Writing for the Chicago Tribune, practicing attorney Benny Kass writes:

“In my opinion, if two or more people buy real estate, they should enter into a written partnership agreement — before taking title — that attempts to anticipate future problems. It’s always better to reach an agreement when you are talking with your partner rather than when you are fighting each other.”

Amen. So what does such an agreement look like, what are the various legal arrangements for owning a home with others, and how does this impact the sale down the road?

If you buy property with your spouse…

According to the National Association of Realtors’ 2019 Home Buyers and Sellers Generational Trends Report, 63% of recent home buyers are married couples. People who purchase property with their spouse generally hold title in joint tenancy with the right of survivorship because should one spouse die, all property rights pass to the surviving spouse (regardless of what’s written into the will).

This varies from owning a house as community property, an arrangement in which a spouse can will their share of the house to someone else. Under joint tenancy, however, an owner can still sell their interest in a property to someone else before they die.

If you buy property with your siblings…

You may choose in this case to own the house as tenants in common. With this setup, each tenant owns a percentage of the property, but those percentages don’t have to be equal. So one tenant could have a 20% stake, another a 30% stake, and yet another a 50% stake.

When the time comes to sell, all of the co-tenants must agree on how to move forward (whether that’s through selling the house or some kind of buy-out arrangement). If the co-tenants can’t settle on a plan, then they’ll have to go through a partition proceeding in court (more on that below).

If you purchase an investment property…

Setting up an LLC in this case has several advantages, according to a report from U.S. News and World report: 1) An LLC protects you in the event that someone gets hurt on the property (though state laws on the level of liability protection vary) and 2) You can have an unlimited number of owners and outline how the sale of shares in the LLC are to be handled in the planning documents.

When you plan for your estate…

To avoid probate, put the property in a living trust. This is the step many aging parents take to ensure a smooth multi-owner home sale among heirs after their passing.

“I’m working with a client with three sisters on a property that’s been in the family for 40 years — with that many beneficiaries, things can get complicated,” says Ristau.

“Luckily, there’s a trust document in place that removes many of the hurdles. It’s set up so that the one sibling is the successor trustee of the property for the parents. So, when both parents pass, that sibling picks up the reigns as she has been legally designated to make the decisions on the property.”

Hire an agent who’s a neutral party

You can keep the terrain neutral by hiring an agent who no one knows personally but who is also a high performer and objectively qualified to deliver a great outcome on the sale that everyone is satisfied with. To make it easy, HomeLight will connect you with three top-performing agents in your area with relevant experience for your neighborhood and property type, and from there you can select someone who all owners believe to be a good match.

During a buyout, get the house professionally appraised

Let’s say you have three people who own a property — John, Betty, and Tom. John and Betty decide they want out and would like to sell the property. Tom, however, won’t agree to sell and would like to continue owning the house.

In that case, one option is for Tom to buy out John and Betty from their share of the house. This requires 1) that Tom is financially able to do so and 2) that the three owners can agree on how much the house is worth.

Unless everyone is super amicable and happily agrees on the property’s value, then the next logical step is to have the home professionally appraised to come up with that number objectively.

If the appraiser says the house is worth $500,000, then each party has a  $166,666 share in the property (assuming they all own an equal stake). Tom would then collectively owe $333,333 before he owns the house outright.

However, in this situation there’s an inherent conflict of interest: Tom, who has to buy out John and Betty, is hoping the house appraises a little lower so that he owes less, while John and Betty want to walk away with the most money possible. They’re gunning for a higher appraisal.

So it’s not a given that a single appraisal will put all the owners in agreement about how much Tom owes. Tom may choose to order a separate appraisal from John and Betty’s, and the parties could meet somewhere in the middle of the two values. But if this doesn’t result in an agreement, then the owners will likely have to get a judge involved.

Pro tip: If you’re the one who sells your share of a multi-owner property, you’ll need to take steps to remove your legal obligation to the property.

This includes making sure the mortgage is refinanced to remove you from the loan (or that your name is removed from the existing mortgage if allowed). You’ll also need to remove your name from the title with a quitclaim deed.

Split ownership costs fairly until the house sells

Whether you have a tenants in common or joint tenancy agreement in place among multiple owners, it’s typically expected that each owner pays their fair share of the continuing housing expenses (mortgage payment, utilities, etc.) until the property sells.

The amount owed by each party is typically split by the percentage of ownership. If you own 50%, and your two co-owners each own 25%, then you’ll need to cover half of all housing expenses while your co-owners split the remainder.

Understand what you’re owed from the sale and the costs of selling

If you’re a 50% owner, this doesn’t mean that you’ll get exactly half of the sold price, however. Proceeds are only paid out after all closing costs, taxes, fees, and commissions are paid.

If the house is an inherited property, you may also need to account for a capital gains tax and expenses related to selling a house during probate.

Know your options when you reach a stalemate

When one party of a multi-owner house wants to sell, but the other owners don’t, the simplest solution is for the person who wants out to sell their share — if legally allowed.

However, if multiple owners want to sell, but one or more doesn’t and you can’t come to some kind of buyout agreement, then you may have no choice but to take legal action.

You’ll have to have everyone out of the house to sell it

“A few years ago, I had a property with an inheritance structure that gave all seven kids in a large family executive power over the property sale,” recalls Ristau. “While six wanted to sell, the one occupying the property did not. Ultimately, they had to evict the sibling living in the house before they could sell the property.”

Going to court is a possibility, but make sure you’ve exhausted other routes

With everyone physically out of the house, the legal process to split up property among multiple owners is called a partition action. This legal action divides the property in question equally between all owners, giving each party title ownership of a portion that they can sell independently.

This works if the property in question is a large estate that can be divided into lots that are equal in value and function.

For example, the court might divide a three-acre farm between three co-owners by giving 1.25 acres to two of the co-owners, while the third receives the half-acre that includes the farmhouse and other structures.

In many cases, the property in question cannot be practically divided between the multiple owners. For example, if a beachfront cottage is divided to give one party the cottage, and the other party gets the beachfront—no buyer will want to purchase one without the other.

When a partition action is initiated on a property that can’t be physically divided, the court will force the sale and the proceeds from the purchase price will then be divided amongst the co-owners.

When you go to court, none of you really win

Whether or not the property can be appropriately divided among all co-owners, a partition action may not be the best solution.

“In a partition action, the court makes the ultimate decision on how the property is divided, but it’s an expensive and time-consuming process,” explains Ristau. “It could be as long as a couple of years to get through the court systems, and you’ll need to cover all housing expenses like the property taxes and heating bills for the duration.”

As Kass, the practicing attorney, notes for the Tribune, the only people who win in a court sale are the attorneys who collect a fat paycheck, and the buyer who scoops up the property for a huge discount. As the owners, it’d be better to work it out among yourselves or try mediation before resorting to partition action.

Disclaimer: Information in this blog post is meant to be used as a helpful guide, not legal advice. If you need legal help selling a house with multiple owners, please consult a skilled attorney.