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

thewrongtrousers

Had a similar situation with my brother years ago. It was slightly different and we sold the house rather than one buying the other out.

We didn't agree with a basic 50/50 split with the rent. As far as we were concerned the rental income from my brothers room was his and we split the rest 50/50 - it basically covered the cost of his mortgage payments. He did insist I take a fee for organizing the tenants but that is something for you to work out between yourselves.

Something else for you to consider is that as you are planning to buy him out then you will get the benefit of any improvements that are done on it. Personally, like others I don't think this is an issue, unless you say had a top of the range kitchen put in a few months ago.

Mossfarr

how about simplifying it completely?
Your brothers only contribution (via your parents) was 5% of the value on purchase.
So offer him 5% of its current value: £525000 x 5% = £26,500.00

getmore4less

The starting point is what equity you each owned at the start.

As he has never paid the mortgage and got say 1/2 the deposit he is in for 5% as are you.

Now the initial agreement was say 50:50 on that other 90% and you used lodger money to cover some of the mortgage.


There are 2 main ways to work this out.
Debt based or equity based.

With debt based you assume you own 50% of the equity and then work out how much of the debt you each have left based on the shares of the lodger income.

This will be relatively easy even if the lodger income was variable.

The equity way you try to establish how much of the debt the lodger money was servicing and how much you were servicing on your own.

to do that properly you need to add in a virtual lodger amount for yourself. the total lodger total you split at the equity % so have a slightly more complex calculation.

if the lodger money was variable then it might need some averaging out if there were big gaps.

with some number can give you an idea of where each of these end up.

xylophone

Your brothers only contribution (via your parents) was 5% of the value on purchase.
So offer him 5% of its current value: £525000 x 5% = £26,500.00

And what about his share of the capital gain?

Mossfarr

xylophone wrote: »

And what about his share of the capital gain?

He would be getting a 5% share of the capital gain.

The house was purchased for £315,000.00, Their parents contributed 10% deposit (5% each).
So the brothers gifted 5% share of £315,000 was £15,750.00

The house is now valued at £525,000 so 5% will be £26,500.00
The brother would be gaining £10,750.00 for his investment over the 4-5yrs they have owned the house.
Significantly more than if he invested the money in an ISA or savings account.

MyOnlyPost

Mossfarr wrote: »

He would be getting a 5% share of the capital gain.

The house was purchased for £315,000.00, Their parents contributed 10% deposit (5% each).
So the brothers gifted 5% share of £315,000 was £15,750.00

The house is now valued at £525,000 so 5% will be £26,500.00
The brother would be gaining £10,750.00 for his investment over the 4-5yrs they have owned the house.

Think about it......... Waiting for penny to drop.........

And how much does the OP make for the same investment?

£525,000 - 315,000 - 26,500 = ?

steeeb

Mossfarr wrote: »

He would be getting a 5% share of the capital gain.

The house was purchased for £315,000.00, Their parents contributed 10% deposit (5% each).
So the brothers gifted 5% share of £315,000 was £15,750.00

The house is now valued at £525,000 so 5% will be £26,500.00
The brother would be gaining £10,750.00 for his investment over the 4-5yrs they have owned the house.

He's due years of rent though. OP has been living in the house rent free. (But assuming he hasn't paid the mortgage, this needs to be taken into account also).

There are many many ways of looking at this. Deposit as a sum? As a percentage?

Now the price has gone up he'd be arguing for it as a percentage, if the house was now worth 100k he'd be wanting 15k :P

This is why it's always ideal to work out these things BEFORE. Although I know saying this now adds nothing to the situation.

Perhaps ask what his thoughts are first. Ask him if there's a figure he had in mind on what it would take for him to hand his share over. He might just say 'gimme 20k and tell me where to sign'.

Mossfarr

MyOnlyPost wrote: »

Think about it......... Waiting for penny to drop.........

And how much does the OP make for the same investment?

£525,000 - 315,000 - 26,500 = ?

The OPhas lived RENT FREE for 4-5 years and the amount outstanding on the mortgage is £258,00.00!
OP definitely wouldn't be making a loss - but has had all the work and inconvenience of dealing with tenants during that time!
To quote my earlier post......
"how about simplifying it completely"
5% in 5% out!
(nope - can't hear any pennies dropping).

thewrongtrousers

Mossfarr wrote: »

how about simplifying it completely?
Your brothers only contribution (via your parents) was 5% of the value on purchase.
So offer him 5% of its current value: £525000 x 5% = £26,500.00

Sorry can't agree with this at all. Okay the brother who doesn't live there hasn't paid any of the mortgage, however we don't know how much of any mortgage payment the rental income would cover. If we assume from what has been said that it pretty much covers it 100% then the brother is entitled to half the value of the property, maybe minus a bit for maintenance costs etc. My main problem would be how they divide up the rental income, as I have already said a straight 50/50 isn't really fair to me, but I am aware it could be argued that it is.

MyOnlyPost

Mossfarr wrote: »

He has lived RENT FREE for 4-5

Who has? The OP appears to be called Joanna and the brother doesn't live there.

Mossfarr wrote: »

To quote my earlier post......
"how about simplifying it completely"
5% in 5% out!

We should buy a house together as an investment on the proviso that I can buy you out in 5 years.

We pay £315,000 for a house and each put in 5% deposit, in 2022 the house is worth £525,000 and I give you 5% of the current value.

We each invest £15,750 and the mortgage is £283,500. I pay the mortgage for 5 years, lets say interest only and to do this I get tenants for the house to fund the payments.

In 2022 I agree to buy your half and I pay you £26,250 as you suggested. As you rightly say you are up £10,500.

I now have a house which is worth £525,000 and it has cost me £15,750 + £26,250 = £42,000 and I still have a £283,500 mortgage. I decide to sell the house tomorrow and lets assume £15k in fees

£525,000 - (£15,000 + 42,000 + 283,500) = £184,500

So because I paid the mortgage and dealt with tenants I take 94.6% of the eventual capital gain AND I got to live in the house for 5 years too.