If your parents are fortunate enough to own a rental or business property, you may stand to inherit it from them when the time comes. Where things get complicated is if you inherit the property alongside siblings. You might have an amicable relationship with your other family members, which could make it easier to resolve disputes or decide what to do with the property. But if relations are strained, or you can’t come to an agreement about what to do with the business or property, it’s time to consider a family member buyout.
A family member buyout on inherited investment properties can be the right choice to resolve disagreements among siblings, but if done in haste or without caution, you could potentially spend more money than you need to. In the worst cases, you could ruin an otherwise positive relationship with your family, and have to deal with expensive and time-consuming litigation.
Before committing to a buyout, get the property appraised and inspected first.
One of the common reasons for breakdowns in any buyout is when some or all the parties involved feel they are paying more or receiving less money than they think they should. To avoid these disagreements, the first step should be to have the property appraised to determine its current value.
Ideally, you should come to an agreement with your siblings on an appraiser—one who has no prior existing relationship with anyone involved with the property. If necessary, split the cost of the appraisal between everyone in the negotiation.
Along with the property appraisal, you will want to have an inspector pass through in order to find if there are any existing issues that need attention. This can influence the value of the property, and it could give you some additional leverage in negotiating with your siblings.
Once you know the value of the investment property, decide with your siblings how to go forward with the buyout.
The most straightforward buyout of the investment property involves paying off your siblings directly with your own funds. But depending on your available funds and the value of the property, you may not have the money on hand to buy the others’ share of the property outright. But there are alternate means to fund such a buyout.
Using the investment property’s income to pay off your siblings
If the inherited property is a rental or a business, you can make up for the lack of personal funds with that income. So long as your siblings agree to such a plan, you can make regular payments over time, with the terms documented on a promissory note. This plan does require that your siblings are willing to cooperate with you for as long as it will take you to pay them off, and it also relies on the property remaining profitable for the duration.
Applying for a loan
If your relationship with your siblings is not on good terms, or they simply want their money for the property as soon as possible, you can try to apply for a loan. This is the fastest solution, and it’s also why it is important to have an appraisal and inspection done right away. You will want to apply for a loan that can cover not only your buyout, but also any repairs or improvements.
Hard money lenders might be the best option for a loan. It’s rare to be able to qualify for a mortgage or business loan on an investment property that will cover all the necessary costs, whereas a hard money lender might be able to do so.
If you cannot come to an agreement with your siblings, a partition suit may be your last resort.
In this situation, the worst-case scenario is that you cannot come to an agreement with your siblings over the value of the property and/or a buyout plan. They may even refuse to sell because they have their own plans for the property. Regardless of why it’s gotten to this point, your only choice will likely be to lawyer up for a partition suit.
Unfortunately, litigation is often the most expensive and slowest option. If your siblings are highly contentious, a partition suit can last through multiple appeals. The result may be that no one in the family ends up with the property, and instead you are forced to sell it to a third party. Even if you do successfully win the right to purchase the property, there’s still a real possibility that you could spend far more money than the market value just in pursuit of that win.
A hard money lender is the best way to quickly resolve a family buyout, and put your plans for the investment property into action.
A hard money lender like Socotra Capital can offer a range of loan options that are tailored to the various types of inherited properties. This is particularly useful if you’ve inherited short-term Airbnb or VRBO properties, as traditional lenders and banks typically can’t make loans on these properties. Additionally, you may be able to get a loan sufficient to fund the amendment of any physical issues with the property—making it more profitable—while still being able to afford buying out your sibling’s share of the property.
Note that even if you do come to an agreement before it gets into legal action, you should still hire a probate attorney. If the investment property has high value, distribution of the estate is complex or unclear, or if there is vagueness with the will of the decedent, a probate attorney can help manage the buyout process.