How to split up the profit from this house sale

getmore4less

bobwilson wrote: »

capital repayments

You can ignore them in the equitable split based on servicing debt.

That means my calculations hold as the fair way to do the split on equity and debt.

any other way is flawed.

getmore4less

bobwilson wrote: »

You're assuming that two independent loans were taken out at £162.5k each. That's not the case.

The loan is £325k in total, it isn't officially split. We decided to try to make payments to make it 50/50 after 25 years, personally between us. There was no guarantee of either of us following through. Our ownership was going to be based on how much we ended up contributing, hopefully 50/50 if we manage to pay it each, otherwise less/more depending on who paid more.

I thought the debt was £225k but not relevant to the principle.

If that was the model you were using then it is flawed

You have to take account of the interest share on the debt that bought the equity. it may not be debt free equity but it is still a share that the person servicing the debt owns.


I go back to a simple example situation you buy a place for £200k one pays cash and the other buys using £100k debt( ok has to be a joint mortgage)

The person with the deposit pays nothing to the mortgage the other the full cost but it is interest only.

The house double in value to £400k using your model the person that put down the deposit gets £300k the other person paying the mortgage gets nothing.

It should be £200k each and the mortgage gets paid off by the one paying it.


How you split the debt payments is equivalent to separate loans.


If you have an algorithm that won't work for all values of deposits debt and interest rates or repayment/interest only it is flawed.

The £100k deposit buys a share of the house worth £325k the most that can be is around 31% to suggest that should be over 90% is ridiculous.

bobwilson

getmore4less wrote: »

You have to take account of the interest share on the debt that bought the equity. it may not be debt free equity but it is still a share that the person servicing the debt owns.

Understood. However, the interest share on the debt that bought the equity is not fixed. If either party lost their job or decided to pay less, the other party would legally have to pick up the pieces. Therefore, it cannot be based on future intention.

getmore4less wrote: »

How you split the debt payments is equivalent to separate loans.

Not legally. Both parties are responsible for the entire loan.

getmore4less wrote: »

If you have an algorithm that won't work for all values of deposits debt and interest rates or repayment/interest only it is flawed.

The assumption that both parties will pay £800/£339 % split for the next 23.5 years is flawed. Since both parties are equally responsible for the 'one' loan, future individual repayments cannot be assumed.

getmore4less wrote: »

The £100k deposit buys a share of the house worth £325k the most that can be is around 31% to suggest that should be over 90% is ridiculous.

Agreed. The bank doesn't receive any capital gain. This would leave 67% unaccounted for. If this is split 50/50, it would result in: (31%+33.5%) vs (0%+33.5%) = 64.5% vs 33.5%

By paying £100k deposit, person 2 has taken on more risk; had the house lost value, person 2 would be losing more than person 1 since person 1 has no equity. Any gain must also reflect any potential loss equally between parties. A 50/50 split doesn't account for this either.

64.5% vs 33.5% split is the only algorithm that accounts for all values.

jjlandlord

You seem to have have many answers, and more details than posted at first.

I think you have got the possible options on the table.

What was agreed initially? If nothing, which was unwise, then you both need to discuss.

getmore4less

bobwilson wrote: »

Understood. However, the interest share on the debt that bought the equity is not fixed. If either party lost their job or decided to pay less, the other party would legally have to pick up the pieces. Therefore, it cannot be based on future intention.

But that has not happened,

until is does the % equity bought by the debt stays the same.

If you need to change the debt ratios then that can be done that keeps the equity fair at that point.

It probably gets a bit messy because I think you need to revalue the asset because what you are doing is in effect is repaying one loan and starting a new one with different ratios. I will check this later.


The model you are using just does not work, to stress test it has to work fairly for all combinations.

Taking a previous simple example where one person pays cash and the other an interest only loan and you buy 50:50.

With your model the one with the debt never owns any equity where the reality is they have paid for 1/2 the place and should get 1/2 the value(then pay off whatever debt they have left).

getmore4less

bobwilson wrote: »

Understood. However, the interest share on the debt that bought the equity is not fixed. If either party lost their job or decided to pay less, the other party would legally have to pick up the pieces. Therefore, it cannot be based on future intention.

It is fixed upto the point you change it.

Not legally. Both parties are responsible for the entire loan.

Agreed but the agrement on the side is that you share the debt unequaly and take that into account. easy to set up legaly and is often done to protect deposits with a deed trust. this is standard practice when doing this sort of joint arangement.

The assumption that both parties will pay £800/£339 % split for the next 23.5 years is flawed. Since both parties are equally responsible for the 'one' loan, future individual repayments cannot be assumed.

as above untill the ratios change the equity bought stays the same.

Agreed. The bank doesn't receive any capital gain. This would leave 67% unaccounted for. If this is split 50/50, it would result in: (31%+33.5%) vs (0%+33.5%) = 64.5% vs 33.5%


but the debt is being serviced unequaly so we are back to the propotions of the debt represent the equity bought at the start.


