How to split house & mortgage 3 ways when 1 person isn't contributing toward deposit?

getmore4less

Sheveko wrote: »

Surely there is a formula whereby the deposits are given back and then the remaining equity is split to take account of the different mortgage payments?

The percentages of the remaining equity split has to be adjusted somehow, taking into account the 40K deposits.

You do that by having the deposits buy a % of the property and giving that % back on sale before any debts are paid off.

For some reason people canot get their head round the basics.

if they all paid cash, then there would be no giving deposits back each gets a % of the sale.

If they borrowed some of the money from their mums then there would still be the same calculations.

Get a mortgage and the calculations seem to change in some people heads for no reason and suddenly there is this need to pay back deposits.

rising_from_the_ashes

I'm certainly no expert ....

I think where your solicitor is going wrong is that you have to take account of the fact that the house value may drop (as well as increase)..... so those of you who've put in £40k deposit, may not get that amount back - and that you have to accept that risk to the same level as the person who is paying more of the mortgage (eg if there was only 80k profit from the sale of the house, you wouldn't both get your £40K back and the person who'd been paying nearly 50% of the mortgage getting nothing).

Generali

getmore4less wrote: »

Each person buys a share in variable asset with cash or debt.

The house value varies but your % ownership does not so thats what you own

From the share of the proceeds you get you pay off your share of the debt.

The key is to keep the debt parts in ballance so thats why the % of the morgage calculated to ballance the equity at the start is the % that should be pid and for any overpayments.


This is the simple and fair way to do it, there are variations but most of the alaternative just don't work for all situations of rises and falls in value.

The take you deposit back, is benifitial to the deposit payer on falls in value but penalises them on rises.

Ok. I've tried to come up with a formula that includes that. I used to run a hedge fund with 7 different classes of investment so I have some experience of splitting assets between investors but I'd be happy to see any specific criticisms of my suggestions.

The main problem with my suggestion IMHO is that there is no recognition of the extra risk that X & Y are taking.

Sheveko

rising_from_the_ashes wrote: »

I'm certainly no expert ....

I think where your solicitor is going wrong is that you have to take account of the fact that the house value may drop (as well as increase)..... so those of you who've put in £40k deposit, may not get that amount back - and that you have to accept that risk to the same level as the person who is paying more of the mortgage (eg if there was only 80k profit from the sale of the house, you wouldn't both get your £40K back and the person who'd been paying nearly 50% of the mortgage getting nothing).

Actually it's worse than that. I found an anomaly in our calculation.

If we sell up for a small loss at 240,000 and have 160,000 mortgage left you'd expect us all to make a small lost right? Not according to our calculations, which splits the equity like so:
Person A £39,215.69
Person B £39,215.69
Person C £1,568.62

A and B are effectively losing money but C is making money.

I'm going to have a play with the spreadsheet that Generali generously provided us and see how that works.

rising_from_the_ashes

If a small loss was made as per your example, I would expect C to make a slight profit as they've been paying 50% of the mortgage so that has to be taken account of.

Sheveko

Okay, right. Person C does start to make a loss as the selling price goes down.

You can download my spreadsheet calculations here:
http://dl.dropbox.com/u/2980189/Scenarios.xls

rising_from_the_ashes

Looks good to me ... (fantastic spreadsheet) but as I said, I'm no expert.

I also think you need to have a chat about what would happen if scenario 2 happens - although A & B have lost money on their initial deposit, they still obviously have money left to walk away with something but person C has a shortfall .... where is that going to come from?

If person C doesn't actually have the £4k +, it's going to eat into the amount that A & B walk away with & person C would end up owing A & B £2k+ each ...

Sheveko

Thanks. It's even better in iWork Numbers because I can split all the scenarios onto their own sheets but in Numbers you can keep them all visible on the same page. Doing this means the formulas use the header names instead of just the cell references which makes it much easier to read the formulas.

Good point on what happens when person C makes a loss. A loss is unlikely as we're in London and we'll be renovating the place, adding value. We have a joint account for the renovation which we'll all be adding to in equal shares, so if we had to sell up before we'd spent the renovation budget and made a loss then 1/3 of whatever is left over in the renovation budget could go toward paying person C's loss. Person C also has enough income to be saving £1000/mth so they will be able to save up a contingency fund. The worse that can happen is that person C owes an outstanding amount to person A and B, which can be written into the Deed of Trust.

Suarez

How can this be so difficult lol

250k
Person 1 puts 40k deposit so owns 16% plus 43k Mortgage (17.2%)
Person 2 puts 40k deposit so owns 16% plus 43k Mortgage (17.2%)

Person 3 puts 83k mortgage (33.2%)

getmore4less

rising_from_the_ashes wrote: »

Looks good to me ... (fantastic spreadsheet) but as I said, I'm no expert.

I also think you need to have a chat about what would happen if scenario 2 happens - although A & B have lost money on their initial deposit, they still obviously have money left to walk away with something but person C has a shortfall .... where is that going to come from?

If person C doesn't actually have the £4k +, it's going to eat into the amount that A & B walk away with & person C would end up owing A & B £2k+ each ...

Thats correct, think of it as if 1 & 2 lent money(1/3 each) to 3 at the start and they split the mortgage 3 ways.

This might make it easier to understand what is going on, 3 pays interest to 1& 2 for the loan

The effect is the same as using the mortgage, they are compatable models.