Realign Your Family Partnership

Katie and her husband own a beach house with another couple, but there isn’t anything in their contract if one couple wants to pay off the home early. Dave says paying it off is a great plan, and they should readjust their ownership plan.

QUESTION: Katie in Salem and her husband own a beach house with another couple, but there isn’t anything in their contract if one couple wants to pay off the home early. Each person is 1/4 owner. They are the third generation caretakers. Dave says paying it off is a great plan, and they should readjust their ownership plan.

ANSWER: The problem is you’re joint and there are several of you on the loan, which means that if they go bankrupt, you get the whole thing. You get the whole loan. If they don’t pay, you have to pay. I’m not a fan of this kind of thing at all.

If you pay off the loan yourself and reinstall a mortgage on the property where they owe you the difference, that’s probably a good plan as long as they’ll go along with it. In the process of that, you need to make sure your partnership agreement has all of those details covered. I don’t like partnership agreements as I told you, but having said all of that, if you’re going to rest this thing, it needs to cover all of the possible downsides: divorce, default, drug use, disinterest, disability, death. What happens in all of these worst-case scenarios?

I think an LLC would give you more flexibility and protection as to what would happen in these worst-case scenarios. I think you’ve got a good plan to pay it off, and in the process of doing that, I would like to raise the sophistication level of your agreement—moving it to an LLC and addressing all these other concerns. What I have found is that the more of these concerns addressed ahead of time, when they happen, you don’t have to have a big falling out. If you can anticipate all of your negative things and already have a deal on what happens on the negative thing, then you’ve got a pretty positive situation going forward, and you have a chance at this working out okay.

I like your plan as long as they will agree to let you have a lien back against the property for their portion that you paid off and then they pay you off. I think that’s a great idea.