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Commission When Buying Out Co-owners

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Steve Portigal

Freshman Member
Joined
Jul 24, 2003
I own a duplex with two other folks. At this point, one owner is buying out the other two. We have had the house appraised and are calculating the buyout value using that amount, minus the amount owning on the mortgage (divided by 3, that's the payout for one departing party).

Now, the issue of "commission" has come up. When selling via a realtor, they will get 6% of the sale. I believe the assumption is since it is likely, but not guaranteed, that when the remaining owner does sell the property down the road, he will use a realtor and pay 6% on his sale.

Should the departing owners deduct 6% of their share to allow for that amount that he will potentially incur in the future?

Is there a standard practice in this type of situation (co-owners of a house, buying one or more parties out of the ownership)?

I apologize for the lack of clarity in how I'm describing this, it's confusing for me! If anyone can articulate how the buyout amount might be calculated, or any thoughts on the issue of commission and why or why not, or any precedent, that'd be great. And I know this is post-appraisal but I hope it's within the experience/expertise of the forum members. Thanks

Thanks!
 
Joined
Jan 13, 2002
Professional Status
Retired Appraiser
State
Florida
A Realtors commission would only apply at the time of the sale the Realtor was involved in. Not in any other transaction where a Realtor is not involved.

IMHO
 

Dave Smith

Senior Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Wisconsin
Should the departing owners deduct 6% of their share to allow for that amount that he will potentially incur in the future?

Will the departing owners get their share of the commission back later if the remaining owner sells without a Realtor? Why give up money that might not be justified?

Its best to forget the commission issue.

My $0.2 worth.
 

vargasteve

Junior Member
Joined
Jan 21, 2002
Professional Status
Certified Residential Appraiser
State
California
Its a good question - This is NOT actually an appraiser question as it outside the process of determining an opinion or estimate of value.... However, I offer the following...

I believe that this should definately be taken into consideration if the buyer is prudent, and or you & the seller want to be fair. Everything is open to negotiations, the cash flow (if any) & projected future benifits would be a factor when determining what you'll accept or not accept in negotiations. In addition to the 6% there is normally another 2%+- in costs associated with normal transactions depending on where you live (not including known & unknown repairs aka Section 1

In my estimation, more importantly is the purchaser who is buying the co-owner/seller out is assuming ALL CAPITAL GAINS, while the selling partner WALKS!!!!. Check with a CPA for details but this is the reality. But even if you've never rented it out untill now, the owner is subject to capital gains on a Small Income Property. Here is an example;

you bought it for $150K. (each party with $50K equity)

its now worth $300K (you do the math on the SP, I guess your paying out upto $50K).

Now that you've purchased it, let's say that you decide to sell it.

The remaining owners have $150K in capital gains (PLUS in addition you have the depreciation added onto that #$ if I'm not mistaken)- the selling partner walked CLEAN when he or she sold it to the partners, while the remaining partners end up paying the tax's (at their rate - added to the annual total for that year). Unless the law changes in the future, it is a burden your accepting. (By the way, I've made this mistake myself, so I speak from experience)

So if & when the 2 remaining partner's sell, they pay on $75K Each capital gains PLUS the depreciation claimed over the period.

Since this is tax related, and you may have been occuping a portion of the duplex this does play into it. Also, you may have been living in both, or 1 side only. In addition, for the IRS you are required to live in a duplex 2 out of the last five years and then you can be exempt from portions of these tax's I'm refering to here. Consult a qualified CPA or Tax attorney for details
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Your question is really a legal question and should be answered by your attorney and/or accountant. We are not qualified to give you legal advice. That said, if the deal is between existing owners I would just determine the equity and split it three ways.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
Warning Will Robinson!!! Warning!!! You are making an assumption that the commmission will be 6%. If the owner sells by himself, there is no commission. Secondly, there is no set rate for commissions. I know realtors that sell at 3% (1.5 to buyers rep, 1.5 to sellers rep). Others sell at a flat fee on one side and a variable on the other ($500 + 3% to buyer's broker). There are others that sell at a flat fee, period, depending on overall type of property and probable sale price.

