Published:
February 3, 2021

How to settle disputes in your co-ownership group with an operating agreement.

One of the most common fears of co-buying is resolving disputes. Establishing trust and open communication is key when you purchase property with friends or family, so we always recommend laying out a set of instructions that outline scenarios and what to do when they happen. This is done in an operating agreement and is a critical document to create and go over thoroughly with your team before you start working with a real estate agent.

Common disputes covered in an operating agreement

  1. If someone cannot pay their portion of the mortgage, what happens?
  2. If something breaks like a refrigerator or hot water heater, who pays what and who is responsible for getting it done?
  3. If someone wants to sell their stake in the property, how do you handle this?

These are all things your group can include in an operating agreement. Not only should you talk about these things, you need to document them as well. An operating agreement is a legally binding document that should establish confidence between members and safeguard against ambiguity or disagreements.

You can find tons of templates for property operating agreements and tailor them to fit your needs. In any case you can add extra provisions and scenarios not covered in a template. Consider adding these if they don’t already exist.

How to add resolutions to common disputes

1. If someone cannot pay their portion of the mortgage.

Resolution 1:

If someone defaults on their portion of the mortgage, you can put in a stipulation that says the other members of the group will cover XX amount of months and be paid back within XX amount of months at a particular rate of interest. You can include a max number of months other members are willing to cover the other person’s missed mortgage payments upon which the defaulting member will be forced to sell their stake in the property to the other members at fair market price less the owed mortgage payments.

Resolution 2:

If someone defaults on their portion of the mortgage and you decide to share a “rainy day fund”, the mortgage payments can be paid for with this fund for XX number of months and paid back in XX months at a particular interest rate by the defaulting member. You can include a max number of months other members are willing to cover the other person’s missed mortgage payments upon which the defaulting member will be forced to sell their stake in the property to the other members at fair market price less the owed mortgage payments.

2. If something breaks, like a refrigerator or hot water heater, who pays what and who is responsible for getting it done?

Resolution 1:

If something breaks, like an appliance, you can add a resolution that states what portion each group member is responsible for and who is responsible for executing the repair.

Resolution 2:

If something breaks, like an appliance, you can use funds from a “rainy day fund” you and your group have been contributing to. State who is responsible for executing the repair as well.

3. If someone wants to sell their stake in the property.

Resolution 1:

If a group member decides they want to sell their portion of the property, you can add a solution that says they are obligated to first offer their stake to the other group members at a fair market rate.

Resolution 2:

If the other group member does not want to purchase the member’s stake in the property, they can find a party to buy it in XX number of days or months.

Resolution 3:

If the other party does not wish to purchase the member’s stake in the property and does not want to find a party to buy it, the group can agree to sell the property at a fair market rate and dissolve the LLC.

Assigning a third party mediator

Another option to consider is assigning a third party mediator to reference when and if something arises that is not covered in an operating agreement, OR to help facilitate resolutions when documented scenarios do arise. A neutral third party can reduce stress on your personal relationship and promote trust and confidence in your group as well. You can assign a third party and their role in your operating agreement as well.

Consulting a property attorney

We also recommend having a property attorney review your group’s operating agreement before signing it. When you are making one of the biggest investments of your life, it’s worth a few hundred dollars to be extra clear and confident in your responsibilities. There are plenty of property attorneys that specialize in operating agreements and LLCs, so this should be relatively straightforward and not too costly.


Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.