How to split up the profit from this house sale

getmore4less

bobwilson wrote: »

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.

The £100k allrady got its share from the 30% it was invested in.


I am trying to decide if you are the one with the deposit trying to do over your mate or the one without looking for the info to defend their investment.


There is no way anyone with any sense would fork out £800pm for this limited return.

They should own the amount for the debt they are servicing, anything less is doing them over.

How have you accounted for the upfront costs or are they included in the £325 purchase cost and the £100k deposit?

getmore4less

bobwilson wrote: »

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.

I don't disagree with that part .

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

no they won't its a 1:99 split, by saying that you don't understand the model , my model is more like one party puts in £25 cash and they borrow £75 spliting the repayments £25:£50 when they lose they each owe a different amount, which is what happens with the house purchase model.

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.

At the time the debt repayments change the equity changes, you model this as if you refinanced with current value another indication you don't understand the model

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.

BY servicing the debt they are contributing to the % that bought

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!)

The issue is how do you fully protect the £100k if there is a shortfall and that is very difficult, the traditional one used is the get you money back but that does not reflect the investment it is equivilant to an interest free loan to the other party.

The equitable model reflects the relevent value of the investment and the
to insure against the other risk is very difficult since at the outset there is a negative equity situation due to the costs and as in your model the one without the deposit owns nothing so pays nothing.

This actualy increases the risk because it builds in the no need to pay.

The legal situation is that the mortgage is a single charge with joint liability and they get paid first(which is a risk in itself)

This is what causes the confussions because any other method of borrowing it would be obvious what the equitable shares are.

Any other agreement between the parties to try to ballance out the ownership is a side agreement normaly done through a trust deed which will if things are short result in a debt between the parties.

I think I understand what you are trying to do but I don't think you have it right with your model as the payment distribution does not reflect the equity owned at that point, the party with no deposit owns nothing so should pay nothing as soon as they start to service a bit of the debt they should own what that bit is worth at the time.

The simple example that shows the issue is 50% deposit other 50% serviced by debt on an interest only basis, your model the one with the deposit get everything forever, that does not reflect the risk.


Need to think if there is a way to do what you want, I don't think there is as the downside risk protection needs a different insurance than just getting more money later.

I don't think you can map the risk of the other person not paying IF there is a shortfall onto the net equity on the upside.

With the equity model when debt repayments changes this can be managed through changing the equity at the time it changes so that is not an issue.

The only risk is the shortfall one on disposal

The other issue is that the risk of not having a shortfall debt repaid is gone as soon as the value increases enough to cover the outstanding mortgage debt and the deposits so it no longer needs insuring.

bobwilson

getmore4less wrote: »

There is no way anyone with any sense would fork out £800pm for this limited return.

You could also say there is no way anyone with any sense would fork out £100k in this scenario. If the property had gone into negative equity, they could lose everything while the other person is protected, yet still gets equal profit in the event of a rise in value.

Are you a chartered accountant or solicitor? Or is this just your opinion.

Does anyone know where the law stands?

getmore4less

bobwilson wrote: »

You could also say there is no way anyone with any sense would fork out £100k in this scenario. If the property had gone into negative equity, they could lose everything while the other person is protected, yet still gets equal profit in the event of a rise in value.

Are you a chartered accountant or solicitor? Or is this just your opinion.

Does anyone know where the law stands?

That's why you use a trust deed to create the protection although there is always going to be the risk of a debt as the property will start with a capital loss due to costs and if the investment fails then you need to factor in a repayment plan or adjustment to the profit.
(you would also put in all the other exit conditions, to cover things like deaths, loos of income to cover the debts, change in mind on paying the debt or just wanting to get out, to not have some agreement in place is a far bigger risk than the initial investment)

Another way is to borrow separately but that can be expensive if you don't have some way to secure it. it does not have to be all the money just enough to cover the potential loss(the unknown).

I have given this some thought and with the equity model the only risk you are trying to protect is the inter person debt should there be a shortfall on disposal and the other person won't or can't pay.

Either party changing the debt they want to service is handled by the model at the time of change.

The challenge is quantifying the outcomes to determine what the risk is worth to both sides and putting in the the relevant premiums .

Once the asset value can meet the commitments the risk no longer exists.
You are already there in less than a year yet you expect near 100% from the start and have that reducing over the full 25 years, clearly the risk premium not in proportion to the risk.

The trade off to try to get a bigger share requires giving up the debt option

I don't think there is an algorithm that works that should be acceptable to the non contributor(unless it is quite small and limited overhang on value or time) as there is no benefit, the loss of upside negates the penalty on the downside but they still have to pay the full cost of what they are loosing for the full term.


You also still need to clarify what the inputs were at the start(at least £10k+) or if these are included in the £325k starting cost already.