By paying £100k deposit, person 2 has taken on more risk; had the house lost value, person 2 would be losing more than person 1 since person 1 has no equity. Any gain must also reflect any potential loss equally between parties. A 50/50 split doesn't account for this either.

The risk is that the other person might end up owing them money.
by using your model you create the risk that need not exist

If you do the equity shares coorectly it works out properly
By taking on the servicing and resonsibility for the larger debt you equalize the risk from day 1.

With your model the £100k deposit take the bigger loss than they should do since you are saying the negative equity is split 96/4 it shouldn't if done properly

64.5% vs 33.5% split is the only algorithm that accounts for all values.
incorectly.

I have reviewed the need to change the debt servicing at some point during the agreement and I don't think there is a way to do it without using the sell & buy model(not actualy doing it) that needs the current estimate of value.

getmore4less

getmore4less wrote: »

The £100k deposit buys a share of the house worth £325k the most that can be is around 31% to suggest that should be over 90% is ridiculous.

bobwilson wrote: »

Agreed. The bank doesn't receive any capital gain. This would leave 67% unaccounted for.
.

You can use the propotion of the new equity created by paying off the debt to split that part of the profits.

Since you seem keen on using the actual amount paid off, lets do it, I know they were rounded figures but the £4k £1k split of whats left after the mortgage will work out correct for actual values.

From the amounts given £225k over 25 years at £1139 payment (3.6%?)
after 1 year the debt would be around £219339, so £5661 paid off split

person 1 £3976 70.24%
person 2 £1685 29.76%

That unacounted for 69.23 % should be split 70:30 after the mortgage is paid off.

getmore4less

dimbo61 wrote: »

House has gone up £82,000 in one year?
London by any chance?
Has work been done on property? What work and who paid ?
Buying and selling costs? Someone paid stamp duty on £325K and solicitors fees, mortgage fees, searches, survey etc!
Have both parties lived in the property? Capital Gains TAX?
Selling costs more like £10/15K with London estate agents 2/3% plus legals etc ERC on Mortgage?

Forgot this bit was never clarified...

The full purchase costs need to be included as the starting price for splitting the equity.

This means that if any cash was put up for this needs to be included as part of the deposits for working out the equitable shares based on the cash injected and the debt being serviced

On sale it is the net proceeds, before paying of the shares of the debts that is split on the equitable shares then each pays off the share of their debt.

This is critical to making the distributions fair.

It also means that any purchase(unless bought cheap) is automatically in negative equity by the buy/sell cost and can result in an inter person debt if sold before the prices moves enough to cover the cash injection of the lower contributor.

bobwilson

getmore4less wrote: »

From the amounts given £225k over 25 years at £1139 payment (3.6%?)
after 1 year the debt would be around £219339, so £5661 paid off split

person 1 £3976 70.24%
person 2 £1685 29.76%

That unacounted for 69.23 % should be split 70:30 after the mortgage is paid off.

You're forgetting that the deposit is a part of the investment in the property, not just the repayments. So, by your logic:

person 1 £3976 3.9%
person 2 £101,685 96.1%

By your logic, that unaccounted for 69.23 % should be split 4:96 after the mortgage is paid off.

bobwilson

getmore4less wrote: »

The risk is that the other person might end up owing them money.
by using your model you create the risk that need not exist

If you do the equity shares coorectly it works out properly
By taking on the servicing and resonsibility for the larger debt you equalize the risk from day 1.

With your model the £100k deposit take the bigger loss than they should do since you are saying the negative equity is split 96/4 it shouldn't if done properly

I think this is the key point here.

When someone is paying a higher deposit, they are taking a higher risk. You may think that your model accounts for this, but the risk is that the other person won't pay back the debt, or won't pay back the other person should negative equity arise, and that would be a very high risk indeed. The £100k deposit however, is there and already exists.

Rather than the risk of one person to owe the other (as in your model), it makes sense that the risk is taken on purely between the person and the house's change in value. This way no person would ever owe another should the house go into negative equity, and each party would take on loss or gain according to their investment/risk. This is the way investment has been done for centuries.

This of it like this: if you bet on the horses £1 and your friend £99. They win £5000. By your model, they both would receive £2450 return on their investment. I appreciate it's a simplistic comparison a loan is involved, but the same principle applies. In this example, the return on investment is 1:99 and that is also the risk of loss should the horse lose, 1:99.

This, should also be how a house sale is split up, since its change in value is a risk.

Take another example, one person stops paying mortgage payments for the rest of the 23 year term and leaves the other to make the payments. By your model, they would still be entitled to 50:50 split. By the correct model, it will be dependent on the mortgage payments made by whom. If person 1 has contributed 20% toward investment of the property, he/she receives 20% of the increase or decrease in value, and so on.

Does anyone know where the law stands in regards to splitting house sales, or have any government links I can check out in this regard?

It seems there is a lot of disagreement, and a lot of ways of looking at this so it'd be great to see where the law stands (as illogical as many people often find it!)