Are you currently going through a separation but want to keep the house? Have you just inherited the family home along with your siblings and want to become the sole owner? If any of these situations apply to you, there’s a simple solution – a buyout.
Buying out your partner, family member or any other undivided co-owner essentially means financially compensating those involved in the deal, who will then give up their claim to the property. They will then lose their deed to the property and will no longer be able to make any decisions regarding it.
Here's what you need to know about real estate buyouts.
Buying out your partner as part of a separation or divorce
Buyouts in real estate are mainly done in the context of a divorce or separation. This is one of the three options available to couples when it comes to settling the matter of residency, as mentioned in our article Separation or divorce: handling the mortgage and the house. A buyout can therefore be presented as an alternative to selling the house when one of the partners is interested in keeping the property and has the financial means to do so.
Why do we have to buy them out?
In some cases, you might wonder why it is necessary to buy out the partner who wishes to leave the property. This question is all the more legitimate when the house is only registered in the name of one of the two people.
It should be noted, however, that the law considers spouses or those in a civil partnership to be equal. In this sense, they are deemed to have claim to the property in equal shares, in other words, half-half, even if only one name is on the contract. Each of them is entitled to half of the profits in the case of resale. When one of the two spouses wishes to keep the house rather than sell it, it is therefore necessary to financially compensate the one who no longer wishes to keep the house by buying them out.
Note, however, that there may be some exceptions to this rule; for example, common-law partners are not subject to the same legislation. For more details on this topic, you can consult this page on Éducaloi.
Market value assessments during a buyout
Before being able to buy out your spouse, it is still necessary to know the value of their share and, by extension, the value of the property at the heart of the transaction. The first step to becoming the sole owner of the home is to have its market value assessed by a professional.
To do this, it is highly recommended that you seek the expertise of a licensed appraiser. This type of real estate professional will be able to accurately and objectively establish the market value of your home. Check out our articles for more information on the role of this expert as well as the costs involved. Alternatively, you can contact us to be put in touch with a licensed appraiser in your area.
How to calculate the value of the share to be bought out
Once you know the market value of your property, you can then determine the value of your spouse’s share using this calculation:
Home value – debts associated with the property = net worth
Net worth ÷ 2 = value of spouse’s share
It is first necessary to subtract any debts accrued on the property (i.e., the balance of the mortgage left to pay, penalty fees for breach of contract, etc.) from the market value of the house. This allows you to calculate your home equity.
Since, as previously mentioned, partners are deemed to have equal ownership of the residence, this equity is then halved. Once this operation is completed, you will know the total value of your partner’s share, which you will then have to buy out in order to have complete ownership over the property.
Depending on the agreement you make with your ex-partner, the buyout price can be paid in cash or by transfer of a property of equivalent value.
Financing a buyout and changing your mortgage loan
To buy out your partner and become the sole owner, it is most likely that you will need a mortgage. You will then have to prove that you can afford to pay for the house by yourself.
The financial challenge will be even greater if you have yet to build much equity on your home before separating, since the loan you will have to take out will be quite substantial. This will reduce the chance of your proposal being accepted by the bank.
As with any mortgage, your financial institution will consider your income, debts, and credit history to judge whether or not you qualify for the loan. You will therefore need to have sufficient earnings to make mortgage repayments, as well as a good credit score and no prior history of late payments.
If the bank refuses to grant you financing, know that there are alternatives that could still allow you to go through with your plan. One such alternative is to ask a partner or family member to be a guarantor on your loan. However, be careful when choosing this option and be sure to understand the responsibilities and consequences of such a choice before going ahead with it.
A second alternative is to apply for a loan from another financial institution since there is no obligation to stay with the same bank. You could also turn to a private lender, although this usually carries more risk than a financial institution. Once again, be aware – this is a temporary solution and should not be used in the long term.
Costs associated with a buyout
Before going ahead with your plan to keep the house and buy out your partner, it is imperative that you consider the costs associated with this decision. Among other things, it is important to think about the total costs, with breach of contract fees, notary fees, evaluation fees, etc.; these areall things to consider.
Don’t forget that, once the agreement is settled, you will also have sole responsibility for paying all municipal and school taxes, maintenance and repair fees, electricity costs, etc.
However, it is worth noting that if you buy your ex-partner's share within 12 months of the separation, you will not have to pay transfer tax on the transaction.
Buying out in an undivided co-ownership
Although often mentioned in the context of a separation or divorce, buyouts are not limited to situations like this.
in fact, a buyout can also occur in any situation involving an undivided co-ownership. Co-owners can be members of the same family who have obtained property rights as part of their inheritance, friends who have co-signed for the purchase of a property, or spouses who have purchased a home for two.
Therefore, if you inherited the family home together with others in your circle, you could buy them out in order to become the sole owner. Similarly, if you bought a country house with two of your friends and one of them wants to leave the area to settle elsewhere, you could decide to keep the residence between the two of you by buying the third person’s share.
As explained above, you will first need to have the property in question valued in order to determine the value of your respective shares. In these circumstances, however, the share held by each person may not be equal. You can consult the co-ownership contract, if applicable, to find out the share of the person who wishes to give up their share of the property. You can then multiply this share by the home equity in order to get the buyout amount. Let’s look at an example:
The share of the individual wishing to leave the house is 40%.
The home equity is $250,000.
$250,000 x 40% = $100,000
The value of the share you will have to buy will therefore be $100,000.
You can then proceed with the buyout, and if necessary, take out a new mortgage on the property.
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