Partner wants out--need advice on a fair "buy-out" price

11 Replies

Good evening y'all!

I'm new to the forums and the community, but I have been lurking from afar for awhile now.  My quick impulse to join the forums comes from a need to seek advice on a current dilemma with one of my properties. 

Currently one of my partners wants to liquidate his half (50%) of the partnership and has offered me a price.  I feel the price too high, mainly because it lacks applying any fees that we would have if we sold the place today.  My position is we should appraise the house, minus the fees of selling (somewhere between 7-10%), subtract the debt left on the mortgage and then divide it by 2.  Whatever that number is, is what his half is worth.  He contends that no fees should apply since I'll be making more money in the long run and that we should just get an appraisal, minus the mortgage debt and then divide by 2.  In his scenario, if I had to sell tomorrow by myself because of an emergency or need, I would already be down the 7-10% for the fees associated by selling it.  It doesn't seem right to me.

Does anyone have any experience or advice?  Am I crazy to think the fees should be factored in?...he seems to think so.  Is there another formula I should seek out?

Thanks in advance.

KIP

Make it simple. Determine what you would sell your half for, and give him a buy/sell offer. He can buy you out or you will buy him out, at the same number. That is pretty fair.

I agree with your interpretation.  If you should decide to sell soon, you'd being paying the full fees from your half.  He's the one that wants out, you shouldn't take the hit.

the above two posts are great...

Just out of curiosity what kind of deal is this?  Are you guys holding with tenants, is it a flip in progress, what is the exit strategy? How much are you both invested at this point and what do you believe the appraisal will come back at?

Holding with tenants.  Lease will be up in August.  I haven't even factored in the cost of making it "look pretty" for resale.  This was originally a buy and hold, but now he wants out.   I think the appraisal will come back lower than he thinks.  He thinks it will be $490k, I think it will be $460k....current tenants haven't been the cleanest of folks :-(

Currently I'm 50% owner, looking to hold on longer and willing to buy him out at a reasonable price.  If that doesn't work, he's more than capable of finding someone else to buy him out if I don't agree on the price.  Just want a fair price for his share and the way the discussion have gone, I'm looking for a little ammo or objective formula to use to simply it all.  His version of him not paying fees versus mine of paying 7% is a $17,250 swing in his favor.

@Kip Pierson  Do you have an agreement with buy out language in it?  If there's no language regarding buy out in your agreement then it seems to me your options are wide open on determining a value or even to agreeing to a buy out @ all.  I would assess the risk/reward of having 100% control of the property.   I

  • If the property appraisers for more than you paid for it- Great deal for him to cash in on the appreciation without really having to see if the market agrees with the appraisal. You would be the one that eventually be taking the risk of trying to sell the property @ that appraised price or higher later.
  • If the property appraises for less than you paid you could pay him off now, betting that it will appreciate in the future or the value could go down.

Either way it's a gamble.  

Another approach would be to base the buy out on the original investment plus income the business/property is producing.  Remove the appreciation bet.  Put a value on his original investment, then plus up the buy out based on the property net income.  He's out, gets his investment back with interest.  

Best way to determine a fair price - one person picks a number, the other decides if the number is a buy or sell price. 

Take over his side of the debt and tell him goodbye.   He doesn't get to realize any profit on it until there is profit on it, which is when it is sold.   Who knows what it will sell for or what damage will be done before the tenant moves out.   You can't have your cake and eat it too.   I would put it on the market to sell,  whatever is left after it is sold you split it, if there is a loss, then you both get to eat it.   This is why it is very important if you go into a partnership, that everything is very well defined before any money changes hands.  As they say, the only ship that won't sail is a partnership. 

I like what Joseph said.  Sit down together and work out what is fair if either partner wanted out.  Then you both are in agreement or......have a non related 3rd party investor give their 2 cents after analyzing all the details.

The best offer I'd give him is an appraisal -10%.  You're going to pay 6% to an agent to sell it at some point, plus other customary closing costs.  You're also going to have to get it ready to sell and you're going to be paying the mortgage while it's vacant and on the market.  There's no guarantee of appreciation so his claim that you'll make more later is baseless.  

In the future when entering a partnership an exit agreement is one the absolute first things to get in writing because every partnership ends at some point.  

How is the title and mortgage held? In an LLC or in your names?

I agree with @Joseph Ball  and @Bryan H.  , ask him if the would buy you out at the price he picked, and ask yourself if you would sell your part to him at the price you picked. If the answer is no, then the price is not fair.

Would you let him buy you out for 207K(cash and mortgage assumption)?  If so that is a fair and reasonable offer.

How much did you put into the property?  

Would he will to be a silent 25% partner for 1/2 of the cash he put in originally(assuming there has been an increase in the value).  He retains some upside long-term, but gets some cash now.  If you go this route, I would amend the agreement to allow buy-outs either way and also you may want to protect against a partition lawsuit if possible.

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