A majority of the time, when a homeowner passes away, the home is passed down to the children. As a result, many folks find themselves inheriting a house with siblings.
Every year, people ask their attorney, real estate agents, or friends what to do when they inherited a house with a sibling or a couple of siblings.
This article will go over your options on what to do with an inherited house when siblings are involved. Some of the topics we will discuss:
- The three common options for inherited houses
- How to buy your siblings share of an inherited house
- And, what to do when your sibling refuses to sell
A special note: while this article will use the term “sibling” for simplicity and consistency purposes, all of the content applies to any situation where you inherit a property with multiple owners
For example, it applies if you inherit a property with a step-parent, cousin, a nephew, a niece, or other relatives. It applies when you inherit a partial equity position in the property.
The common reason a situation like this happens is if a homeowner intentionally created a Will that split their assets between multiple owners or a married couple without shared dependents. In this case, assets are often split between the children and the step-parent.
Assets passing down to children, and thus split ownership with siblings, is a more common practice in a Will and attributable to intestate laws in the probate process.
What To Do When Inherited House With Sibling?
At a basic level, you have three options when inheriting a home with siblings. You can keep, sell, or rent it. Let’s briefly explore each option, what causes some families to choose one option over the other, and help you determine which option is right for you and your siblings.
Keep The Home
In a small fraction of cases, family members will choose to keep the house. After nearly a half decade of experience in the industry and real estate market, I found families keep the property when:
- It is a vacation home
- Or, one family member chooses to live in the property.
When the property is a vacation home, rather than a primary residence, families will keep the property, split the ongoing costs, and share its use.
With primary residences, one family member may wish to keep and live in the property. In this case, it is most common for that sibling to buy out the rest of the siblings. We’ll dive more into buying out your siblings below.
Sell The House
The most common, and straightforward, solution is to sell the property. Selling the home is preferred. By selling the home, you can settle the estate and pay off any remaining debt in the estate. Once all the debt is settled, the proceeds are split according to state laws or the Will.
To successfully sell an inherited property, make sure to work with a qualified probate realtor.
For more information on how to sell an inherited property. We wrote a comprehensive guide on how to sell an inherited property, which you can check out.
Rent The Inherited Property
Lastly, you and your siblings can rent the property out. This often works best when inheriting a property with no mortgage. The reason boils down to ability to settle the estate and positive cash flow.
I rarely recommend this as an option if it requires buying out siblings by taking out a mortgage or you enter into a partnership with your siblings on a rental property that requires a mortgage.
A mortgage is likely required when the estate lacks enough proceeds and assets to settle all debt or lacks enough proceeds to buy out siblings.
Let’s look at some specific numbers to solidify this point. An estate has a home worth $300,000, a mortgage of $100,000, and $100,000 in additional cash.
In this case, the cash assets are able to satisfy the mortgage. You and your siblings can own the house free and clear. Making it an option as a rental.
On the other hand, assume all variables are the same except there is no extra cash. In other words, to pay off the mortgage, you and your siblings will need to take out a new mortgage on the property to pay off the existing mortgage.
This is rarely a good idea and makes family relationships more complicated than they already are.
Do All My Have To Agree On An Inherited Property?
In the following sections, we are going to discuss some of the common problems that arise when siblings inherit property from parents and a few of the corresponding solutions.
A fair share of cases where property is inherited often have siblings who disagree what to do with the property.
When there is a detailed Will or a Trust in place that spells out what is to be done with the property, sibling disagreements are a moot point. What happens to the property is up to the Will and Trust, regardless of siblings opinions.
Unfortunately, few Wills and Trusts are detailed enough to explicitly state what is to happen to the property. Instead, brothers and sisters must come to an agreement.
When agreement can’t be reached, a last resort option is to involve the courts.
Let’s look at some common options when siblings disagree on what to do with an inherited property.
How Do I Buy A Sibling Out Of An Inherited House?
You may find yourself wishing to keep the property or rent it out while your sibling wants to sell the property. In this case, you likely need to buy your sibling out of an inherited house.
On a simple level, all you need to do is pay the fair market value for their equity position. On a paid off house, this is relatively straightforward. It gets more complicated if a mortgage exists on the property.
Check out our article on determining the fair market value of an inherited property.
Let’s say you and your brother or sister inherit a paid off property worth $300,000. You both have equal ownership of the property, and therefore, have an equity position of $150,000.
