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If Not A Contract, At Least An Understanding

I 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. [3] 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 [4])