purchase price calculation--full buyout after partial buyout


H

Howard J

Quicken is asking what Party B's purchase price is for a
house. (Parties A and B are described below.)

I've come up with three overall ways to calculate Party B's
purchase price. Each of those ways could be adjusted because
of a virtual sales commission, which was used in calculating
the buyout by Party B of Party A.

First I'll list our questions and what seem to be relevant
facts. Then I'll list the ways I've come up with.

Questions:

(a) what do you think the purchase price is?

(b) is there a different answer depending on how the answer
is being used? For example, one answer to track in Quicken
or other home uses, and one answer for IRS, and one for CA's
prop 13 purposes.

(c) if you've not already addressed it, please discuss any
impact that the virtual sales commission has on your
thinking.

Facts

The house was purchased by party A about 12 years ago, using
money down and a mortgage taken out at that time. The tax
appraised value was at a lower amount than the purchase
price, because Party A had Prop 13 tax advantages from a
recent sale of Party A's previous residence.

Party B became part owner of the house about four years ago.
An appraisal was not performed at that time.

Several months ago three things happened at the same time.

First, an attorney specializing in such matters was
consulted by both parties in a joint meeting. That attorney
advised that, if Party B followed through with its plan to
pay off the existing mortgage, then each party had roughly
half ownership of the house.

Second, an appraisal value was obtained, by an appraiser
selected by a mortgage company.

Third, Party B then obtained a new mortgage, paid off the
old mortgage, and bought out from Party A the rest of the
house equity.

The buyout was calculated as half of the total equity.
Total equity was calculated as:

i) starting from the appraisal's figure.

ii), subtracting six percent of that figure, in order to
reflect that both parties would have to share in paying a
sales commission if the house were to be sold to a third
party.

iii) subtracting the remaining amount of the mortgage principal.

Ways I've come up with to calculate the purchase price.

Calculation 1) The equity (of parties A and B) as of the
moment before the buyout.

That would be calculated by taking the appraised value, and
subtracting the amount of the mortgage's remaining
principal. I'm not sure whether the amount should be
reduced to reflect that a sales commission would eat up part
of the funds if an outside sale were occurring.

Calculation 2) A combination of (a) appraisal-based value
for the 50 percent owned prior to the buyout, combined with
(b) the amount paid to buy out Party A, and possibly
combined with Party B's half of the virtual real estate
sales commission.

The calculation would be:
Start with 50 percent of the appraised value.
Add the amount used to buy out Party A's remaining 50 percent.
Possibly add Party B's amount of the virtual sales
commission. (That amount works out to 3 percent of the
appraised value, because Party B's buyout by Party A was
reduced by half of the virtual six percent sales
commission.) The reason for adding Party B's amount of the
virtual sales commission would be because Party A will be
responsible to pay a fully six percent commission if Party A
sells the house.

Calculation 3) The house's appraised value, less the amount
paid to buy out Party A's remaining 50 percent, and possibly
less 3 percent of the appraised value. (The purpose of the
3 percent would be to reflect that Party B's buyout of Party
A was reduced by that amount to reflect that Party B would,
when Party B sells, have to pay that 3 percent.)

The calculation would be as described. That is, start with
the house's just-appraised value. Then, subtract from that,
the amount paid to buy out Party A's remaining 50 percent,
and possibly also subtract 3 percent of the appraised value.

Thanks in advance!
 
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