Siblings and Inherited Property

[sal paradise]

Bogleheads,
My partner and 3 siblings inherited a single family home. My partner and one sibling will be buying the other two out. The home will become an investment property. There will not be any bank financing involved. Multiple appraisals were completed and a home inspection will be completed. Are there other things that should be addressed? Should the average of the appraisals be used? Can the appraised value be reduced by realtor costs even though realtors are not involved? Should my partner and other sibling form an LLC?
Appreciate any insight,
Sal

[Jack FFR1846]

The price is up to them. Sure, they could just use an appraised value. It's not going to be exact and if the house were put on the market, it would likely drop 10% between offer/acceptance, repairs, taxes paid and real estate agent fees. But the siblings could agree on any number. They could pull a number out of the air if they wanted to.

[02nz]

Others with more expertise will no doubt chime in, but to me, this is the wrong time to nickel and dime the two siblings being bought out, especially if they're less well off. If the spread between the average of the appraisals and the highest one isn't huge (say within 3-5%), I'd just go with the higher value.) And taking realtor costs off the appraised value when no realtor is involved seems to me really small. But maybe that's just me.

[arcticpineapplecorp.]

definitely use an LLC. That is, unless you don't mind having your personal assets at risk of a tenant's or stranger's (who falls on sidewalk) lawsuit.

[Sandtrap]

Bogleheads,
My partner and 3 siblings inherited a single family home. My partner and one sibling will be buying the other two out. The home will become an investment property. There will not be any bank financing involved. Multiple appraisals were completed and a home inspection will be completed. Are there other things that should be addressed? Should the average of the appraisals be used? Can the appraised value be reduced by realtor costs even though realtors are not involved? Should my partner and other sibling form an LLC?
Appreciate any insight,
Sal

1. Sometimes, in estate distributions, a property will be put on the market to get a variety of actual offers. Then those offer prices will be averaged or other formula and that used as criteria.

2. Can the appraised value be reduced by realtor and other costs? Absolutely.

3. Do whatever you have to do to cover yourself from liability, especially where a rental property is involved. IE: LLC, Umbrella policy, etc, etc.

4. Put in writing in detail an agreement between owners on how to divide up expenses and income. Open a separate account just for this. Do not commingle rental income with personal funds.

5. If any owner puts in "sweat equity", renting to tenants, trouble calls, check outs, repairs, etc. Then document that. Things need to be clear down the line when it comes time to sell.

6. If there happens to be losses, how will the various owners pay them?

7. Details and small details.

[ChrisC]

How did your partner inherit this property? Was it by transfer while the prior owner was living, or upon the prior owner's death by will, or without a will -- and how did the siblings own the property (tenants in common, joint tenancy, etc) this could affect your tax basis in the property when the other siblings are bought out. I don't mean to make this complicated, but it's not as simple as one would think. Get a lawyer to advise you and document the transfers.

I inherited a 4 family/apt brownstone bldg in NYC with two of my siblings, and I wish I could buy them out but it would cost me a lot of money and would probably cause internal family strife. We did form an LLC to hold the property because: (1) it solved and equalized title ownership interests, (2) and we needed additional liabilty shields provided by the LLC -- I did not think commercial insurance policies fully protected me and my siblings.

[malabargold]

It’s family.
Insist on using the highest appraisal.

[Xrayman69]

Had a very similar situation recently. Things didn’t work out like we would have liked but in the end it is BUSINESS when dealing with family.

The family members being bought out may potentially feel slighted if the house is sold in the future for a significant gain. However they will say nothing if sold at a loss compared to the buy out cost.

Get a bank appraisal as if you were to finance the property for a 50% mortgage value. This may cost you a few hundred dollars in processing but it is a neutral party that has no stake other than appraising the property for relative worth. This is also useful for future capital gains valuation if you decide to ever sell in the future.

Given that it is just BUSINESS there are typically 9-10% costs in “selling” property from real estate agents (6%) to taxes to closing costs etc. if you decide to sell in the future these costs will be present and no family member will be subsiding this real cost that weighs down the final proceeds after cost. Perhaps a “nice” gesture would be lower the cost of the appraised bank value by 5% to account shared costs.

In my situation the other family member placed what I felt to be an unreasonable value on the home and thus it was put up for sale and the market revealed the actual value of the home which was significantly below the family members “expert expectations” (greater than 15% off not counting costs. The family member has not been and is not the most financially literate individual. Upon realization that there would be costs associated with selling the property that decreases the final proceeds by 9% the family member was very upset with the process of “why did they get 6%”. I suspect that this sudden windfall (large in relations to the family members financial state) will be squandered.

