How do I calculate a fair figure to buy my brother out?

joanna183

Hi all, I'm looking for some advice about how to calculate a fair figure to buy my brother out of our shared flat.

To give some background, we bought the flat (3 bedroom) in 2012 at a purchase price of £315,000, with a 10% deposit generously given to us by our parents. My brother moved abroad so has never lived in the property, and I rented out two of the rooms to help cover the mortgage. In the last five years I have spent ~£20,000 on home improvements (new kitchen, bathroom, etc) but have had the benefit of tenants covering some of the mortgage throughout the period. He hasn't contributed but we agreed that we would take this into consideration at point of sale. Our life situations have changed (he's now married with a baby) so we have discussed the possibility of me buying him out. The property is now worth £525,000 with £258,000 outstanding on the mortgage.

How do I come to fair figure of what the amount would be for me to do so? Do I take into consideration the fact that the home improvements would have added value to the property, or do I just look at the cash value of what I paid? Any advice would be MUCH appreciated!

MyOnlyPost

Generally home improvements such as kitchen and bathroom only add value to the owner, unless it was particularly run down at the time of purchase. If you did a massive upgrade as opposed to swapping like for like then this may have some impact on the value but unlikely as much as what you actually spent.

Has you brother been paying any of the mortgage or have you paid it solely? Is this mortgage in joint names? This affects the calculation as to what he is due as some of the principle has been paid down already. Also if you brother has never lived there he will be laible for capital gains tax on his half

steeeb

How much do you estimate the property to be worth without the improvements?

Do you (and your brother) somewhat agree that you living there 'rent free' and you having to pay all the mortgage somewhat cancel each other out?

In reality the home improvements might not have actually made much different to the purchase price, only saleability - I assume the mortgage payments have been significantly less than that of what rent would be.

So you can probably just both agree it's fair that £525k is the figure to use.

His equity share in the property is (525-258 = 267/2) = 133.5

joanna183

@My Only Post Thanks for your advice re the home improvements, I hadn't thought that they may affect the saleability rather than the value. Regarding your questions, I have paid the mortgage solely, and yes, the mortgage is in our joint names.

ThePants999

There are no factual answers here. Fundamentally you have to reach agreement with your brother. A fair figure is one that you're happy to pay and he's happy to accept, that's all there is to it. Ideally, you both would have discussed this in advance of incurring the costs / taking in the lodgers :-)

There's a lot of potential for debate about what factors are and aren't appropriate to take into account, how much value to assign to X and Y, etc. In the absence of any up-front agreement, I would suggest that 50% of the equity would be a reasonable starting point. If you sleep on that and decide that you'd feel particularly hard done by, you could start trying to account for everything. Don't jeopardise your relationship with your brother, though. It's all too easy for that to happen with these things.

If you really want to get technical, then at the other extreme of the simplicity scale, I'd also consider this to be "fair":
- 50% of the equity
- minus half of all mortgage payments made to date (that he would presumably have paid if resident)
- plus half the rent that the flat could have achieved if let in its entirety for the period (which you logically owe him for having sole use of a house that's half his) - note, doing it this way means you take the income from lodgers completely out of the equation, as once you've paid notional rent then the flat is yours to do with as you wish
- minus either half of what you spent on home improvements (which he would presumably have contributed if resident), or half of the increase in the property value that resulted from your home improvements - different people have different views as to which of these are appropriate. You did all the work, but the flat post-improvements is still half his, but then what if it added less value than it cost, but then how do you calculate the value it added, yadda yadda...

The logic there is that if he'd contributed half of everything, and been fairly remunerated for not having use of the half a flat he owns, he'd clearly be owed a simple 50% of the equity. So you're trying to put him in the same financial position as if that had happened. As you can see, it's more than a little complex, which is why I'd just forget it all and go for 50% personally!

joanna183

@Steeeb - thanks for your reply. We do indeed agree that there has been a benefit to me living there with tenants, and there has also been a benefit for him in that he's never had to deal with them :-) Luckily, I think we're both after the best possible outcomes for ourselves and for each other. The last thing we want is to cause a family feud.

How much do you estimate the property to be worth without the improvements? I guess not actually that much less. I'd be completely guessing at £515,000 so a negligible difference.

steeeb

Perhaps say to him the property would be worth around 515k without the improvements you soley paid for. Mention the mortgage and rent likely cancel each other out.

How about I buy you out based on a 515k figure.

If he's not happy with that, ask why and work from there.

Based on 515k:
258k - Outstanding mortgage
257k - Outstanding equity

Will you be able to get a mortgage for 386.5k? (Assuming you have no other savings and you're just using your 128.5k equity).

