A real estate investor that I know has a saying, “Your most expensive money is your own money, and your second most expensive money is your family’s money.” For those of you who have made a real estate investment with a family member, you can probably understand very well the meaning of that saying.
For example, we were recently approached to do a loan on a property for a man whose sister brought a legal action against him called an ‘Action in Partition.’ Because the brother and sister jointly own the rental property, the sister felt she wasn’t getting her fair share and thus sued her own brother. In this case, the man decided to obtain a private money loan to buy his sister out of the property altogether.
This type of behavior is very common in properties that are jointly owned by family members. In a buyout situation, it is important to arrive at a value on a property by looking at comparables sold within the last six months. Or if good comparables aren’t available, agree to split the cost of an appraisal. Then you will use this value to determine a buyout price. From there, if the loan to value is favorable for a lender, it is possible to obtain a loan against the property to buy out the family member at the agreed upon amount.
If you are unable to negotiate a buyout with a family member, then the alternative is to sell the property. Although selling may not have been the original plan with the property, in some cases it is better than dealing with a dejected family member in a real estate deal.
Because there are so many unforeseen costs involved in real estate investing with family members, we are often approached for private money loans against properties where family members are being bought out with our new loans. This is an example of how the cost of private or hard money loans is considered cheaper than the cost of keeping a family member in a deal. Because many borrowers are unable to qualify for bank loans against investment properties, a private money loan is a good alternative in the case of a buyout.
Consider all of the costs involved before investing with a family member. On a new acquisition, weigh out all of your financing options before you consider using family member’s cash. To find yourself in a buyout situation later down the road, is never easy to deal with and can be costly for all partners involved.