Author Topic: Crazypants Mortgage 1:1 Buy-out question  (Read 2646 times)

monstermonster

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Crazypants Mortgage 1:1 Buy-out question
« on: June 11, 2015, 12:24:39 PM »
So this is not for me, but for my SO to be clear, but I feel like Mustachians might be the *only* people who might have advice.

So my SO and his ex have two investment houses that they've owned for about two years. Technically their LLC which they both own 50/50 owns the properties. Both are about ~$400K in value (practically identical after some backyard improvements), and had a 20% down payment on both.

House 1 is a front house rented out by long-term tenants & backyard ADU rented out (quite profitably) as an airbnb
House 2 is a duplex with one unit rented out by SO's ex and roommate (she pays fair market rent to the LLC) and the other unit rented out as an airbnb (similarly profitable)

Currently, my SO does all the property management for both properties - for both the Airbnbs and the long-term tenants (even though the ex lives in one of the houses.) They share 50/50 in the profits of the LLC, even though he doesn't get paid for his property management time. The LLC does pretty well, definitely makes much more than the mortgage and other expenses of the properties, but both SO & Ex have incredible high income jobs otherwise, so the property LLC is not their sole income, just a long-term investment.

The SO & ex went through a tough breakup about a year ago, and recently the ex has been letting her feelings creep into the business side of things - asking for unreasonable things, not communicating when decisions need to be made about tenants, etc. Honestly, it would be best if they could decouple business-wise as well.

We've come up with the idea of them "buying one another out" of the mortgages and dissolving the LLC came up- the ex would own the house she lives in, and get the profits from her airbnb - and my SO would own the other property and get the profits from that airbnb & rental. My question: is this even a thing they can do without having to refinance again? Is there a different trick a skilled mortgage broker or lawyer can do? Both their names are on both the mortgages.

Obviously there may be a slight ~$20-30K difference in the property values when they get assessed (they are in different quickly changing neighborhoods), but both have the cash on hand to easily make one another whole.

Anyone have a hint of an idea? Figured I'd ask here first. If SO can get the ex to go for it, this seems like a win-win for both of them: they make the exact same amount of money as they are now, but don't have to negotiate with one another and drain each other emotionally to do business things.
« Last Edit: June 11, 2015, 01:07:34 PM by monstermonster »

zephyr911

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Re: Crazypants Mortgage 1:1 Buy-out question
« Reply #1 on: June 11, 2015, 01:12:26 PM »
So this is not for me, but for my SO to be clear, but I feel like Mustachians might be the *only* people who might have advice.

So my SO and his ex have two investment houses that they've owned for about two years. Technically their LLC which they both own 50/50 owns the properties. Both are about ~$400K in value (practically identical after some backyard improvements), and had a 20% down payment on both.

House 1 is a front house rented out by long-term tenants & backyard ADU rented out (quite profitably) as an airbnb
House 2 is a duplex with one unit rented out by SO's ex and roommate (she pays fair market rent to the LLC) and the other unit rented out as an airbnb (similarly profitable)

Currently, my SO does all the property management for both properties - for both the Airbnbs and the long-term tenants (even though the ex lives in one of the houses.) They share 50/50 in the profits of the LLC, even though he doesn't get paid for his property management time. The LLC does pretty well, definitely makes much more than the mortgage and other expenses of the properties, but both SO & Ex have incredible high income jobs otherwise, so the property LLC is not their sole income, just a long-term investment.

The SO & ex went through a tough breakup about a year ago, and recently the ex has been letting her feelings creep into the business side of things - asking for unreasonable things, not communicating when decisions need to be made about tenants, etc. Honestly, it would be best if they could decouple business-wise as well.

We've come up with the idea of them "buying one another out" of the mortgages and dissolving the LLC came up- the ex would own the house she lives in, and get the profits from her airbnb - and my SO would own the other property and get the profits from that airbnb & rental. My question: is this even a thing they can do without having to refinance again? Is there a different trick a skilled mortgage broker or lawyer can do? Both their names are on both the mortgages.