To buy out your sibling, simply pay them the fair market value for the property, or $150,000.
If a mortgage exists, you still pay the equity position, but the existing mortgage also needs to get paid off. Let’s take the same $300,000 house and assume there is a $100,000 mortgage.
In this example, you and your brother or sister each have an equity position of $100,000. This is calculated by subtracting the mortgage against the home’s value to determine the equity in the home. Since there is equal ownership, you are both left with $100,000 in equity.
The real question is “how do you get the money to buy out your sibling?” You have a few options.
Use Assets In The Estate
In a best case scenario, you’re able to use assets in the estate to buy your sibling’s share of an inherited property. This requires the estate to have cash, retirement, or other equitable assets that are equal to or greater than your sibling’s equity position and the mortgage.
Here is an example where this would work. Let’s take the $300,000 home with no mortgage and equal ownership. You and your sibling have a $150,000 equity position.
Inside the estate is an additional $100,000 in cash and your parents left you and your sibling an additional $100,000 each as the beneficiary to their retirement accounts.
In this case, you would have enough cash to pay your sibling for their ownership in the property. Instead of everything being split 50-50, you would walk away with the inherited property. Your sibling would get $300,000 in cash.
Often, most people who inherit a property they wish to keep will need to refinance the property.
Refinance The Inherited Property
In the case where the estate lacks enough proceeds to buy out your sibling, you need to refinance the property or take out a mortgage on the property.
The type of mortgage and interest rate you are eligible for will depend on the anticipated use of the property. For example, if you plan to keep it as a rental, then it is considered a secondary property. If you plan to move into the home, then it will qualify as a primary residence.
Take the same $300,000 property with no current mortgage. You and your brother or sister have equal share of the property. To buy out your sibling, you would need to get a mortgage of $150,000 for the property.
Keep in mind that all of this gets more complicated when there are more siblings involved and there is a mortgage on the property, especially if you inherit a property with a reverse mortgage on it.
What Happens When Sibling Refuses to Sell Inherited Property?
Every so often, you find yourself on the other side of the coin where you wish to sell the property, but your sibling refuses to sell the inherited property.
What are your options then? Can you force the sale of the property? Can siblings force the sale of an inherited property?
The answer to that question is, yes. You or your sibling can force the sale of inherited property through a type of lawsuit known as a partition action. Here siblings will go before the courts and a judge will determine what happens with the property.
A majority of the time, the courts will force the sale of the property as they rarely cannot coerce someone into remaining a co-owner of an inherited property. This applies even if a majority of parties wish to keep the property.
So, if you find yourself wishing to sell, but your two siblings wish to keep the property, it is likely the courts will rule in your favor and force the sale of the property.
This must always be a last option solution because of the financial costs and strain on familial relationships. A partition of action will easily cost the estate thousands of dollars.
The ideal approach is to try to reach agreement with your siblings. When that’s not possible, involve an attorney to mediate and reach agreement between your siblings.
If all efforts are exhausted, file the partition. In some cases, the act of filing the partition is enough to get your siblings to the negotiating table.
Sibling Lives In Inherited Property
It’s not uncommon for a sibling to live in an inherited property. For example, perhaps your sibling moved into the home to take care of your father or mother. As part of the agreement, your sibling lived there rent free.
Now that your father or mother has passed away, you have inherited the property and your brother or sister is living rent free in an inherited house.
Is this allowed?
The complicated answer is that it depends. If terms of the Will or Trust state it is permissible, then your sibling can live there rent free and it’s mandated by the law.
On the other hand, if the Will did not spell out the terms, then you are in a gray area. The best solution is to consult with a probate attorney in your state. Downriver residents can consult with a Downriver probate attorney.
In many cases, a sibling living in an inherited property prior to the settlement of the estate is required to pay fair market rental value to the estate. This would not go directly to you or your other siblings. Rather it would get paid to the estate.
Often an agreement is worked out where siblings live rent free in the inherited property and in turn the sibling continues to take care of the property. In either case, consult with your probate attorney.
Conclusion
When you inherit a property in Michigan with your siblings, you have three basic options: keep it, rent it, or sell it. The most common solution is to sell your Michigan inherited property. For learning more about how to sell an inherited property, check out our great resource.
You can also connect with one of our probate real estate agents.
