Thursday, February 7, 2008

Owning property with a non-spouse

As a real estate professional, I come into contact with individuals who are planning to purchase a property with another person not their spouse. This is an extremely tricky area because the partners could have a falling out or something happens to one of them to change their mind about their share of the ownership.

  • One, a father told me that his son and his girlfriend were going to buy a home together. I suggested that his son and girlfriend needed a written contract or an agreement as they weren't yet married. The father's remark was something like "of course they will get married, I'll disown my son if he doesn't marry his girlfriend". Now, I was just trying to help and head off some potential problems that may have occurred due to their non-spousal relationship.

  • In a second situation, I was working with a young professional women who wanted to purchase a commercial building to relocate her business to. Her other real estate investment was in a partnership with three other women. She suggested that the three others buy out her portion so that she could proceed with her business plans. When my client received a ridiculously low offer, she had no recourse other than to hire an appraiser and attorney to convince her partners of the proper valuation. No written contract was ever discussed or completed as they all were "good friends". This situation continued to unravel for over a year and even then still had each of the partners paying large legal fees to their own attorneys.

Attending a recent broker's tour meeting at the headquarters of the Silicon Valley Association of Realtors, I heard Nancy Chillag speak to these types of arrangements. Nancy Chillag is an attorney who has practiced law for over 20 years and specializes in construction law, representing both contractors and homeowners. What follows are my notes of her presentation. Hopefully, they will help you keep away from problems that do not have to even come up.

Nancy's first piece of advice is to always have a written contract.

Her second bit of advice was to ask some basic questions before getting into a partnership:

  • Who's going to contribute what to the venture?
  • How are negative cash flows going to be handled?
  • How are repairs and maintenance expenses going to be handled?
  • How is the non-payment by a partner going to be handled? By a loan from the other partner(s)?
  • What type of situations will cause one or more of the partners to a buyout of the remaining partner? This is commonly referred to as a "buyout provision" as part of an exit plan. For instance, many corporations have a succession plan to prepare for the replacement of key executives.
  • How will the value of the property be determined? One manner could be that each partner hires an appraiser and then the appraised amounts are averaged.

Of course, nothing in state law requires that an owner stay with another owner that he/she doesn't want. If the situation disintegrates enough, Nancy said that may call for a partition lawsuit where one partner sues to partition his/her share. Courts normally order a sale of the property and make it subject to their approval. A costly method to employ that often results in less interest by buyers as they don't want to get involved in someone else's legal web.

If you are considering a real estate investment with at least one non-spouse owner, get things taken care of in advance. Contact Nancy Chillag of Chillag & Associates in Menlo Park. Visit Nancy's website at She has also authored "Building by the Book: Legal Advice for Contractors" and "How to Survive a Remodel" a book I have in my library.

Thanks for reading!

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