Q: Our parents left their home to me and my two sisters. The home is located in Oklahoma and was appraised at $49,000 three years ago. The home has a mortgage with a balance of about $21,000 and the house needs some repairs. One of my sisters wants to buy out my sister and me. She’s offering us each $9,000. Does this amount sound fair?
A: At first glance, the amount your sister is offering you seems about right. But we certainly can’t tell you that it’s fair for sure. But if we make some assumptions, we can provide a little context that will help you understand the deal and whether your sister’s offer is fair or not, and whether you should take it anyway.
Let’s start by assuming that the home is still worth $49,000. If the value hasn’t changed much, then the sister that’s buying you out is probably giving you a fair amount. (We’ll explain in a moment how the numbers play out.)
But what if the property is really worth $100,000 or is only worth $15,000. Is the price fair?
You need to know a bit more about the transaction so that you and your sisters can evaluate the offer. If all the homes in the neighborhood are selling for around the same amount and they are all in about the same condition as your parents’ home, you have a great reference point. It’s easy to then assume that the property is truly worth $49,000.
If, however, home values have gone up and real estate brokers in that area now feel that home prices are significantly higher for homes similar to yours, the $9,000 per sister price may be too low given where the market is.
But what if your parents’ house is in worse condition than other homes in the neighborhood? If the repairs needed to the home are extensive, the true value of the property might be $49,000 when other homes of a similar size but in better condition are selling for $80,000.
Here’s how the numbers look if the home’s value is right around $49,000. Start by subtracting the payoff amount for the loan, and a number of costs relating to the sale, including the broker’s commissions and other closing costs. The closing costs could run about 2 to 3 percent plus the 6 percent commission. That’s about $4,500 plus the $21,000 loan, or about $25,500. That would leave you with about $23,500 in cash. Divided by three, and you’d receive slightly less than $8,000 each. In this context, the $9,000 she’s offering seems quite fair.
Remember, you’d have to sell the home for a bit more than the $49,000 to come out ahead if you consider that most sales require the payment to the broker of anywhere from 4 to 7 percent of the sales price, other closing costs and fees, transfer taxes and recording fees, among many. If your costs of sale were to be around $7,000, you might have to sell the home for around $55,000 to see the same payment to each of you of about $9,000.
You could talk to a few local real estate agents about the property and see what value they estimate for the property. That will give you additional perspective.
The more important issue here, however, is how you handle the emotions attached to the property. Are you and your other sister keen to sell? How will you feel if your sister buys your shares of the property, renovates and then cashes in on the sale down the line? The most important thing to preserve is your relationship and if selling to your sister will preserve and enhance your relationship, then taking the deal is the smart thing to do.
Over time, a few thousand dollars won’t matter much. But the ongoing relationship you have with your sisters and their families is much more valuable.
Let us know how it all works out.