Do You Own Real Estate with a Partner? What to Do When the Partnership Ends
It’s not uncommon to purchase real estate with a partner. Indeed, it can help you purchase an investment property you could not afford on your own, or benefit from a partner’s skills and vice versa. However, it makes you somewhat dependent on that relationship continuing, which is not always the case. When the relationship goes sour (or something else happens that means it’s no longer feasible), you need to work out what you are going to do.
What Can Cause Partnership Disputes?
The word “dispute” implies that you are angry with each other, but there are actually a number of reasons why you may need to dissolve a partnership:
- You are in a genuine dispute. This might include disagreements about how to run the business, workload imbalance, etc. In many cases disputes can be resolved, but sometimes they simply can’t be.
- Divorce. No, I don’t mean when you own real estate with your spouse. If somebody in the partnership gets divorced, they may be obligated to sell the property and split the proceeds with their ex.
- A partner needs cash fast. This might mean for medical purposes, to pay for repairs to their primary residence insurance isn’t covering, because their kid got into a really good and expensive school, etc.
- A partner dies and their heirs want to sell the property, either because they don’t want to get involved with managing a property or to settle a dispute over the will.
- A partner is retiring and wants to get out of the real estate business.
Any of these, or other reasons, can put you in a position of wanting to dissolve the partnership and sell the property. So, what do you do next?
What Should You Do First?
There are a number of ways in which you can own a building together, including joint tenancy and tenancy in common. You may also have set up a LLC to protect the partnership. How you dissolve the partnership will depend in part on how you own the property and in part on your goals afterwards.
Regardless of this, the first thing you need to do is get an up-to-date valuation of the property, as-is. If you own commercial real estate in Inland Empire, I can help with this. Without knowing what your property is worth, it’s impossible to move forward. There are a number of ways in which valuation can be approached. An expert can tell you which valuation approach will get you the best return. If you are in a serious dispute with your partner(s) then you may end up with dueling valuations. Make sure you know what methods everyone is using.
How Do You Get Out of the Partnership?
You essentially have two overall choices when it comes to getting out of the partnership. If you still want the property, you may be able to buy your partner out. Whether this is feasible depends on your assets and/or your ability to get a loan. Otherwise you may have to sell the property and split the proceeds. If you have tenancy in partnership, then the chances are the property will have to be sold. This is a rare arrangement that only applies in California, however. Most likely, you have joint tenancy or tenancy in common. Joint tenancy means that ownership is automatically divided equally. It’s not often used by business partnerships because when a partner dies their share goes to the other partner, not their heirs. If you have tenancy in common, in which the amount of the property owned varies and the share goes to the person’s heirs not the other partner, it is relatively easy to buy somebody out if you have the assets.
If not, then the building will have to be sold, and the proceeds will be split according to the partnership agreement. If the building is owned by an LLC then you again will probably have to sell the building, split the proceeds, then dissolve the LLC. Dissolving an LLC is a fairly complex process and you should talk to a lawyer about this.
Ideally at this point everyone can walk away with their share of the profit.
If things are less amicable, then lawyers will probably get involved. This could mean one partner suing another for breach of contract, or filing a partnership dissolution lawsuit. If the property is owned by an LLC, they do not have the right to force the sale of assets, unless stated in the agreement. In this case, the chances are the remaining partners will buy them out, although they may have to sell a property in order to be able to do so. Most partnership dissolution lawsuits end the same way as amicable splits, either with you buying them out or with the property being sold and the money split.
What Do You Do Next?
Assuming you haven’t bought your partners out and you all prefer instead to sell the property and split the proceeds, the final step will be to sell the property. You should contact a broker, like me, to get a valuation, and the price should be in that ballpark unless you all agree to lower the price in order to sell quickly. If the building has tenants, they should be notified as specified in their lease.
It’s important to make sure that the person selling the property keeps everyone in the loop. Even if one partner has agreed to take on the task of handling the sale, important correspondence should be sent to the other. Ideally, you should be in agreement if you need to drop the price if the property has not sold as quickly as you were expecting.
The important thing is to find a good agent who is experienced in handling these kinds of sales. This might be the same person who did your valuation, as they are already familiar with the property and the specific reasons why it is priced the way it is. I have much experience in these kinds of sales and can help with getting a property valuation and also with selling the property. Contact me to find out how I can help you.
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