Obviously there may be a slight ~$20-30K difference in the property values when they get assessed (they are in different quickly changing neighborhoods), but both have the cash on hand to easily make one another whole.

Anyone have a hint of an idea? Figured I'd ask here first. If SO can get the ex to go for it, this seems like a win-win for both of them: they make the exact same amount of money as they are now, but don't have to negotiate with one another and drain each other emotionally to do business things.
LLC's generally have to pay all debts before dissolving, so the mortgages would be the biggest complication. The simplest answer would be for each of them to get their own mortgage and buy one of the properties from the LLC, then divide all remaining LLC assets.
This could trigger some capital gains tax depending on how the sale is structured.
Ideally they would sell both properties to themselves at a price equal to the LLC's adjusted (post-depreciation) cost basis to avoid that. But that's likely to be below FMV, so that could bring other issues in.
Yeah, this one is sticky... wow.

zephyr911

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Re: Crazypants Mortgage 1:1 Buy-out question
« Reply #2 on: June 11, 2015, 01:17:38 PM »
Side note: they can definitely add and remove individual names from the respective titles via quit-claim, and there's nothing to stop them from making an agreement about who receives what rent.
It's all just a question of getting that LLC dissolved. If the company itself is on the mortgages, then they are financially entangled until those mortgages are paid off and the company is closed. If it's just the partners as individuals, as can happen with new LLCs, then maybe it's easier.

monstermonster

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Re: Crazypants Mortgage 1:1 Buy-out question
« Reply #3 on: June 11, 2015, 01:27:33 PM »
Side note: they can definitely add and remove individual names from the respective titles via quit-claim, and there's nothing to stop them from making an agreement about who receives what rent.
It's all just a question of getting that LLC dissolved. If the company itself is on the mortgages, then they are financially entangled until those mortgages are paid off and the company is closed. If it's just the partners as individuals, as can happen with new LLCs, then maybe it's easier.

Thanks for the insight.  I believe SO just transferred the titles to the LLC about 9 months ago officially, rather than have it be both of their names- not forseeing how troubling business management has gotten working with his ex. So that may have put the nail in the coffin for this idea. Perhaps, though, they can find a way to get the lawyers to make an agreement that does a better job of giving each of them a house on paper, rather than 50/50 of both.

zephyr911

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Re: Crazypants Mortgage 1:1 Buy-out question
« Reply #4 on: June 11, 2015, 01:53:01 PM »
Thanks for the insight.  I believe SO just transferred the titles to the LLC about 9 months ago officially, rather than have it be both of their names- not forseeing how troubling business management has gotten working with his ex. So that may have put the nail in the coffin for this idea. Perhaps, though, they can find a way to get the lawyers to make an agreement that does a better job of giving each of them a house on paper, rather than 50/50 of both.
If he just transferred titles to LLC 9 months ago, and they already had the property and the mortgages before that, the mortgages probably aren't in the LLC's name. But that's going to be the key question... who owes the debt.
If the debt is owed by the two of them jointly (not the LLC) then dissolving the LLC and abandoning claim to each other's chosen property will be easy. The mortgages will be the final sticking point. You can quit-claim yourself off a property and leave the other person with sole title, but you're still liable for the debt - so they'd each own a house, but they'd both be locked in as guarantors of each other's debt until it's paid off.

monstermonster

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Re: Crazypants Mortgage 1:1 Buy-out question
« Reply #5 on: June 12, 2015, 08:22:34 PM »
I actually found the answer for anyone searching this thread later: a 1031 tax-deferred exchange will likely fix a lot of the issues.

http://apiexchange.com/index_main.php?id=8&idz=26

fishnfool

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Re: Crazypants Mortgage 1:1 Buy-out question
« Reply #6 on: June 14, 2015, 08:26:27 AM »
I actually found the answer for anyone searching this thread later: a 1031 tax-deferred exchange will likely fix a lot of the issues.

http://apiexchange.com/index_main.php?id=8&idz=26
Great link with 1031 exchange info!

It would be nice to hear how your SO eventually gets things worked out.

Thanks for the link!