Friends bought house together, one wants out

pab_lowe

The title sort of explain the situation.
Two platonic friends bought a property together at the height of the boom and the house is now worth 40% less. They had agreed originally to hold on to and live in the property for 2 years and now those 2 years are up. No agreement in place for what should happen after those two years are up.

Personal circumstances have changed and thoughts are turning to the individuals own relationships. As such, one has offered to 'buy' the other out to the tune of the original deposit on the house (each paid about 7% of the original value). This move is seen as opportunistic and not desired by the second party. However, pressure is being brought to bear as the 1st party's significant other is now also living in the property.

Sorry for the coded language but I am aware that this is a small country, I can provide more info if required for clarity.
My questions are as follows:
Will a bank even allow one party to get out of the mortgage with such negative equity?
What sort of solution could be deemed 'fair' so as to keep both parties happy and maintain their original good relationship?
Many thanks for reading and I appreciate any advice or questions

am i bovvered

Two platonic friends bought a property together at the height of the boom and the house is now worth 40% less.....one has offered to 'buy' the other out to the tune of the original deposit on the house (each paid about 7% of the original value).

Seems like a great deal under the circumstances.

Will a bank even allow one party to get out of the mortgage with such negative equity?

As everyone knows the banks have quite rightly tightened up on the loan ratio they are lending, it is impossible to say how much the bank will lend without knowing the income of the lender.

What sort of solution could be deemed 'fair' so as to keep both parties happy and maintain their original good relationship?

The offer seems very fair to me, if the friend who is now offering to pay 7% of the original asking price decided to cut and run both parties would make a massive loss. As you say there was a verbal agreement to change the arrangement in 2 years.

both parties happy and maintain their original good relationship?

People and circumstances change, if anyone wants to stay friends for life they need to compromise. Good Luck

Zulu

I would have thought that they made an arrangement to last for two years. Two years is now up. Would the offer of a "buy out" of the deposit have held any water if we were still in a boom?

The_Conductor

Offering to give the other person their deposit back is remarkably generous to be honest. If the house were put on the open market- which is the other option- not only would both individuals loose their deposits- they would be clearly in massive negative equity. I don't understand why the other party is unhappy with getting their deposit back- its incredibly generous given the circumstances.

bijapos

I presume the other party is peeved that they are only getting the deposit back and not the last two years mortgage repayments?

The_Conductor

bijapos wrote: »

I presume the other party is peeved that they are only getting the deposit back and not the last two years mortgage repayments?

Thats a sunk cost- and probably less than it would have cost them to rent elsewhere. Why are they getting their knickers in a twist over this? The only other option- other than one partner buying the other out- is to sell the property on the open market- which will entail a massive loss for both parties. They are being offered a remarkable opportunity to walk away from a bad investment........

shoegirl

smccarrick wrote: »

Offering to give the other person their deposit back is remarkably generous to be honest. If the house were put on the open market- which is the other option- not only would both individuals loose their deposits- they would be clearly in massive negative equity. I don't understand why the other party is unhappy with getting their deposit back- its incredibly generous given the circumstances.

I am not sure I'd call it remarkably generous, I'd just say its a fair deal.
They get back what they put into it, minus 2 years morgage payments, but they get back their deposit and no further liability if the other parties are able to raise the mortgage enough to buy them out.

Recall that up until recently a lot of people were paying proportionately more on rent than they would have on a mortgage for the same property so its not totally unreasonable. Maybe get together with an independent solicitor and have a consultation on it together so people have a fair idea of what the legal ramifications are. There certainly could be some difficulty in remortgaging alright but I think its more or less a sale from 2 people to 2 people even though one person is not changing?

The_Conductor

I'd dispute that its a fair deal- the property is now in massive negative equity- this is irrespective of how much has been paid off the mortgage in the past 2 years- but its a reasonable assumption that its down in the region of 40% on what it was originally purchased for. To be given the opportunity to walk away relatively unscathed from this badly performing asset- is quite simply, very very generous.

quozl

I agree with smmcarrick. It sounds to me like the 2nd party is being remarkably foolish about this.

If they can get their initial investment back, and walk away without the 50% of the negative equity that they should be responsible for then they are being offered a fantastic deal.

The money spent on mortgage payments over 2 years will be minor compared to the loss in value of the property. Especially considering that they would have been paying rent somewhere anyway.

I don't see the bank allowing them to do this anyway, so it's probably moot. The banks will know it's a too-good-to-be-true deal, even if this person doesn't.

PullOutMethod

There are countless examples of couples splitting up in similar circumstances to this and the neg equity must be shared.
Let me get this straight - the second person is being given a chance to walk away with no neg equity and is not happy ?!?!?!
Please tell the first person to withdraw their offer - the second persons stupidity does not deserve such generosity.
Does this imbecile not read newspapers ?

pab_lowe

Thanks very much for your responses.
I don't believe that the loss in equity was a major issue for either party, they both continued to live in the house and paid their mortage which they were both able to pay for.

I believe the issue was more around the long term. Ie why do I need to sell now? This is an asset and can be rented and maybe some day down the road if the market improves, it could be sold at a better price. However, I guess this comes down to if the two parties can make what is essentially a business agreement.

Bear with me while I muse but I suppose party 2 is maybe miffed at party 1's opportunism of offering a little over 10% of the current value to obtain 50% ownership.
That said, party 2 walks away with a deposit to put on a similar property and no obligations to negative equity property.

