. If a spouse attempts to back out of the agreement later on, an attorney can help you prove all contractual terms were met, and the other party will have to engage in the buyout. If all contractual terms are not met on either party’s end, then you may need to engage in dispute resolution.
- Mediation – Not every house buyout will go smoothly, and that is okay. Many couples who agree to buyouts find it easier to go through mediation. During these sessions, a third party can help work with all parties to help find a compromise. If mediation does not pan out, there is still the option of litigation.
- Litigation – If a mediator cannot help the couple reach a solution, or if the buyout is especially complicated (or expensive), it could be time to go to court. The judge will reach a solution based on equitable distribution principles.
Pros and Cons of House Buyouts
House buyouts are a common aspect of every divorce, and they are just one resolution for how jointly owned property will be handled after the divorce. There are advantages and challenges to buyout agreements – it’s helpful to be informed so you can understand the considerations involved.
One potential advantage to a house buyout agreement is that it allows all parties involved to move on without having any type of judge-mediated conflict. It cuts out the need for extensive litigation, and people appreciate that. Especially when there are children involved and there is a pressing need to stay out of court beyond the divorce case itself, house buyouts can be beneficial.
Parties also benefit from the house buyout because it means there’s less stress in a sale process. Without a buyer and seller between them, neither party has to worry about research into the home, home inspections, negotiating in good faith and handling all the costs of a third party all the way up to closing.
House buyouts also can save time after a divorce, because they’re often less time consuming than trying to broker a third-party sale. A house buyout can expedite the divorce process by allowing the parties to finalize the property division without having to wait for a buyer to arrive and a sale to be completed.
That said , the house buyout agreement also has a few disadvantages. One, the buyout still requires one party to come up with money to provide the buyout. This presents a financial challenge – and if that person doesn’t have the money to buy out the other, negotiations can become stressful. There needs to be an accord on what a fair buyout amount is, and people need to budget their post-divorce financial situation around a property purchase.
A buyout also doesn’t allow for good-faith negotiation about issues like renovation or maintenance costs that may be necessary on the property. For example, if the person staying in the house requires extensive renovations, will the purchase offer increase to reflect that? What if the property needs maintenance that the person exiting the house feels should be considered in their purchase price? All of these issues can make fair buyout negotiation difficult.
A house buyout isn’t always going to be in your best interest, but with a team of experienced divorce lawyers on your side, you’ll be able to weigh the pros and cons properly.
Financing a House Buyout
If you have made the decision that one or both of you wish to keep the marital home and that you intend for the other to ensure his or her interest in the properties’ value, you need to figure out how you will finance the buyout. The problem here is how to find the money to pay your spouse his or her share. Refinancing is the obvious solution, if you qualify for a loan. But it’s not always that simple or practical. For starters, will only one of you be living there? This could mean only one can be on the qualifying mortgage. And remember, mortgage interest rates are now at historic highs. Refinancing may be a way to lower the interest rate. However, it is likely going to mean greater payments and a longer period before the residence is paid off.
If one you is keeping the house, a home equity loan on that property is another option. Again, it may depend on the credit scores of the parties, but it is money readily available on the equity that is already in their home, which again could be drastic savings in interest and principal payments. If there is equity in the home, you could also decide to split the equity and give your spouse’s share of the equity to him or her in future distribution of assets. Your spouse could then perhaps take that equity out of the house as his or her share and refinance.
Sometimes, if money is an issue, you could negotiate either that the spouse who wants out stays for a specified period of time while the spouse who wants to stay finds the means to buy out (refinance or equity loan or some other means), or that the spouse who wants out finances the buyout. While this seems inexpensive, it does mean that the spouse who wants out is financing his or her own divorce and the end of the marriage rather than the actual buyout. There are creative ways to ensure the money is not left out there (escrow it and use it to offset alimony calculations, etc.) your trusted financial professional can help you navigate through that process.
Common Pitfalls of House Buyouts
One of the most common mistakes in buyout agreements for a house is the undervaluation of the property. Parties to an agreement may decide to use the tax assessment value of the property, a figure which is often a gross undervalue. Failing to retain a good real estate appraiser or not relying upon the full appraisal report can also be a mistake.
Another mistake is failing to have an agreement carefully examined by a family law lawyer. A buyout of a house is generally done in the context of a marriage dissolution and is only one part of a much larger net family property agreement. If that agreement has not been carefully examined or if the buyout is not properly incorporated into the larger agreement, there could be confusion and a lot of aggravation down the road.
Recent case law has suggested that parties to a buyout agreement should also address tax implications in their agreement. It is important to do so because otherwise the CRA could take away an informal agreement and use the contract terms against you, to your detriment. Obviously, any long-term tax planning issues should be discussed with a reputable tax accountant or lawyer to ensure minimal taxation occurs.
Finally, sometimes parties fail to consider the long-term effects of a buyout agreement. Once an agreement is signed, it is binding. If you have additional children after the divorce or if an ex-spouse becomes disabled, the buyout agreement may have unforeseen long-term financial effects on the parties. Always consider these effects in advance before signing the agreement. Legal advice is essential in helping parties navigate these types of issues.
Getting Expert Assistance
When it comes to a house buyout agreement after divorce, it’s crucial to consult with legal and financial professionals to ensure that each spouse is well informed about the process and their rights. Experienced divorce attorneys work to protect the legal rights and assets of their clients, while knowledgeable accountants and financial advisors often work to help determine whether a property buyout is a good financial/agreement for their client. Additionally, a house buyout involves an array of tax issues , so talking to a CPA before signing an agreement is crucial to making the right decision and getting the best possible deal.
Professional guidance is also wise to ensure that the house buyout is fair to both spouses. Unfortunately, it’s not uncommon for a wealthier spouse to use advanced legal tactics to gain as much as possible during the divorce. While your attorney will do everything possible to advocate for your rights, their success will also depend upon your honesty and transparency. When dealing with a high-value asset like a house, find attorneys, accountants, real estate agents and others who are well versed in issues related to divorce.