You love hanging out with certain friends or have the perfect roommate in your current rental. You’ve got a great relationship with one of your siblings who lives nearby. You and your partner have been together for years and want something more permanent.
Should you buy a home with them?
It’s not uncommon for family members or unmarried, unrelated people to purchase a home together as either an investment property, a vacation home, or as a way to afford a more expensive house or condo in a certain neighborhood.
However, there are some key points to consider before making this type of financial decision:
Choose Your Co-owner(s) Carefully. This is the most important step before you go any further since you want to make sure your co-owner(s) is financially sound, has a good credit history for mortgage requirements, no outstanding liens, has life insurance, and is overall a trustworthy, responsible person when it comes to finances, bill paying, etc. Just because he’s a good buddy from work doesn’t mean you should buy a home with him. Of course, you also want to have someone you like and will enjoy living with on a daily basis if it’s a home you will share together.
Create an Ownership Agreement. You may get along and think alike in many ways, but it’s important to get everything in writing. It’s like a pre-nuptial agreement but for homeownership! It’s worth the expense upfront to get a good attorney now who can help you write up a detailed agreement and who can go over the pros and cons for your particular situation and finances.
You want to make sure you are on the same page on how you will own the home; how ongoing expenses such as utilities, mortgage, property taxes, homeowners insurance will be divided up and paid; and how an owner’s share will get transferred when necessary. What about renting out your share if you move and don’t want to sell? Who gets the tax deduction since unrelated people can’t file a joint tax return? There are lots of things to consider when writing up this agreement.
Work this all out with your co-owner(s) now when everyone is calm and willing to discuss. You might also want to add a clause to your ownership agreement in which a third party mediator would be brought in to handle any future disputes that can’t be resolved easily.
You’ll be happy you have this document since it will prevent misunderstandings (and possible court proceedings) later on and will help you settle a situation when something does arise.
Decide on Ownership Title. First and foremost, the co-owners need to agree on how the property’s title will be held, which is basically the type of joint ownership:
- Tenants in Common (TIC) – Most friends or unrelated owners choose this type of ownership so that each co-owner has a separate legal title. The shares in a TIC can be equal or unequal percentages depending on how much someone will be contributing toward the home. In this arrangement there is no right of survivorship, so each co-owner can pass along his or her share via will to others outside the ownership agreement. However, the co-owners can make an arrangement to have “right of first refusal” so that the remaining owners can decide if they want to buy out the other owner or his/her heirs if that’s the case.
- Joint Tenants with Right of Survivorship (JTWROS) – Most married couples have this form of joint ownership, so if one spouse dies, the survivor automatically becomes the sole owner. Some family members or unmarried couples buying together also may choose this type of arrangement and share one title between the co-owners so that the home stays in the “family”.
- Limited Liability Company (LLC) – Some co-owners decide to create an LLC or a trust to hold the property’s title. This makes moving owners on and off the title easier.
Again, work with your attorney to determine what would be the best type of ownership for your situation and finances.
Create a Co-habitation Agreement. This is another document that you should get in writing with details on everything, and I mean EVERYTHING, that may come up – how to divide responsibilities for home maintenance and repair; who buys furniture and appliances; who gets access to the home and when (especially important for vacation homes); rules for pets, smoking, visitors, overnight guests, future boyfriends or girlfriends moving in, big parties, groceries, etc. etc.
You’ve probably lived with roommates at some point in your life or at college, so you know what daily habits can make or break any harmony in a living situation. Anticipate what can come up and discuss with your co-owner(s) now to set up some ground rules. Since you own a home with them, you just can’t walk away with little notice but need to be responsible and compatible in order to make your ownership agreement work.
However, no matter how great things may be going, you are going to need an exit plan…
Create an Exit Plan. You can’t plan life when it comes to joint ownership – getting married, new job in another city, a change in finances – but you can be prepared. We’ve already discussed above how different types of joint ownership can affect how one owner can transfer shares to another or not. This is where “right of first refusal” comes into play. But how will you agree on a sales price – get two appraisers and average their findings? What if you’re a domestic couple not married and no longer want to own a home together?
As you can see, it can get complicated and that is why you should work with your attorney and include a detailed exit plan in your Ownership Agreement. Together all co-owners should come up with a fair, agreeable plan now so that you can begin AND end on good terms.
Buying a home with others – either friends, family members or a partner – can be a wonderful experience but just remember to plan carefully since you will be dealing with them financially over the long term. But, there are details that need to be worked out before moving forward. If you are thinking of going this route, let’s talk well before you are ready to start looking at houses. Email me and we can schedule a time to talk through what you need to know.