Thanks again for your help, can anyone say whether a bank would actually allow this to happen or if it is down to individual circumstances

pab_lowe

sorry, reread some comments about the banks allowing this to actually happy so apologies for the repeat question.

Pulloutmethod, not sure what you know about the person in question or indeed their reasons for asking what is contained in my post. However, the use of 'imbecile' is wide of the mark and to be honest probably says a lot more about you.

The_Conductor

pab_lowe wrote: »

can anyone say whether a bank would actually allow this to happen or if it is down to individual circumstances

What you are asking is- is there a financial institution out there willing to offer a 150% mortgage on a property. In the absence of another asset on which to secure the amount loaned (as the house would be clearly insufficient), the answer would have to be a resounding 'no'.......

magicbastarder

quozl wrote: »

I agree with smmcarrick. It sounds to me like the 2nd party is being remarkably foolish about this.

we don't know the financial situation of the second party - they may not be able to afford a place, even getting their deposit back; lending rules have tightened, so they may not be able to borrow.

quozl

magicbastarder wrote: »

we don't know the financial situation of the second party - they may not be able to afford a place, even getting their deposit back; lending rules have tightened, so they may not be able to borrow.

You're really stretching there.

They can either have a half-share in a property in serious negative equity, or they can get their 7% of the original purchase price back and walk away. With that, they can then rent in a falling market.

The suggestion that because they may not be able to buy another place, they're better with a half share in a rapidly depreciating asset makes no sense.

They can rent. In fact, I hope that if they do get out of this situation so lightly their immediate reaction will not be to try and purchase again in the current climate.

am i bovvered

I don't believe that the loss in equity was a major issue for either party

as it was bought as an investment, this is incredible

I believe the issue was more around the long term. Ie why do I need to sell now?

that was the verbal agreement, it would change in 2 years.

pab_lowe

am i bovvered wrote: »

as it was bought as an investment, this is incredible

I think it is credible that there are different views on investment.
I think it is credible to have an investment that pays off in 20-30 years rather than 2-3
and I think it is credible to be happy to pay your mortgage (or have someone else pay it via rent if you decide to move out) at the same rate as what was agreed when taking out the mortgage.
Are you suggesting that someone in this situation would be better off taking what is offered and reinvesting (ie buy a new house, if possible) if investment is really their game?
thanks again

Kipperhell

pab_lowe wrote: »

Bear with me while I muse but I suppose party 2 is maybe miffed at party 1's opportunism of offering a little over 10% of the current value to obtain 50% ownership.

That isn't actually the case. No Lawyer would let somebody do this and no bank will agree it either. A and B owe 46.5% of the property cost to the bank if the house was 200k so say 93K each. Now the house is worth 40% less it would be 120k. so the own 50% each or 60k each but a debit of 93k of a an out right debit 33k each. A is offering to buy a 33k negative equity for 7k!!!

The only fair option is for A to pay B the current market rate for his portion meaning 60k (instead of 100k the way suggested) . In the deal proposed the person being opportunist would be the guy getting his deposit back.

It really is obvious that the two people involved are clueless on what is being proposed and need to seek legal advise.

am i bovvered

pab_lowe wrote: »

I think it is credible that there are different views on investment.
I think it is credible to have an investment that pays off in 20-30 years rather than 2-3
and I think it is credible to be happy to pay your mortgage (or have someone else pay it via rent if you decide to move out) at the same rate as what was agreed when taking out the mortgage.
Are you suggesting that someone in this situation would be better off taking what is offered and reinvesting (ie buy a new house, if possible) if investment is really their game?
thanks again

No, I am suggesting that there "investment" has dropped 40% in two years, they have a chance to get out and break even, they should take that chance. Becoming a landlord is a difficult job, esp when being undertaken by 2people who it seems could have a difficult working relationship (you stated earlier that undue pressure was being applied from one to the other)

you seem to be ignoring the fact that originally the arrangement was to be for 2 years ?? that is now up.

PullOutMethod

Ok, let's say house cost 400K and was bought 2 years ago and a small deposit.
Essentially nothing has been cleared from the mortgage principle after 2 years on a reasonable length mortgage.
Each person now owes 200K.

Person one lets person two walk away (never mind paying him !) and takes on the whole mortgage.

Person two buys house next door to person one for 50% of the value 2 years ago.
Person two now owns the same house with a 200K mortgage.
Person one owns the same house but with a 400K mortgage.

Person two is not looking a gift horse in the mouth - they are punching it in the balls.

seamus

By all accounts, the guy who wants to "get out" should be paying the other owner for the privilege of bailing.

A very simple way of looking at what you "own" in a property is to take the current market value, minus the outstanding mortgage and split it in two.

This is easy when the house is in positive equity - €300k value, €200k mortgage, each person owns €50k.

In negative equity, the sums are identical. So €200k house, €300k mortgage, each person "owns" negative €50k - in other words they owe €50k each for which they have no security to back it up.

In real terms, it means that the half of the house owned by each person is worse than worthless and either party looking to "get out", should be paying the other party for the privilege. If he was being offered nothing to walk away from the "investment", he should run and be delighted about it.

On the other hand, if he did have a long-term investment in mind in the property, then a solicitor should be able to draw some form of leasing agreement. That is, person A takes up exclusive residence of the property and pays a certain amount of "rent" to person B. The agreement would be that neither can sell without the other's consent and that person A has complete and exclusive use of the property (meaning person B has no keys or right of access to the property) until person A decides that he no longer wants to live there.

That would satisfy the relationship needs of person A without forcing person B to sell or causing undue stress on their friendship.