Need help with percentage share of joint house sale!

Bigell2000

Hi there,

My brother and I bought a flat in 2004 for £250,000. I put in £17,500 towards the 10% deposit, he put in £7500. The remainder was a £225000 mortgage that we have paid interest only since, 50/50 all the way.

So the way I see it my percentage share is 7% and his is 3%.

Simply speaking, if we now sell the flat for £500,000 as suggested is possible, my 7% would be worth £35,000 (500,000x7%) and his 3% would be worth £15,000. Am I right?

Then split the remainder after mortgage has been settled down the middle and bob's your uncle:

275,000-35,000-15,000= 225,000 split 50/50 = 112500
Me: 112500+35000 = 147,500
Brother: 112500+15000 = 127,500

Follow me so far?

The bit that gets me is the adjustment to this equation that improvements to the flat might have made.

During the first few years we did the kitchen, bathroom and refurbed the living space to the tune of £20,000 of which I was the sole contributor.

Where in the percentage share might this cash investment go? It's obviously added to the value of the property today as we've been quoted good prices per share foot based on the A1 condition of the place, but does it go in to the %share at the beginning, nudging mine up to 15%, or somewhere else in the calculations.

I don't think it fair to consider it an interest free loan, that I just receive repayment for out of the profits, as we've both benefitted from the improvements, aesthetically and financially.

Please help, as we want to sell this flat fairly but never drew up any legal agreement at the beginning. It's worth saying again, all bills and mortgage (of only interest to remain consistent) have been paid equally since we owned it.

Thanks in advance.

bowlhead99

There is no hard and fast rule as different people would do it different ways.

Even your first assumption that you initially get 7% vs his 3% and you equally share the 'profits' could be done differently.

On the extra deposit, there is Method 1 which you outlined.

Then Method 2 - arguably you put in 70% and he put in 30% of all cash needed, you then both paid a notional rent to the mortgage company because you both lived there equally, but you still own 70% of the whole thing - nobody has paid any of the equity off by clearing any of the mortgage principal, so you still own 7/10ths of it. If he had wanted more he should have paid you back or made an overpayment of the mortgage to invest his 'fair share'. That method would of course favour you.

Method 3: Alternatively, nobody agreed or signed anything to say you're entitled to more profits than him, so you both own the place equally as joint tenants, or as tenants in common in equal shares. That would favour him.

Method 4: Alternatively, the fact that you put £10,000 more cash on day one, means your mortgage borrowing was lower and the two of you saved giving mortgage interest to the bank over the years. So the 9 years compound interest saved (at 4% or 10% or 2% or whatever your mortgage rate is), should first be paid to you out of the proceeds (after clearing the mortgage), then you get your 17.5 and he gets his 7.5 and you split the rest equally.

So that's 4 different ways of doing just the initial deposit, without it even being an exhaustive list! And of those, only 'Method 3' is a little unfair as you don't personally get any kind of return on your extra deposit.

- Presumably without you having put in the extra 10k deposit, the pair of you couldn't have done the deal at all, or would have faced higher interest rates on the whole 225k+ borrowed, so arguably you have created more value for him than the £20k extra proceeds you are intending to take with your method, and so even a more aggressive method than that is defensible from your side.

- But he would say that without him paying half the mortgage interest and sharing the bills over the years, you couldn't have done the deal yourself either, so he has helped you make a profit, so he wants half of it all.

This is why people make agreements, especially when going into businesses with family and friends. Better to to agree when you are starting off and feeling neutral than to try and agree it when there is big money coming back and you have opposing opinions.

The money you spent on the refurb and kitchen/bathroom could similarly be split in a multitude of ways with no right answers other than what you agree.

Firstly, arguably a 8-10 year old refurbed living space may not be adding anything to the sale value in 2013, as buyers will have their own tastes, but it may help it sell faster than having 20 year old decor. Likewise with the kitchen/bathroom, hard to say what a second-hand bathroom to your personal tastes is 'worth' today. Effectively you have just covered ongoing maintenance cost, like a new boiler or a new dishwasher, you haven't added a room or an extension or anything.

On that basis, a valid thing to do is simply say that the two of you have 'enjoyed' it equally over the years (whether living in it together or renting it out or whatever you've been doing with it), and he should have clearly put 10k in the pot in 2004/5/6 as his fair share of this 20k refurb cost. He did not and you put his 10k for him. The most sensible thing to do is to say that he now needs to pay this out of the exit proceeds and that he should do this with interest to reflect the time value of money.

The mortgage company would have wanted some known amount of interest percentage from you if they had lent the 10k shortfall cash into the pot for refurbs and had not had a penny back over the years, so you could use that as a start point.

If it is a low percentage, you might want to argue that your personal 'opportunity cost' was higher because you could have gone and invested it in something awesome or gone away on lots of holidays and had fantastic life experiences which you've sacrificed by putting 10k extra into the refurbs, so you think 5% compound interest for the 8 years or whatever is too little - and you want 6% instead, because, hey, a personal loan for him would have been 10% so he's still getting a sweet deal. He would then say "well if I'd known the choice was to borrow at 10% I wouldn't have, and we'd just have lived with crap wallpaper for longer, so I'm not going to pay you a penny more than the 'going rate' for borrowing that we can get from our mortgage statements, in the absence of anything better".

One thought for you if you insist that you want to get paid in equity (with a massive percentage return) rather than as loan interest (with a smaller return at mortgage interest rates), is that if you had both been sensible and trying to strike a properly documented deal at the time, you would have run through every possible scenario. If the flat had dropped in value by 10% or more before you needed to sell it for one reason or another, leaving you with zero cash after the mortgage settled, would you have been happy to have lost all your 17.5k deposit and 20k refurb money while your bro only lost 7.5k? Probably you would see it as he owed you - you would want some downside protection.

What if in total you lost 16k between you - would you expect him to lose every penny of his money and you only lose the first 8.5k of your 37.5k? Or would you have said you will each lose 16/45ths of your cash? I suspect you would say he should be losing all his deposit money rather than have you take the much bigger cash hit. You would want some downside protection.

So, if you would have wanted some downside protection, it's not really a true equity investment, more of a loan really, and you should not grab all of the equity upside on the extra deposit or the refurb cost, just because you've been lucky enough to collectively make a 6x return on 45k cash put in.

Hindsight is 20:20 so of course you would say it was a safe investment so you wouldn't have needed any downside protection, and were happy to have more cash at risk in an equity meltdown, but in reality I suspect this was not the case and you haven't documented it that way. Seems cheeky to then grab all the upside. Of course there's nothing to stop you starting there in negotiations.

Have fun :beer:

ValHaller

Bigell2000 wrote: »

The bit that gets me is the adjustment to this equation that improvements to the flat might have made.

During the first few years we did the kitchen, bathroom and refurbed the living space to the tune of £20,000 of which I was the sole contributor.

Where in the percentage share might this cash investment go?

One way. Decide a moment in time roughly when this £20,000 was spent. Your brother pays you £10,000 plus compound interest at your mortgage rate from the time you agree it was incurred.

Let_Us_See

Bigell2000 wrote: »

.....but never drew up any legal agreement at the beginning.

Your short sightedness has returned to bite you on the backside. Always, complete an initial agreement, and at any other stages of borrowing or expenditure, purely to avoid this scenario.