Refinancing and Buying Out a Co-Owner in South Dakota

This section explains, in plain language, how one co-owner can refinance a property and use the funds to buy out the other co-owner under South Dakota law. It summarizes the practical steps, key documents, lender requirements, and legal risks. This is an educational overview only and not legal advice.

1. Basic concept — what refinancing + buyout means

Refinancing and buying out a co-owner typically means that one co-owner obtains a new mortgage in that person’s name (or otherwise obtains funds), uses those funds to pay the other co-owner for that person’s ownership interest, and records a deed transferring full ownership to the buyer. The mortgage and title must be updated so the departing owner no longer has legal or financial obligation on the property.

2. Typical step-by-step process

1. Agree on the buyout method and price.

   Start by agreeing on a buyout amount or method for calculating value (appraisal, market comparables, or formula based on outstanding mortgage and equity split). Put the agreement in writing (purchase agreement or settlement memorandum).

2. Get a professional valuation.

   Most lenders and co-owners want an independent appraisal or a broker price opinion so both sides accept the market value used to calculate the buyout.

3. Decide how the buyout will be funded.

   Common options:

   • Refinance the mortgage in the buying owner’s name and use the refinance proceeds to pay the selling owner.
   • The buyer uses cash or another lender (home equity loan, personal loan) to pay the seller.
   • The seller takes a seller-financed promissory note (installments secured by the property) if both parties agree.
4. Apply for refinancing as a single borrower.

   The borrower must qualify on income, credit score, debt-to-income ratio, and LTV (loan-to-value). The lender will require documentation of income, assets, and the property appraisal. Discuss with lenders whether an existing co-borrower can be removed and what payoff is needed to clear any current lien.

5. Handle title and deed transfer.

   To remove the other owner from title, the seller usually signs a deed (commonly a quitclaim deed or warranty deed, depending on negotiations) transferring their interest to the buyer. That deed is recorded in the county Register of Deeds where the property is located. The new mortgage will be recorded as a lien against the property.

6. Close the refinance and pay the seller.

   At closing, refinance proceeds pay off any existing mortgage lien(s) and the agreed buyout amount is disbursed to the selling co-owner. Make sure the closing statement (HUD-1 or Closing Disclosure) shows the payoffs and buyer/seller funds clearly.

7. Obtain lien releases and record documents.

   After payoff, ensure the prior lender records a satisfaction or release of mortgage. The buyer should confirm the deed transferring title has been properly recorded so the selling owner has no recorded interest.

3. Lender and title issues to expect

• Lenders will generally not remove an owner from an existing mortgage without a refinance or formal release. If the departing owner is on the existing mortgage, the easiest way to remove them is for the remaining owner to refinance in that person’s name.
• If an owner remains on the public title but not on the mortgage, that owner still has an ownership interest—so the deed transfer is required to clear title.
• Some lenders require the departing owner to sign lender forms or a deed before closing; others require payoff first. Clear this with the lender early.
• A title company or real estate attorney can run a title search and issue title insurance for the new loan and ownership.

4. If the co-owner refuses to cooperate

If a co-owner refuses to sell or sign transfer documents, one option in South Dakota is a partition action — a court procedure where a judge can order sale or division of the property. Partition actions are often time-consuming and costly, so they are a last resort. For information on South Dakota statutes and procedures, see the South Dakota legislative site: South Dakota Codified Laws and resources. Consult a local attorney for advice about starting a partition action and likely outcomes.

5. Tax, financial, and practical considerations

• Payoff vs. sale price: agree whether the buyout pays the seller a lump-sum equal to market value minus debt, or another formula.
• Capital gains tax: sellers may face capital gains on the gain. They should consult a tax advisor.
• Gift tax: if the buyout price is below fair market value, there could be gift-tax implications.
• Record-keeping: keep copies of the deed, closing disclosure, payoff statements, and any promissory notes or security instruments.
• Insurance: update homeowner’s insurance and any liability coverage to reflect new ownership.

6. Common paperwork you will encounter

• Purchase or buyout agreement (written terms between co-owners)
• Appraisal report and title search
• Deed (quitclaim or warranty deed) transferring ownership
• Mortgage or deed of trust documents for the new loan
• Promissory note and mortgage if seller financing is used
• Closing Disclosure or settlement statement and payoff statements

7. Who to consult

Because property ownership, mortgages, and tax consequences can be complex, engage the following professionals early:

• A South Dakota real estate attorney — to prepare/approve deeds, buyout agreements, and to advise if a partition action arises.
• A mortgage lender or broker — to pre-qualify the buyer for refinance and explain lender requirements to remove the co-borrower.
• A title company — to perform a title search and issue title insurance at closing.
• A CPA or tax advisor — to address tax consequences of the transaction.

8. Typical timeline

From agreement to recorded deed and new mortgage, the process typically takes 30–60 days if the buyer qualifies for refinance promptly. If negotiations, appraisal, or title issues hang up the process — or if court action (partition) is necessary — the timeline can extend to months.

9. Example (hypothetical facts)

Two co-owners each hold 50% of a house worth $300,000 with an existing mortgage balance of $100,000. Owner A wants to stay and buy out Owner B. They agree on a buyout price of $150,000 for Owner B’s share (half of $300,000). Owner A applies for a refinance for at least $250,000 (to pay off the old mortgage and pay Owner B). After closing, Owner B signs a deed transferring title, receives $150,000, the prior mortgage is paid off, and Owner A now holds title and a new mortgage alone.

Helpful Hints

• Get a written buyout agreement before ordering an appraisal or refinancing to avoid disputes later.
• Talk to lenders early about requirements to remove a co-owner from title or mortgage; each lender’s rules differ.
• Use an independent appraisal or multiple comparables to support the buyout price and avoid later disagreements.
• Record the deed immediately after closing—recording clears public title and protects the buyer’s interest.
• If cash is tight, consider seller financing with a written promissory note and recorded mortgage as an alternative to immediate full cash payment.
• Keep copies of every document: deed, payoff statement, Closing Disclosure, promissory note, and any lender correspondence.
• If negotiations break down, contact a South Dakota real estate attorney about whether a partition action is appropriate; a court can force a sale when co-owners cannot agree.
• Do not rely on informal verbal promises; property transfers and mortgage changes require signed, recorded documents to be effective.
• Consult a tax professional before finalizing terms if you expect significant capital gains or unusual financing concessions.