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Real Estate Prenup Guide

This guide explains each section of the Real Estate Prenup Agreement, its purpose, and key options to consider when completing the contract. By understanding these sections, you can make informed decisions, creating an agreement that meets your specific needs and goals.

Legal Representation Disclaimer

Purpose:
To ensure all Co-Owners understand their right to legal representation and the implications of shared counsel.

1. Independent Counsel:
Each Co-Owner has the right to hire their own attorney to review and advise on the terms of this Agreement.

2. Shared Counsel:
If Co-Owners opt to use the same attorney:

  • The attorney must act neutrally and cannot favor one Co-Owner.
  • A Conflict of Interest Waiver may be required, which discloses the risks and ensures all parties consent to joint representation.

Why It’s Important:
Legal counsel protects your individual interests and ensures all parties fully understand the Agreement.

1. Ownership

Purpose:
To define the ownership structure and determine each Co-Owner’s percentage of the property.

Options for Ownership Structure:

  1. Tenancy in Common (TIC):
    • Each Co-Owner owns a distinct share of the property.
    • Shares can be unequal and are transferable to heirs.
    • Best for Co-Owners contributing different amounts or prioritizing flexibility.

Example:
Co-Owner A owns 60%, and Co-Owner B owns 40%. Upon Co-Owner A’s death, their share passes to their heirs.

2. Joint Tenancy:

    • All Co-Owners have equal ownership shares.
    • Includes right of survivorship, meaning a deceased Co-Owner’s share automatically transfers to the surviving Co-Owners.
    • Best for Co-Owners who want equal shares and no inheritance complications.

Example:
Co-Owners A and B own 50% each. If A passes away, B automatically owns 100%.

How to Determine Ownership Percentages
  1. Financial Contributions:
    • Ownership reflects each Co-Owner’s contribution toward:
      • Down payment
      • Mortgage payments
      • Closing costs
      • Property taxes or insurance

Example: Co-Owner A contributes $70,000, and Co-Owner B contributes $30,000. Ownership splits as 70%-30%.

2. Sweat Equity:

    • Ownership reflects the value of labor provided to improve the property (e.g., renovations).
      • Assign a monetary value to time spent (e.g., $25/hour).
      • Use appraisals to measure pre- and post-renovation property value.

Example: Co-Owner A contributes $40,000 in cash, and Co-Owner B contributes 400 hours of labor worth $20,000. Ownership splits as 67%-33%.

3. Mixed Contributions: Combine financial and sweat equity contributions to determine shares.

Why It’s Important:
Clearly defined ownership percentages prevent misunderstandings about contributions and ensure fairness.

2. Possession and Use

Purpose:
To outline who can occupy the property, assign exclusive areas, and clarify guest policies.

Key Decisions to Make:

  1. Equal vs. Exclusive Access:
    • Equal Access: All Co-Owners can use the entire property.
    • Exclusive Areas: Certain areas (e.g., bedrooms) are reserved for specific Co-Owners.

Example:
Co-Owner A gets Bedroom 1, and Co-Owner B gets Bedroom 2. Shared spaces include the kitchen and living room.

2. Guest Policy:

    • Option 1: Guests allowed for up to 2 nights without notice.
    • Option 2: Written approval required for guests staying more than 1 night.

4. Vacancy Rules:
If a Co-Owner moves out for more than 30 days:

    • They remain responsible for their share of expenses.
    • Option: They may lease their share with written approval.

Why It’s Important:
Establishing clear rules for occupancy, exclusive areas, and guests minimizes conflicts and promotes privacy.

3. Expenses

Purpose:
To allocate financial responsibilities for mortgage payments, taxes, insurance, and repairs.

Key Financial Responsibilities:

  1. Mortgage Payments:
    • Split equally OR
    • Split based on ownership percentages.
  2. Utilities and Maintenance:
    • Option 1: Split equally.
    • Option 2: Allocate based on usage or occupancy.
  3. Necessary Repairs:
    • Repairs required for property safety or integrity are shared based on ownership percentages.
  4. Optional Repairs/Improvements:
    • Require written agreement from all Co-Owners.
    • Contributions may or may not affect ownership percentages—decide this in advance.
  5. Emergency Fund (Escrow):
    • Co-Owners may set aside monthly funds for unexpected repairs or defaults.

Example:
Each Co-Owner contributes $200/month into a shared account for emergency expenses.

Why It’s Important:
Clearly defined financial responsibilities prevent disputes over payments and unexpected costs.

4. Mandatory Sale or Buyout

Purpose:
To outline what happens if a Co-Owner wants to sell their share or trigger a buyout.

Key Options to Include:

  1. Commitment Period:
    • No sale or buyout allowed for the first 3 years (or a term you choose).
  2. Right of First Refusal:
    • Remaining Co-Owners get the first opportunity to buy the selling Co-Owner’s interest.
  3. Appraisal Process:
    • Require 1 or 2 certified appraisals to determine fair market value.
  4. Auction Process:
    • If multiple Co-Owners want to buy, hold an auction with minimum bid increments (e.g., $2,000).

Why It’s Important:
A defined exit strategy ensures a smooth transition when a Co-Owner wants to sell.

5. Distribution of Proceeds

Purpose:
To clarify how proceeds from a sale or buyout will be divided.

  • Proceeds are distributed based on ownership percentages.
  • Deduct any unpaid expenses (e.g., missed mortgage payments) before distributing the balance.

Example:
Co-Owner A owes $5,000 in unpaid contributions. That amount is deducted from their share.

6. Death of a Co-Owner

Purpose:
To determine what happens to a deceased Co-Owner’s share and obligations.

Options to Consider:

  1. Buyout Option:
    • Surviving Co-Owners have the right to buy out the deceased Co-Owner’s share at appraised value.
  2. Heirs’ Rights:
    • Option 1: Heirs must sell their interest to the surviving Co-Owners.
    • Option 2: Heirs may retain the interest but cannot occupy the property without approval.
  3. Financial Obligations:
    • If heirs cannot cover mortgage payments or expenses, surviving Co-Owners may cover them in exchange for reduced ownership shares.

7. Dispute Resolution

Purpose:
To provide a clear process for resolving conflicts.

  1. Mediation First:
    • A neutral mediator helps resolve disputes informally.
  2. Arbitration:
    • If mediation fails, disputes are settled through binding arbitration.
  3. Court Enforcement:
    • The non-compliant Co-Owner pays all legal costs if enforcement is required.

Final Thoughts

This guide helps you make informed choices when building your Real Estate Prenup Agreement. Consider your goals, priorities, and potential scenarios to create a contract that works for everyone. When in doubt, consult with an attorney or real estate advisor to ensure clarity and fairness.