[CAsage]

Take the average of several appraisals, and subtract 8~10% for normal and expected transaction costs if the property was to be sold today. You can swing that number a little higher if you are feeling generous, but do not overlook the fact that if sold today, there would be costs and expenses that would have to be paid. Money and family are volatile mixes, so allow for a little emotion. If the siblings being bought out believe they are being shortchanged, put it on the market with the intention of actually selling it. Note that if you get an offer, you are legally bound to sell so no fishing here! You can always buy a different property. Get realistic appraisals and find out what the selling/prep/repair costs are in your area.

[Thesaints]

Whichever all the heirs will agree to in writing will work best. Anything else won't work, one way or another.

[8foot7]

Average of three appraisals and then deduct 6% for realtor fee would be fair, I think.

If people balk at the cost of three appraisals (that's 1,200 bucks split across four parties, so there really shouldn't be an issue), then agree to use the lower of two appraisals.

It's family but it's also business and you want to proceed fairly to all parties while also protecting your own interests.

[clydewolf]

I think the sellers should have a requirement that the house can not be sold for 3 years. They do want the buyers to quickly turn around and sell the house for a large profit.

[dbr]

Maybe the house should be sold and the proceeds split four ways exactly. If your partner and the other sibling want to go into the rental real estate business they can take the proceeds and buy something. Even if that sticks them with a little higher buying and selling costs it could save a lot of debate and a lot of rancor over the house.

[Thesaints]

Maybe the house should be sold and the proceeds split four ways exactly. If your partner and the other sibling want to go into the rental real estate business they can take the proceeds and buy something. Even if that sticks them with a little higher buying and selling costs it could save a lot of debate and a lot of rancor over the house.

It will certainly make some real estate agents and the taxman happy.

[sal paradise]

Maybe the house should be sold and the proceeds split four ways exactly. If your partner and the other sibling want to go into the rental real estate business they can take the proceeds and buy something. Even if that sticks them with a little higher buying and selling costs it could save a lot of debate and a lot of rancor over the house.

It will certainly make some real estate agents and the taxman happy.

I appreciate everyone's feedback. Selling the house and splitting it four ways is definitely the cleanest way, but unfortunately, there is some sentimental value to keeping the house.
As far as setting up an LLC, can the LLC be set up in a different state than the property?

[8foot7]

I think the sellers should have a requirement that the house can not be sold for 3 years. They do want the buyers to quickly turn around and sell the house for a large profit.

Along these lines, it might be good to have in the sales agreement a way in which the sellers now participate in a portion of the buyer's upside; for instance, if the house is sold within three years, current sellers will each receive 25% of the difference between current appraised price and contract price at the time of future sale. That splits the appreciation four ways, 25% to each family member, so that any short-term large profits are fairly shared.

Obviously that creates some perverse incentives 2.5 years from now if interest in the property from potential buyers builds, but you can't control everything.

[Tamarind]

Absolutely set up the LLC. It's advisable to have the LLC registered in the same state as the property, especially if renting the property is the only business being conducted by the LLC.
I think some states tax more if the owner is out of state. Also think of it as another way to be clear about the separation between the LLC and it's owners. It shouldn't matter where the owners live. As a landlord you really want that veil to be solid.

Make sure to actually think through the articles of incorporation for the LLC, and how owners will split ownership and duties. You can do this yourself if you are so inclined (I have), or consult an attorney.

Make sure the LLC exists before the deal goes through such that the 4 owners are selling to the LLC.

Make sure the LLC carries appropriate insurance before the property is rented.

Though not strictly financial, I'd suggest being generous to the other siblings, ie using a higher appraisal (avg of top 2?) and/or not subtracting realtor costs you aren't actually incurring. While you might get away with it if sibs are less savvy, it 1) doesn't reflect well on you and 2) if all 4 inherited equally you must get consent of at least one sib to sell at all.

[Carefreeap]

Maybe the house should be sold and the proceeds split four ways exactly. If your partner and the other sibling want to go into the rental real estate business they can take the proceeds and buy something. Even if that sticks them with a little higher buying and selling costs it could save a lot of debate and a lot of rancor over the house.

It will certainly make some real estate agents and the taxman happy.

I appreciate everyone's feedback. Selling the house and splitting it four ways is definitely the cleanest way, but unfortunately, there is some sentimental value to keeping the house.
As far as setting up an LLC, can the LLC be set up in a different state than the property?

It's going to end badly I hate to say. No tenant is going to take care of the property the way the parents did. Multiple partners mean multiple problems. Reminisce and enjoy the good times but sell and move on.