Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Leslie in CA: Hi Brian, My mother passed away a little over six months ago and left the family house to my sister and me. My sister wants her share of the cash for the house right away, but things are more complicated than the estate just writing her a check. I’m the executor of the estate and there isn’t enough cash to do that. Based on comparable sales in the neighborhood, the house is worth somewhere around $700,000. But there is still a $210,000 mortgage remaining. My sister expects to be paid about $350,000 because she says that is what the house is worth. She insists the mortgage just goes away because our mother died. There was no life insurance. The house is sitting vacant. The first two months of the mortgage were paid from available cash in the estate, but I’ve paid the last four months with my own funds. I’ve tried to explain to her that we need to sell the house soon before this gets any more complicated. She insists that I’m trying to swindle her out of what is rightfully hers and that she just wants her $350,000 and we’ll be done with it. Where do I go from here to settle this fairly for both of us?
Answer: Hello Leslie. You have a tough situation on your hands. Someone other than yourself, maybe a probate attorney, needs to sit down with your sister to explain what her options are. It sounds like the place to start is by explaining that she inherited half of the equity in the house, which is different than half the market value of the house. That could be a tough conversation if she thinks you are trying to swindle her. And it doesn’t get any easier because the next part of the conversation is to help her understand that owning half of the equity also means that her half of the estate is also responsible for half of the expenses for the house and anything else that is in the estate.
It will be a judgment call on your part or whoever is trying to explain it to her, but it might go better if her (and your) options are explained to her before trying to explain how much money she is entitled to. I’m suggesting that because different scenarios will offer her different amounts of money depending on what is decided. Keep in mind that I am not an attorney, and this is just my humble opinion.
The option that is used most often is to sell the house and then divide the remaining equity. But that is not going to be the $350,000 half of the market value that she is thinking. At the closing table, the $210,000 mortgage is going to be paid to the lender. The real estate agent’s commission and other closing costs are also going to come out of the sale proceeds. Keep in mind that the sale proceeds will technically go into the estate bank account. Since the house seems to be the largest asset in the estate, other expenses owed by the estate will probably need to be paid. For instance, I suspect there will also be some attorney fees.
But first, back to explaining some of the options that you and your sister have. You don’t have to sell the house. You could turn the house into a rental that provides both of you with some income for years to come. Keep in mind that the bank probably isn’t going to let the two of you just assume your mother’s mortgage. If you go with an option other than selling soon, the two of you will probably have to take out a new mortgage in your names — talk to a real estate or probate attorney about exploring other options. Another option is for you to both live in the house and pay the new mortgage. Another could be for one of you to live in the house and pay rent to the other, or for one of you to take out a large enough mortgage to buy out the other’s equity in the house.
Leslie, I understand that your sister just wants her share of the cash. I think the place to begin is by helping her understand that she is now a homeowner and that comes with both options and responsibilities along with the financial reward. If you begin by explaining several options to her, hopefully, she will better understand her responsibilities. There could be other options with that particular house. Maybe it is a candidate as a fix and flip for an even higher profit. Or maybe it would make a good vacation or short-term rental.
There are two critical issues your sister needs to understand before deciding among any of the options. First, is the difference between equity in the house and market value. Second, is that any option involving keeping the house is going to come with maintenance and repair expenses and possibly property management costs. Of course, don’t forget about the basic property taxes and homeowner’s insurance.
What can you add to this conversation about decisions two sisters need to make about an inherited house? Please comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].