Dianne Stow
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Real-estate

6/1/2007

When buying out other heirs, go easy on discount for fractional shares

Q: My mother and I equally owned a duplex. Upon her death, I received half her share in the property and the remaining half went to the two adult children of her son. They each now own a one-eighth share in the home and I would like to purchase their shares.

Our problem is that itís difficult to get a precise value of the property since the local real estate market is soft. Two similar properties have sold in the past year. One of them recently sold for $25,000 less than prior sales in the area and another sold several months ago for $25,000 less than that one.

My mother died a couple of months ago. How should we value this property? And, should there be a discount for the fact that my nephews own fractional shares? My lawyer said a typical discount when buying fractional shares is 10 to 25 percent below what it would otherwise be worth. I want to be fair.

A: Generally speaking, I do think there should be some sort of discount for fractional shares. But in this case, that sort of thinking might not be quite right.

First, these are your nephews, and youíll want to do right by them since theyíre family. Also, since they own one-quarter of the property and buying it would make you whole, they might expect you to pay a premium. Think of the game Monopoly. If you own two of three colors, and buying the third property means you get to buy houses or build a hotel, owning that last property is more valuable to you. When trading or paying for it, you might pay a premium.

Iíd take your nephews out for dinner or have a conference call in which you talk about what the properties are worth at the current market value and explain how much other properties have sold for recently. Then, talk about how theyíll get this cash outright, and since itís from their grandmotherís estate there wonít be any taxes due. You might also talk about how there really wonít be a market for their shares.

Offer them a fair price based on the most recent sales prices (perhaps discounted slightly) and see what they say. Donít forget that if they owned the home and wanted to sell it, they would most likely use a real estate agent for the sale and would pay a 6 percent fee to the agent. If they donít accept immediately, you can ask them to think about it or raise the price a bit. You can also talk about how much it costs to own and maintain the property each year. Be prepared to show them the cost of the mortgage (if any), and what their share of the property tax bill, insurance premiums and maintenance costs will be.

Hopefully, theyíll see that itís in their best interest to sell. However, if they donít want to sell at any price, then you need to talk about what youíre going to do with the property and how it will be managed going forward.

Ilyce R. Glinkís latest book is ď100 Questions Every First-Time Home Buyer Should Ask, 3rd Ed.Ē (Three Rivers Press, $18). If you have questions, you can call her radio show at (800) 972-8255 any Sunday, from 11 a.m. to 12 p.m. EST. You can also write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, IL 60022, or visit www.thinkglink.com.