MyOnlyPost

First thing you can say is that the valuation is not the basis for where you start. If you were to sell the house now then your brother would be liable for half of all the associated fees and you are taking on that future burden so the valuation is actually

£525,000 - (Theoretical EA fees + Conveyancing fees) = Valuation for splitting

Then as you solely have paid down some of the capital I would think it unfair for your brother to expect a share of that so now

Valuation for splitting - original amount borrowed = shared equity (this includes deposit) to be divided.

As said though there is no legal right and wrong and it's down to what you can both agree on. It may be better for you to give your brother some money before April 5th and some after so he can split his capital gain over two years and if acceptable (and possible) maybe even give some to his wife to lessen his tax burden. I am not a tax expert though and cannot comment on the legality of splitting the gain over two tax years, it was just a thought I had

joanna183

ThePants999 wrote: »

There are no factual answers here. Fundamentally you have to reach agreement with your brother. A fair figure is one that you're happy to pay and he's happy to accept, that's all there is to it. Ideally, you both would have discussed this in advance of incurring the costs / taking in the lodgers :-)

There's a lot of potential for debate about what factors are and aren't appropriate to take into account, how much value to assign to X and Y, etc. In the absence of any up-front agreement, I would suggest that 50% of the equity would be a reasonable starting point. If you sleep on that and decide that you'd feel particularly hard done by, you could start trying to account for everything. Don't jeopardise your relationship with your brother, though. It's all too easy for that to happen with these things.

If you really want to get technical, then at the other extreme of the simplicity scale, I'd also consider this to be "fair":
- 50% of the equity
- minus half of all mortgage payments made to date (that he would presumably have paid if resident)
- plus half the rent that the flat could have achieved if let in its entirety for the period (which you logically owe him for having sole use of a house that's half his) - note, doing it this way means you take the income from lodgers completely out of the equation, as once you've paid notional rent then the flat is yours to do with as you wish
- minus either half of what you spent on home improvements (which he would presumably have contributed if resident), or half of the increase in the property value that resulted from your home improvements - different people have different views as to which of these are appropriate. You did all the work, but the flat post-improvements is still half his, but then what if it added less value than it cost, but then how do you calculate the value it added, yadda yadda...

The logic there is that if he'd contributed half of everything, and been fairly remunerated for not having use of the half a flat he owns, he'd clearly be owed a simple 50% of the equity. So you're trying to put him in the same financial position as if that had happened. As you can see, it's more than a little complex, which is why I'd just forget it all and go for 50% personally!

Hi The Pants,

I totally agree - this would be much easier if we decided this at the start! :-) But, we are where we are and it's a lesson learnt. I also agree that I don't want to jeapordise our relationship. It's really interesting to hear different ways of calculating it. I think I'm going to do it a few ways and see what the outcomes are. I'm presuming they're not going to differ greatly. Thanks for your advice, I appreciate it.

joanna183

MyOnlyPost wrote: »

First thing you can say is that the valuation is not the basis for where you start. If you were to sell the house now then your brother would be liable for half of all the associated fees and you are taking on that future burden so the valuation is actually

£525,000 - (Theoretical EA fees + Conveyancing fees) = Valuation for splitting

Then as you solely have paid down some of the capital I would think it unfair for your brother to expect a share of that so now

Valuation for splitting - original amount borrowed = shared equity (this includes deposit) to be divided.

As said though there is no legal right and wrong and it's down to what you can both agree on. It may be better for you to give your brother some money before April 5th and some after so he can split his capital gain over two years and if acceptable (and possible) maybe even give some to his wife to lessen his tax burden. I am not a tax expert though and cannot comment on the legality of splitting the gain over two tax years, it was just a thought I had

Very good point, MyOnlyPOst, I hadn't even considered fees, or capital gains tax. Thanks for planting seeds of thought!

joanna183

steeeb wrote: »

Perhaps say to him the property would be worth around 515k without the improvements you soley paid for. Mention the mortgage and rent likely cancel each other out.

How about I buy you out based on a 515k figure.

If he's not happy with that, ask why and work from there.

Based on 515k:
258k - Outstanding mortgage
257k - Outstanding equity

Will you be able to get a mortgage for 386.5k? (Assuming you have no other savings and you're just using your 128.5k equity).

Hi Steeeb, I've just read a few other posts in this forum and I think I need to talk to the lender first to see what the reality of this situation actually is. I have £70k in savings but ideally would not want to use it all, as I like having a buffer in case of emergencies.