IMHO, there's no realtor involved, there's no issue.

Roger
 

Rick Wood

Freshman Member
Joined
Feb 14, 2003
Professional Status
Certified General Appraiser
State
Florida
Steve:

Some states, like Florida, require that a party being paid a commission in a real estate transaction, to be licensed as a real estate broker.

(Note that I do not use the word, "Realtor", as though it is synonomous).

What about the following considerations?

Is the seller licensed as a broker or what ever legal form is required in your state ? ;)

If this is the case in your sale; was it properly disclosed and at the right time to the parties to the transaction ? :blink:

Were all the other things requiring disclosure done at the right time and in proper form? :eek:

Also, who maintains the sellers liability on on the mortgage interest, taxes, other warranties, etcetera ? :D

Are the buyers assuming all liability(ies)? Now and forever and in all forms and fashion? :huh: B)

Also, since you are acting in the same capacity to the sale as the person or party making the claim for a commission, only as to the buyer, how much commission do you, acting as agent for the buyer get? All other things being equal...?

:ph34r: :p :D

I would definitely want to know the answers to these kinds of questions and I would also get with whom ever your attorney is for the proper advice.

Rick Wood
 

KD247

Senior Member
Joined
Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
This has nothing to do with appraising, so you may as well be asking this question to random shoppers at the local WalMart. (Okay, I guess if I had read the fine print before I started spouting off, I would have noticed that you already acknowledged this.)

But...

You sound like you're making some fairly critical assumptions regarding the accuracy of your equity measurement. In my neck of the woods, 6% is almost considered an insignificant amount, in terms of accuracy of value opinions.

When it comes to buyout negotiations, I've always admired the cleverness of the "I-cut-you-choose" method. Just like when you were a kid. One person cuts the cake, the other chooses which piece he'd like. In your case, the solo partner sets the terms and the other two partners decide if they would prefer to buy or sell on those terms. Everything else being equal, this is a great technique because it's pretty hard for any of the parties to say that they were taken advantage of.
 

Pat Butler

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Illinois
I had a lawsuit with a former joint venturer over this exact issue. First of all, it depends on what your 'agreement' says. I use to set up joint ventures and had about a 20 page joint venture document. In my case, I wanted out of one property with a particular partner. This guy had 30 days to buy me out or we sell the property. He pushed it into 4 months then argued over the fine print. I generally think that NO commission should be involved if it isn't there in reality. My problem was that our JV agreement was ambiguous in this respect and my partner wanted me to pay 50% of all costs that he might incur in the future when he finally sold. No way. By the way, I won the case and didn't pay those fees.
 

John Hassler

Senior Member
Joined
Jul 23, 2002
Professional Status
Certified Residential Appraiser
State
California
The sales commission is the cost of liquidating the asset into cash and therefore, from an investor standpoint, should be caculated into the net preceeds. The partner who ends up with the asset has assumed the future cost to liquidate that property.

Using Steve V's numbers for simplicity. Say the property is worth $300,000 with three partners and no liens. Liqudated, each partner would receive $94,000. If, however, one partner buys the other two out at $100,000 each, that owning partner's net value in the property is $300,000 - $18,000 (6% comm.) - $100,000 - $100,000 or $82,000. Of course there are a lot of other factors such as taxes (personal and property) to consider but all else being equal, the partner who buys out the other two would be a fool to do so without factoring in a commission - better to have $94,000 cash that $82,000 of net equity.

I have been in this situation before. The prevailing commission in my area is also 6% however we settled on 5% among the partners (one was a broker). Remember, an owner who sell a property themselves will have significant time and money costs involved. Advertising the sale as well as time holding open houses and dealing with paperwork if and when it sells are not free!
 
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