Buying Home With Friend Leads To Problems

Added February 15, 2007 by Ilyce R. Glink and Samuel J. Tamkin

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Summary: A homeowner had a friend buy half her home for a short period of time. The friend now wants the equity the home earned during the time she was an owner. Even though this deal had no documentation, the friend is owed the equity on her short-term investment. A sound contract up front would have made it clear if the friend was owed equity after selling the house back.

Q: I purchased my present residence in December of 2004. Shortly thereafter, a friend of mine, who basically lived out of the country, inherited some money and wanted an investment.

Stupidly, I suggested she purchase one-half of my house. She paid half of the purchase price. Less then 6 months later she opted out of the deal and wanted her money back (which I gave her). In the meantime, the house had increased in value significantly.

Now she wants half of the equity for that short period of time. I offered her 6 percent interest on money. There was no contract of any kind. Due to a problem with my lender, she was put on title to the home and later taken off title and never put back on.

What, if anything, do I owe her? She never saw the property; and specifically wanted an investment. Thanks for your help!

A: If you sold her half of the home on day one and six months later the home appreciated in value, you owe her half of the increase in the value of the home during that time period.

You paid her what she invested in the home and by your own admission, the value of the home increased. She should be entitled to her share of the appreciation. Of course, she also might be responsible for one half of the expenses incurred in connection with the home during the time you and your friend owned the home.

Clearly, it would have been better for both of you to have had some documentation -- even a letter that described your relationship and expectations, and in particular described who would pay for what expenses and how profits would be shared upon the sale of the home.

Also, some people overlook certain expenses that would otherwise get paid in the sale of a home that might not be paid when one partner buys another partner out of an investment in a home. One such expense is the cost of paying a real estate broker. When you sell a home, you might list the home for sale and pay a real estate broker between 4 and 6 percent of the sales price as a commission.

When you bought your friend out of the home, you could have assumed that the sale was done as if it had been done in the marketplace and deducted from your friend's proceeds those costs that she would have otherwise paid.

You might have made a mistake when you sold her one half of your home, but you should honor the terms of your arrangement -- whether or not that arrangement was in writing -- and pay her half of the appreciation of the home, less costs and expenses.

Sit down with a real estate attorney to work through the numbers and then sit down with your friend and walk her through the numbers. Before you hand over a check to your friend, make sure you have some documentation that recognizes that your friend has been paid in full and has no claims against you or the home for any money owed.

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