Property Valuation For Partner Buyout

4 Replies

I did what most people warn against....getting into business with a family member, and starting an LLC without an operating agreement. Long story short, we need to end our business ties, but there is disagreement about what the buyout price should be for each partner's equity stake. There are three of us in the LLC, and one of the partners will not consider any option other than keeping the property (SFH) for himself....he also has the most conservative calculations when determining the price he'll buy at (no surprise!), which includes realtor fees. Here is the state of things:

PRINCIPAL$148,000.00
APPRAISAL$200,000.00
EQUITY $52,000.00
BANK ACCOUNT CASH$20,500.00
TOTAL EQUITY $72,500.00
EQUITY SPLIT DIVIDED BY 3$24,166.67

The Question: If one of the partners will end up with the property....ie: there is no realtor sale, no closing costs, no vacancies etc. is it still standard practice to value a property with those costs factored in? I say no, but the partner doing the buying is of course adamant that these should be figured in because he will eventually have to sell the properties in the future, which makes his buyout number close to $17K. I have offered to buy him out at the $24K number, but he won't sell to me. 

What do you think BP members? What is a fair, by-the-books method for valuing a single-family rental to dissolve a partnership without selling the house on the market at "market price"?

oooh...that excel chart didn't post well....let me try again:

Principal: $148K

Appraisal: $200K

Bank Account: $20,500

Total Equity: $72,500

Equity Split / 3: $24,166

@Marc M.   I recently did a buy out of a partnership of almost 25 years.  Our operating agreement was almost that old and didn't account for a lot of variables - like one of us keeping the property!  We started with the closing costs built in, such as realtor fees, but in the end we removed them under the assumption that there would be more value in the future and it was ultimately to the remaining partner's benefit if/when he finally sells (Or, he may die and pass the property to heirs, or leave to charity, or ...  and never encounter the costs.)  

In my case, I had to make the case that my partner would be better off selling to me because...  The value of that benefit became the purchase price. 

There may be "standard practices" but they are all negotiable.  Splitting the cost may be an option for you, or create some other valuable consideration for him, such as actually owning it himself without partners! 

I also had to ask myself, Would I be willing to accept the deal I am offering? (sounds like you've done this!) While we both valued the relationship above the $, an equitable agreement had to be made.  While we had some bumpy spots along that road, but I will be meeting my ex-partner for coffee tomorrow at 9am, and THAT is priceless!   

I wish you well!

@Marc Maxey - Just my two cents - Who is to say that he won't sell as for sale by owner down the road in which case there is no realtor's commission.  Also I would point out that he gets appreciation from this point forward...what is the value of that?  This should more than make up his sales commission depending on how long he holds it.

Stick to your guns, and don't do the buy out until you get the price you think is fair.  Your "partner" has to realize that he is gaining and appreciating asset with equity....sell him on that fact....if he can't see that....then sell the asset. 

@Curtis Bidwell and @Chadd Naugle , thank you for the thoughtful replies. I completely agree with both of your points....especially that the realtor fee can be avoided (either hold forever or fsbo) and there is value in being the guy who keeps the property with future appreciation....not to mention that this property is happily cash-flowing with leases signed for the next year! 

For now, I'm just staying put with the way things are since the number I have been offered for my interest is so low....keeping the property with an unruly business partner is more appealing than seeking a judicial dissolution. And for anyone else reading this thread....learn from my mistakes! If you don't have an operating agreement for LLC....even the most basic one, you'll likely default to the state's LLC statutes, which are fairly restrictive and pretty much force you to sue your business partner if you want out. My attorney said this would cost between $30-40K. Unless you have a ton of equity in the deal winding up in court is a losing game.

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