By Colin Newberry, Attorney at Law
This question is one we see often, as sometimes well-intentioned actions can lead to unintentional consequences. Oftentimes a couple will buy a house together without being married. OR, a homeowner will add a boyfriend, girlfriend, partner, or fiancé to a property title.
Unfortunately, once a person is added to the title of a house, it is no longer just your house. You share ownership with that person, and it is, to use Texas legal jargon, Y’alls House. Even if you are the only one responsible the mortgage on the home, this can lead to trouble down the road, if you did not prepare properly from the get go.
Mind you, this isn’t just for people who were in a relationship. I’ve handled partition suits for siblings who inherited property together via probate, investors who are divesting themselves of property or the business relationship, or in one rare case, between a mother and her child who inherited an interest in a property from the child’s deceased father.
What are the things to keep in mind when approaching the division of a jointly owned, and jointly mortgaged, property? A few things to consider:
- -Is it divisible in kind [physical division] or by sale only?
- -Does someone want to stay in the property, or otherwise keep it? Of course, if one person is staying and one person is going, that opens up a whole other bucket of questions.
REMOVAL FROM THE MORTGAGE AND EQUITY REIMBURSEMENT – The two biggest obstacles to partitioning a property
Release from Mortgage: The bank doesn’t care that you don’t own the property anymore; they care that they have two guarantors to go after if the loan falls into default. This is true regardless of whether you are married. Even in an amicable partition, the refinancing or releasing of a party from a mortgage is the most difficult step.
Understandably, anyone who is giving up their interest in a property doesn’t want to have that loan on their credit report, much less be liable for the other owner’s failure to pay the mortgage. When a mortgage cannot be removed as to one property owner – whether because of financial constraints or bank requirements – all that is left for the cautious owner to do is to insist on the sale of the property to satisfy that loan.
Reimbursements of equity: Whether agreed to be sold or forced through a partition sale, the allotment of profits, should there be any, is the most contentious part of any partition. So, who gets money for what? The answer is complicated, but there are certain areas of reimbursement that ring true across all issues:
- -Down Payment: Was the property co-owned at purchase, or was a second owner added to Title after purchase?
- -Mortgage: This obligation is for both owners, regardless of who is on the note. If one owner doesn’t pay, they should owe from the proceeds of the sale.
- -Necessary repairs: If one owner has to make a repair to maintain the condition of the property, then should they get reimbursed for that repair or split the cost?
- -Improvements: Should one owner agree to another owner about improving the property, then it is possible to have the expense of that improvement reimbursed.
With any situation, however, the cost of determining value, reimbursements, and ownership can quickly surpass the value in the home. It is almost universally better to set aside the emotions of whatever relationship existed when the property was purchased, and divide up the property under the relationship as it stands now with a dry, business approach.
THE BEST EXIT STRATEGY HAPPENS AT THE INCEPTION OF THE JOINT INVESTMENT
An even better exit strategy is to have a plan at the inception of the purchase. Called a co-habitation agreement, purchase-sale strategy, or even an Agreement in the Company Agreement should the property be bought by an entity, this document serves as a Pre-Nup for Property Ownership. It states who stays and who goes, how notice is given, how reimbursements are determined, and sets timelines for refinancing or if necessary, pricing, realtors, and timetables for listing and selling the property. This contractual arrangement may seem like an uncomfortable conversation at the time, but is a necessary evil for anyone going into a significant investment with a partner you are not married to.
Back to the Question: How to dissolve this joint ownership? The worst case answer is a Suit for Partition with a judicial determination of reimbursements and equity. The best case scenario is a practical business conversation regarding your investment. The preferred scenario is to have that conversation while things are still in the beginning, optimistic stages of ownership in the form of a co-habitation agreement previously discussed.
No matter what route you take, or are being taken on, one fact remains true. This area of law is complicated and merits the investment of an experienced attorney to guide you through your options to ensure you get the best possible result.