Buyout

What It Means

A buyout is the process by which one or more remaining co-owners purchase the Ownership Share — the percentage ownership interest — of a departing co-owner. In co-ownership, a buyout involves two distinct transactions: a transfer of the departing co-owner's property interest (via a new Deed) and, if the departing co-owner is a borrower on the loan, Refinancing to remove them from the Promissory Note and mortgage.

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Buyout terms are defined in the Co-ownership Agreement, typically within the Buy-Sell Provision and Exit Strategy sections. They specify when a buyout can occur, how the departing co-owner's Equity is calculated, the payment timeline, and who bears the transaction costs.

How a Buyout Works

A buyout is triggered by a defined event in the Co-ownership Agreement — a voluntary exit request, a Default, death, or another agreed-upon condition. The departing co-owner's equity is calculated using the valuation method specified in the agreement, which may reference a recent appraisal, an agreed formula, or a third-party valuation.

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The remaining co-owners then pay the departing party their equity and execute a new deed transferring ownership. Because lenders do not release individual borrowers from an existing mortgage, the remaining co-owners often must refinance the loan if the departing co-owner is a borrower — qualifying on their own income and credit without the departing party.

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If the remaining co-owners cannot qualify for refinancing, the buyout may not be feasible — a scenario the Co-ownership Agreement should address with fallback provisions, such as a defined timeline for the property to be listed for sale.

Why It Matters for Co-owners

A buyout is the most common and least disruptive exit mechanism in co-ownership. It allows one party to leave while the remaining co-owners retain the property. Without predefined buyout terms, a departing co-owner's exit can become adversarial — with disputes over valuation, timeline, and cost allocation increasing the risk of a Partition Action.

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Many groups never formalize buyout terms in a Co-ownership Agreement, which is why valuation and timeline disputes are so common at exit.

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Buyout feasibility depends on the remaining co-owners' ability to refinance. This is a practical constraint that should be evaluated before entering the co-ownership arrangement, not after an exit is triggered.

Key Points

• The process by which remaining co-owners purchase a departing co-owner's ownership interest
• Involves a deed transfer and often a mortgage refinance if the departing co-owner is a borrower
• Triggered by events defined in the Co-ownership Agreement (voluntary exit, default, death)
• Requires a predefined valuation method to calculate the departing co-owner's equity
• Feasibility depends on the remaining co-owners' ability to qualify for refinancing
• The Co-ownership Agreement should include fallback provisions if refinancing is not obtainable