A Real Estate Buyout Agreement is a legally binding contract between co-owners of a property that outlines how one owner can buy out the interest of the other(s). Whether you are co-owning a property with a business partner, family member, or spouse, this agreement is the “exit strategy” that prevents costly legal battles when one party wants to sell and the other wants to keep the property.

Without this agreement, co-owners often face a partition action—a lawsuit where a judge orders the property sold to the highest bidder, often resulting in a significant financial loss for all parties.

When Do You Need a Buyout Agreement?

You typically need this agreement in three specific scenarios:

  1. Divorce or Separation: One spouse keeps the family home and buys out the other’s equity.
  2. Inheritance: Siblings inherit a property; one wants to live in it or rent it out, while the other wants cash.
  3. Investment Partnership: Business partners buy a rental property, but one partner wants to liquidate their investment to pursue other ventures.

Key Components of a Real Estate Buyout Agreement

A robust agreement goes beyond just the price. It must define the process of the buyout. Below is a breakdown of the essential clauses you should include, with sample-style language explanations.

1. Valuation Mechanism (The “Price” Clause)

The biggest source of dispute is determining what the property is worth. You should pre-agree on a method, not a dollar figure.

  • Option A: Appraised Value
    • Sample Concept: “The Purchase Price shall be determined by an average of two independent appraisals. Each Party shall select and pay for one licensed appraiser. If the two appraisals differ by more than 5%, a third appraiser shall be selected by the two original appraisers, and the average of the three shall be the binding Purchase Price.”
  • Option B: Broker’s Opinion of Value (BOV)
    • Sample Concept: “The Parties shall mutually agree upon a licensed real estate broker who will provide a Broker’s Opinion of Value. This value shall serve as the Purchase Price.”

2. The “Shotgun” Clause (Buy-Sell Provision)

This is a powerful clause often used in business partnerships to ensure fairness. It prevents one party from offering an unfairly low price.

  • How it works: Partner A names a price. Partner B then has two choices:
    1. Sell their share to Partner A at that price.
    2. Buy Partner A’s share at that same price.
  • Why use it: Because Partner A doesn’t know if they will be the buyer or the seller, they are forced to name a mathematically fair market price.

3. Right of First Refusal (ROFR)

This protects a co-owner from having a stranger buy into the property.

  • Sample Language: “If any Owner receives a bona fide offer from a third party to purchase their Interest, they must first offer that Interest to the remaining Co-Owners on the same terms and conditions. The remaining Co-Owners shall have 30 days to accept or decline the offer.”

4. Financing and Payment Terms

Buying out a partner usually requires a large sum of cash. The agreement must explicitly state how and when this is paid.

Lump Sum via Refinance: The buying partner refinances the mortgage in their own name and uses the “cash-out” portion to pay the selling partner.

Seller Financing (Promissory Note): If the buying partner cannot get a bank loan immediately, they can pay the selling partner in installments with interest over a set period (e.g., 5 years).

  • Clause Tip: Ensure this note is secured by a deed of trust against the property, so the seller can foreclose if the buyer stops paying.

5. Release of Liability

This is often overlooked but critical. If there is an existing mortgage, the selling partner must be removed from it.

ample Concept: “The Buyout is contingent upon the Buying Partner successfully refinancing the existing mortgage to remove the Selling Partner’s name from the debt obligation within 90 days. If this is not completed, the Buyout Agreement is null and void, and the property shall be listed for sale on the open market.”

Sample Real Estate Buyout Agreement Structure

While you should always consult a real estate attorney to draft the final document, this outline shows the standard structure you will likely use.

1. PARTIES

  • This Agreement is made on [Date] between [Buyer Name] (“Buyer”) and [Seller Name] (“Seller”), regarding the property located at [Property Address].

2. RECITALS

  • WHEREAS, Buyer and Seller currently own the Property as [Tenants in Common / Joint Tenants];
  • WHEREAS, Seller wishes to sell their [Percentage]% interest in the Property to Buyer;
  • WHEREAS, Buyer wishes to purchase said interest…

3. PURCHASE PRICE AND TERMS

  • Total Fair Market Value: $[Value]
  • Value of Seller’s Interest: $[Value x Percentage]
  • Less Payoff of Existing Mortgage: $[Mortgage Amount]
  • Net Buyout Price: $[Cash Amount to Seller]

4. CLOSING

  • Closing shall occur on or before [Date].
  • At Closing, Seller shall execute a [Quitclaim Deed / Warranty Deed] transferring all title to Buyer.

5. CONTINGENCIES

  • This agreement is contingent upon Buyer obtaining financing approval by [Date].
  • This agreement is contingent upon Seller being released from the existing mortgage.

6. DISPUTE RESOLUTION

  • Any disputes arising from this Agreement shall be resolved through binding mediation/arbitration in [County, State], rather than court litigation.

Common Mistakes to Avoid

  • Ignoring Equity vs. Debt: You don’t pay your partner half the value of the house; you pay them half the equity. (Value minus Mortgage Debt = Equity).
  • Forgetting “Phantom” Costs: If you were to sell the house on the open market, you would pay ~6-10% in agent fees and closing costs. In a private buyout, you save these fees. The buying partner often argues the buyout price should be discounted by this amount since they are saving the seller that expense.
  • Quitclaim Deed Timing: Never sign a quitclaim deed transferring your name off the title until you have received the payment or a secured promissory note.