Co-Owned Vacation Home

QUESTION:

We live in California and co-own a vacation condo in Hawaii. We own half and the other party owns half. There’s a $200,000 mortgage balance and the property has a market value of $165,000. If either party were to buy the other party out, how do you figure a fair price to buy out the other party?

ANSWER:

This is an issue that should have been settled before the property was purchased. An agreement between the parties could have said how profits and losses would be divided and also required a “partition” clause that essentially requires a sale to the owner who wants the property most.

There are several basic options.

First, sell your interest to the other party, or vice versa. This would allow the selling party to get rid of such things as maintenance, travel expenses and mortgage payments. But – is there any “value” to sell? Would the selling owner be forced to bring cash to settlement?

Also, a straight sale may not be practical because a transfer of ownership could set off a call from the lender to pay off the loan. Since the property value is less than the loan balance a sale would require the owners to bring cash to closing.

Second, transfer the title from one owner to another with a short sale. However, this requires an agreement by the lender to accept a loss on the mortgage. That seems hugely unlikely, since lenders do not want short sales where sellers retain an ownership interest.

Third, sell to an outside third party and try for a short sale. The lender would surely want to see if there are other ways to get its money back from the current owners.

Fourth, rent the place in an effort to lower ownership costs, generate tax benefits and delay a sale decision.

For specifics, speak with an Hawaiian attorney and get marketing advice from a local real estate broker.