Recently, I received questions about owning property via a partnership; specifically, how to bequeath a vacation home to two children. Admirably, the property owners wanted to minimize any chances of hard feelings between their grown children.
My advice to them? Encourage their children to treat joint ownership of a property like any other business relationship. Put everything in writing. A written agreement is more than a binding contract—it assures everyone understands what’s agreed to, reducing misunderstandings and memory lapses.
Another way to keep everything running smoothly is to assign a single manager to take care of things like loan payments, property taxes, and insurance. When the house burns down, the last thing anyone wants to hear is, “I thought you paid the insurance.”
And when you can see points of friction coming from a mile away, it’s best to deal with them up front. Vacation homes are of greatest value during special days like holidays and birthdays, and at certain times of the year such as long weekends in winter for skiing or during summer when kids are out of school. A master calendar developed well in advance can help avoid hurt feelings and conversations that start with, “I thought I had that weekend!”
With a little compromise, everyone can get some of what they want. Maybe you trade Christmas every year or maybe everyone goes to the cabin to celebrate Christmas together. Though the process of creating the calendar might be a little contentious, once it’s done, it’s done.
The master calendar can include more than who gets to use the property on any given date. It can also be used to plan upkeep and maintenance. You may have heard the old saying, “An ounce of prevention is worth a pound of cure.” This certainly applies to property ownership. You can either do a little upkeep over time or you can deal with the painful emergencies that require a whole lot of time and money all at once.
It’s best to plan for an annual cost of about 3 percent of the value of the property for maintenance, taxes, insurance and others unexpected costs. By creating a joint checking account and having each partner deposit their share monthly, expenses can be covered in a timely fashion with minimal stress.
Another way to reduce stress is to have a buy/sell agreement. If only one partner wants to sell, it’s still best to hire an appraiser to assess the fair market value as if the property were being sold in its entirety. This will yield a different value than the sale of a half-interest. The parties can then either call for third-party financing, where the seller is paid off in cash or, depending on the agreement, the seller can carry the financing for some predetermined time at current market rates.
Changes in ownership can bring up interesting legal questions. What starts as a clean 50-50 split between two siblings gets complicated in a hurry when it is time to pass the property to the next generation. How many ways can you divide a property? What’s a fair division?
In one example, three families bought 160 acres of recreational property on the coast to use as a weekend getaway. The property had three residential sites, one for each family, and the owners immediately saw potential problems with future generations. If each family had three kids, there would be nine owners, yet still, only three residential sites. So, they drafted a partnership agreement agreeing to deed their share of property to one child each, limiting the number of property owners to three in perpetuity.
With a little planning, you can pass on property to your children and their children without starting rivalries like the one between the Hatfields and McCoys.
If you have questions about real estate investing, please contact me at firstname.lastname@example.org or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45years.