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If Not A Contract, At Least An Understanding

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Real Estate AgreementI have two friends who bought a half-million dollar rowhome in Baltimore, MD without a contract.

That’s right, they entered into a business transaction for a half million dollar asset with no contract, no agreement (more on this later), no nothing. Half a million bucks.

They did have what they considered an agreement and it was that they agreed to discuss what they would do with the home in three years. For three years, neither one could move out the agreement was to keep status quo for three years. It’s now three years later and one of their two roommates is moving out… and they’re not sure what they’re going to do. One guy likes the status quo and wants to get another roommate. The other doesn’t want to deal with the headache of another roommate and would prefer to eat the rent difference.

Without a contract, there is no prior discussion of scenarios and default responses. If there’s an impasse, there’s no prior agreement to what the means for resolving it are. Since there are only two owners, there’s no built-in tiebreaker. In their current situation, where one person wants a roommate and the other doesn’t, there’s no “obvious” solution (there rarely is). Is the obvious solution to rent out the room? Or is it to have the one who doesn’t want another roommate eat the rent difference 100%? What if the empty room is on the floor with the owner who doesn’t want a roommate? He certainly gets more utility out of the room than the other owner who lives two floors below him. However, one less roommate means one less person in the living room, kitchen, and dining room; how do you value that? This is not some scenario you couldn’t have predicted. Roommates come and go, so this is certainly a scenario that could’ve been written into an agreement.

At the end of the day, you need a contract because it establishes an understanding. If you do anything that’s more than $500, you need a contract. Contracts aren’t about legal recourse, they’re about reaching an understanding. It’s also important to have these discussions before either party has a vested interest in the specific decision itself. If they discussed the roommate scenario ahead of time, neither would’ve had a preference either way and they could’ve reached a fair solution (they did take a roommate in the beginning). Now one person has a vested interest in the default being “no roommate,” while the other has a vested interest in the default being “get a roommate.” Now you can’t have impartial discussions.

Who knows how this will turn out but fortunately both of my friends are reasonable people so they’ll be able to work it out eventually.

(Image: lumaxart)

{ 9 comments, please add your thoughts now! }

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9 Responses to “If Not A Contract, At Least An Understanding”

  1. Chris says:

    Do you, or any of your readers, have advice on how to resolve a situation of this nature?

    A friend of mine is in a similar situation. He and a buddy bought a house about 3 years ago, no contract. Now one is engaged and wants to sell his interest to buy another place. They are fighting over the terms, price, obligations, etc.

  2. From my experience as an attorney, I can assure you that being friends and being reasonable people is no assurance of a smooth business relationship (or termination thereof) if there is money at stake. The problem you have described is even worse if the “friends” are romantically involved and decide that co-habitation is for them.

  3. Dan says:

    Easy solution. Take the rent difference, and have each bid on how much of the rent difference he’d be willing to pay to take ownership of the room and do as he pleases, i.e. find a roommate, leave it unrented, use as an office, etc. Whoever bids higher gets to do as he pleases and pays the lower bidder his bid plus half the difference. If the empty room is on a different floor there can be a adjustment derived from a similar auction.

    Same thing for Chris’ friend. Have each bid on the house, and have the higher bidder pay the lower bidder his bid plus half the difference.

  4. Nicole says:

    Chris – I think the scenario you describe is the more serious one and the one where a contract would be more relevant. Many people enter into contracts concerning home ownership that do not deal with roommate issues (resolving issues like that is a part of life). But not having a contract that specifies what will happen when one of the owners wants to sell their share is a big problem – there is just a lot more at stake.

    The homeowners in the first scenario who are dealing with the roommate issue should take note right now and draft up a contract that specifies what will happen when they do decide to part ways. That will be a much messier problem by far than deciding whether or not to take on another roommate.

    Chris – your friends should probably consult a lawyer to determine what their rights are. The big issue is whether the seller has a right to sell his interest to any third party if the other owner refuses to buy it for the price and on the terms that the seller wants? does the other owner have any right to reject a potential buyer as unsuitable, etc.? I would also recommend that they look into a good mediation service – an objective third party who can help them to come to a resolution that they can both live with.

    I think the roommate issues is much easier to resolve. If one person does not want a roommate and the other does, the person who does not want the roommate should pay the difference. If the outgoing roommate had his or her own room, then the owner who is covering that cost should get exclusive use of that room.

  5. CK says:

    Definitely a bonehead move, get it in writing.

  6. jim says:

    CK drops the hammer!

  7. Laura says:

    I think it’s in both interests’ to get it all in writing. Many times people say contracts show a lack of trust, but really it is to protect everyone involved. Circumstances change, memories don’t match, and a simple misunderstanding can result in a lawsuit with now two former friends.

    I hope your friends can work this out peacefully.

  8. Double says:

    Get it in writing is a no-brainer. Your friends may be about to ruin their friendship, but I hope it works out for them.

  9. Shadox says:

    OK, that’s a really stupid move. As a (former) lawyer, I can tell you that I have seen many friendships / relationships wrecked because people didn’t bother to negotiate the terms of their business arrangement and put them in writing in advance. Really bad decision.

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