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A buyout occurs when one property owner purchases another owner’s share. Common in divorce, inherited property with multiple heirs, and co-ownership situations where one party wants sole ownership. Understanding the process helps both sides reach fair agreements.

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When Buyouts Happen

One spouse keeps the home and pays the other their share of equity. Most common buyout scenario.
Multiple heirs inherit together. One wants to keep the property; others want cash.
One partner exits while others continue. Departing partner receives their ownership share.
Joint owners disagree on keeping vs selling. One buys out the other to resolve the conflict.
LLC or partnership dissolves. One member buys property from entity or other members.

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Calculating Buyout Amount

Basic formula: Property value minus mortgage balance equals total equity. Multiply by departing owner’s ownership percentage.
Example:
  • Home value: $400,000
  • Mortgage balance: $250,000
  • Total equity: $150,000
  • Departing owner’s share (50%): $75,000 buyout
Options:
  • Professional appraisal (recommended for significant value)
  • Comparative market analysis from real estate agent
  • Agreed value between parties
  • Average of multiple valuations
For contested buyouts, independent appraisal provides objective basis.
Check the deed for ownership shares. If not specified, most states assume equal ownership.Some situations involve unequal shares based on contributions, agreements, or court orders.
Buyout amount may be adjusted for:
  • Deferred maintenance or needed repairs
  • Selling costs avoided (agent commissions, closing costs)
  • One party’s contributions to mortgage or improvements
  • Outstanding liens or obligations
Selling costs are often factored into buyouts. If selling would cost 6% in commissions plus closing costs, a buyout might discount by 3-4% since those costs are avoided.

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Funding the Buyout

Most common method. Keeping owner refinances for higher amount, uses extra funds to pay departing owner.Requirements:
  • Sufficient equity
  • Keeping owner qualifies alone
  • Lender approves higher loan amount
Example: Current mortgage is $250,000. Refinance for $325,000. Use $75,000 to buy out co-owner.
Second loan against property provides buyout funds. Original mortgage stays in place.Considerations:
  • Two payments instead of one
  • May have higher interest rate
  • Requires sufficient equity
  • Original co-owner may still be on first mortgage
Pay buyout from savings, investments, or other sources.Works when buyout amount is manageable and keeping owner wants to avoid refinancing.
Departing owner accepts payments over time instead of lump sum.Structure:
  • Promissory note documents terms
  • May be secured by property (second lien)
  • Interest rate and payment schedule negotiated
Risk for departing owner if payments stop. May require legal enforcement.
Instead of cash, departing owner receives other assets of equivalent value.Common in divorce: one spouse gets house, other gets retirement accounts or investments.Watch for: Tax implications differ by asset type. Equivalent dollar amounts may not be equal after taxes.

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The Buyout Process

1

Agree on value

Get appraisal or agree on property value. This determines buyout amount.
2

Calculate equity and buyout

Subtract mortgage from value. Multiply by departing owner’s share. Negotiate any adjustments.
3

Determine funding method

Refinance, home equity loan, cash, or other arrangement. Keeping owner must qualify.
4

Draft agreement

Written agreement specifies buyout amount, payment terms, timeline, and contingencies. Attorney recommended.
5

Complete financing

Refinance closes or other funding secured. Lender removes departing owner from mortgage (if refinancing).
6

Execute deed transfer

Departing owner signs quitclaim deed transferring their interest.
7

Distribute funds and record deed

Departing owner receives payment. Deed recorded with county.

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Mortgage Considerations

Refinancing is typically the only way to remove someone from a mortgage. Lenders rarely release borrowers without refinance.Until removed, departing owner remains liable even after signing away ownership.
Keeping owner must qualify for mortgage using only their income and credit. If unable to qualify, buyout may not be possible.Options if qualification is difficult:
  • Smaller loan amount (larger down payment)
  • Co-signer (creates new liability issues)
  • Wait until financial situation improves
  • Sell instead of buyout
Deed transfer and refinance should happen together. Departing owner shouldn’t sign deed until refinance removes them from loan.Title company or attorney can coordinate closing both simultaneously.
Never transfer your ownership before being removed from the mortgage. You would have no ownership but remain liable for the debt.

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When Buyouts Fail

If parties cannot agree on buyout terms: Negotiation and mediation Neutral third party helps reach agreement. Less expensive than court. Partition action Any co-owner can file lawsuit forcing sale. Court orders property sold and proceeds divided. Expensive, adversarial, and may result in below-market sale. Continued co-ownership Maintain status quo if no one can afford buyout and no one wants forced sale. Requires cooperation and clear expense-sharing agreement.

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Tax Implications

Transfers between spouses incident to divorce are not taxable. No capital gains at transfer time.
May be treated as sale by departing owner. Capital gains tax may apply on their share of appreciation.Consult tax professional for specific situation.
Keeping owner’s basis includes original purchase price plus buyout amount paid. Important for calculating future capital gains.

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Protecting Both Parties

For departing owner:
  • Get independent appraisal
  • Don’t sign deed until removed from mortgage
  • Get buyout agreement in writing
  • Consider title insurance for seller financing
  • Verify funds received before signing deed
For keeping owner:
  • Ensure you can afford the property alone
  • Get pre-approved for refinance before agreeing to terms
  • Factor in all ownership costs, not just mortgage
  • Document any adjustments to buyout amount
  • Complete transaction promptly

Next: Removing Names from Title

Taking someone off property ownership

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