How to Buy Out a Sibling’s Share of Inherited Property

Buying out a sibling’s share of inherited property can be a complex process. How you do it depends on three things: whether the property is still subject to a mortgage or a reverse mortgage, whether title has already been transferred to the siblings or is still with the estate (that is, with the executor or administrator), and whether you have the cash to buy the property or will need a loan. Selling inherited property to a sibling is a practical option, especially when the property has sentimental value and the family wants to keep it. For the seller’s side of the same transaction, see selling inherited property to a sibling.

Basic Steps in Buying Out a Sibling’s Share

1. Establish the property value

You need to know the market value of the property so you can make a proper offer to your siblings. The best way to get it is to hire an appraiser. Usually, when the decedent dies, the executor or administrator has the property appraised for the inventory. If you agree with that valuation, you can use it; if not, you can have the property re-appraised. Whether your sibling will accept your appraised value is a separate question.

2. Check the mortgage

The second step is to determine whether the property is subject to a mortgage. The mortgage balance determines how much equity your sibling is actually inheriting and gives you a guideline for how much to offer, based on the market value less the mortgage balance.

3. Negotiate the buyout terms

Once you know the amount of your sibling’s equity, you can negotiate the buyout terms. Those terms depend on who owns the property at the moment (the estate or the siblings) and on how you will pay: cash, a loan, or an assumption of the existing mortgage.

4. Secure financing

Depending on the situation, you could take out a home equity line of credit, a traditional loan, a probate loan, an estate loan, a trust loan, an inheritance loan, a money lender loan, or a probate advance.

5. Transfer ownership

Once you have paid your sibling, ownership is transferred by filing paperwork with the court and with the county records, depending on the circumstances of your case. Buying a sibling’s share can be an emotional process for both of you, and it is worth handling with care so that the relationship comes first.

Buyout Terms When the Property Has a Mortgage

When property is still subject to a mortgage, federal law allows the heirs to assume the mortgage under the same terms and conditions as the deceased’s mortgage. The due-on-sale clause in a mortgage is not triggered when the successor in interest receives the property through a will or by intestacy. Assuming the mortgage lets you take advantage of the decedent’s interest rate and terms, even if your credit profile is not as good as the decedent’s. If the heirs do not want to assume the mortgage, the executor or administrator sells the property, pays off the mortgage, and distributes the remaining proceeds to the heirs.

If you want to buy a mortgaged property from your siblings, you have three routes. The examples below all use the same property: worth $100,000, with a $50,000 mortgage, and five siblings including you.

Assume the mortgage and pay your siblings’ equity in cash

You assume the $50,000 mortgage and pay the other four siblings $10,000 each for their shares of the $50,000 in equity.

Assume the mortgage and borrow against the equity to pay your siblings

You assume the existing mortgage and also take a second mortgage, such as a home equity, refinance or cash-out refinance loan, against the equity in the property. If the lender will lend up to 80% of the value of the home, you can borrow a further $30,000 on top of the existing $50,000 mortgage, for $80,000 in total mortgage debt. The $30,000 from the home equity loan is used to pay off the other siblings.

Take a new mortgage to buy the house

You can also obtain a different mortgage to buy the house outright. Your lender will review your income and credit score to determine your eligibility and how much you can borrow. Usually you would need at least 20% equity, because the lender will only lend a maximum of 80% of the value of the house. In the example, you would need $20,000 of your own, while the lender puts up $80,000. That money pays off the $50,000 mortgage, and the remaining balance is distributed to the siblings. The property is then subject to a mortgage with the new lender, with different terms and a different interest rate. You will need to pay closing costs and for an appraisal if the property has not recently been appraised.

Buyout Terms When There Is No Mortgage

When the property is not subject to a mortgage, you only need to buy out the other siblings, which you can do with cash, a promissory note, or a loan.

Cash

This is the simplest route if you have the money. You divide the market value of the property by the number of heirs to get each person’s share. With a $100,000 property and five siblings, each sibling’s share is $20,000, and you need to put up $80,000 in cash to pay your four siblings.

A promissory note secured by a mortgage to your siblings

Another option is to sign a promissory note payable to your sibling for installment payments of his inheritance share, giving him the right to foreclose if you default. This works best when there are only two siblings. If you grant several siblings the right to foreclose, one sibling’s rights as a creditor may be subordinated to another’s, and your siblings will likely not agree to it.

A loan

Since there is no prior mortgage to pay off, getting a loan is easier with a clean title. Your options include a traditional loan, probate loan, estate loan, trust loan, inheritance loan, money lender loan, credit union loan and probate advance. If there is no hurry, a traditional home loan with a longer term and lower interest rate is ideal.

Most inheritance, probate, estate and trust loans are short-term loans, payable within one to two years, the time it is estimated to take for you to receive your inheritance. They also give you the chance to arrange a more traditional home loan. Some people take an inheritance, probate or estate loan because of how quickly they can get it; once the property is deeded to them, they take out a traditional long-term 30-year mortgage and use the proceeds to pay off the inheritance loan.

Other Factors That Affect the Buyout

Once a sibling decides to purchase the interests of the others, he should research the loan options early. If the siblings cannot agree on a buyout at all, the alternative is usually a partition, in which the court orders the property sold and the proceeds divided, which is more expensive for everyone. An estates attorney can help structure the most efficient way to sell the inherited property to a sibling, given the mortgage or reverse mortgage, whether the property is still with the estate, and the need for a loan. Call us at 212-233-1233 or email [email protected].