Fractional Interests

Owning a piece of real estate is usually a fairly simple, straightforward proposition. Once in a while, though, people find themselves owners of a fractional interest in real estate. In many cases this comes about because of an inheritance. As an example, parents pass away and the estate, including the family home, is left to heirs. Sometimes the property is sold and the heirs are paid in cash. Sometimes one of the siblings lives in the house and partial interests to the real property are distributed among all the heirs. Though my example is common, there are many, many ways to become the owner of a fractional interest in real property. Another simple example would be the death of a parent whose estate already consisted of a partial ownership in a piece of property with a co-owner. The parents’ interest is now passed on to the heir or heirs. Imagine yourself the owner of a one-fifth interest in that piece of real estate.

The problem with fractional interests, especially smaller fractions, is communication. If you’re on good terms with your co-owners (the other fractions) and you all see eye-to-eye on the disposition of the property, there is no problem.

Major problems often arise when one of the co-owners lives in the property or perhaps are managing the commercial property and are perfectly happy with the way things are going. Perhaps you own a small interest and need to “cash out” and the other co-owner or co-owners don’t want to sell the property. You offer to sell them your share of the ownership percentage for a reasonable price and they say “no.” In desperation you find somebody willing to buy their share at a fair price and they again say “no.” Perhaps there is animosity between the co-owners. Since it’s no longer politically correct to use the original phrase, I’ll coin a new one – hell hath no fury like a co-owner scorned.

Co-owner hassles can easily be as trying as a divorce and often just as bitter. Often the other co-owner or co-owners will delight in not cooperating with a co-owner. If you’re in this situation, are you stuck? The answer is a resounding “no.”

In the first place, your fractional interest can easily be sold. Having said that, you will not receive the full value because anybody buying your fractional interest is going to end up being a co-owner with the very people you swear are jerks. Anybody buying that fractional interest will factor in various amounts of money for profit and potential litigation.

Let’s use a hypothetical example. Property has a market value of $300,000 and you own a 20% undivided interest in this property. The property is owned free and clear of any debt. Theoretically, you value your share at $60,000. Not so. If the property were put on the market and sold for $300,000, the owners would probably net $275,000 – $280,000. For the sake of this discussion, let’s say $275,000. Your net profits therefore would be approximately $55,000. That is the value of your share if the property were sold in total. You have offered your share to the co-owners at $50,000 and they have either laughed at you or offered you $5,000.

You basically have two choices. One is to sell your share. Anybody purchasing your share is going to do the math that I have just done. Deduct a nice profit from the $55,000 and deduct the potential cost of litigation. My office has purchased fractional interests in property and trust deeds for over a quarter of a century and my calculations would probably go something like this: The $55,000 minus $10,000 profit, minus $10,000-$15,000 set aside for litigation. Therefore, your $55,000 share would probably sell for $30,000 plus or minus $5,000.

That is one of your two alternatives and probably the simplest unless you have finally decided to get tough. If you’re willing to shoulder some expenses and uncertainties, find a real estate attorney. This has to be an attorney specializing in real estate who will understand an “Action For Partition.” Most people don’t know this but any partial owner can, quite simply, force the sale of the entire property through court. Yes, this involves attorneys’ fees, a court fight and unknown expenses, but the eventual outcome will be a forced sale of the property at less than its true value. The court will then divvy up the proceeds among the fractional owners in accordance with their shares.

When our office purchases a fractional interest we try to give the other owner or owners their choice of anything reasonable. We usually offer to sell them our interest, buy their interest, put the property on the market with a broker of their choice or make any other arrangement with them that is fair to both parties. If there is discussion about the purchase or sale price of the interests, the valuation is simple. Either I set the price and the other owner/s can buy or sell at that price or they can set the price giving me the option of buying or selling. Frankly, this is so fair it’s brutal. In the event that we discover a total lack of cooperation we have no problem with threatening and perhaps initiating an Action For Partition. At some point the other owner/s will come to their senses and make a deal before the court sells the entire property for less than its full value.

In conclusion, don’t feel that you have to be picked on just because you are part owner of a property. If you’re feeling abused, take this article to a real estate attorney and at least have that attorney send a letter or two to try to resolve the situation.

Peter Rosenthal
VIP Trust Deed Company