Pitching In: How to Buy With Others
At some point, you've probably considered co-owning real estate with friends or family. In many cases, these arrangements can strengthen friendships and build bonds. When used to buy a primary home, they’re a way for two parties to afford a house they couldn’t have looked at before.
However, when things go wrong in a property partnership, they can go very wrong, causing financial and emotional distress for all involved. “It’s not uncommon to see best friendships turn sour very quickly,” says Karen Radakovich, a Denver real estate attorney. “It’s not the kind of decision to make while you’re having a great vacation together. Go home, do some research and prepare for some honest talks with your soon-to-be business partners.”
Here are some steps to help guide you through the process of buying real estate with friends or family:
- Step 1: Get to Know Everybody
- Step 2: Talk to a Lawyer
- Step 3: Prepare to Exit
Step 1: Get to Know Everybody
Who’s in? People may express great interest in buying a house with you over a wonderful dinner, but the day after their second thoughts kick in. You’ll want to know who’s up for the deal first by talking about the kind of property you’re looking for, how much you’ll put down and what kind of payments would work for you. If you can negotiate a point where the two, three or more of you are comfortable with basics, you may be ready to move onward.
Some topics that need to be aired out with your partners include:
- Finances -- Has anyone been through a bankruptcy? Are there any tax liens outstanding that could attach to the property? How secure is everyone’s financial position?
- Access -- If you’re picturing the house as a place to spend Christmas every year, you’d better clear that before finding the property. Co-ownership generally means making concessions. After all, the house belongs to all of you.
- Responsibilities -- Buying a house takes time and energy and if only one of the partners is doing most of the leg work, resentment can build up. Divide up jobs and schedule regular meetings, whether in person, online or over the phone to discuss the progress.
Step 2: Talk to a Lawyer
You don’t have to consult with an attorney to buy property with someone, and many choose not to since they feel it makes a close friendship or family relationship feel like a business transaction. But there are intricacies and pitfalls to co-ownerships that can trip up the best of pals.
Some items an attorney can help with include:
- Forming an Entity -- It may be in your best interests to create an LLC (limited liability company) or a trust to actually hold the property’s title. This can make moving owners on and off the title easier. If you do create a trust or LLC, let your insurance carrier know to prevent any liability or property loss problems if those occur down the road.
- The Ownership Agreement -- Spelling out the responsibilities each party needs to live up to is crucial. This can cover everything from how and when the mortgage is paid to what happens when a plumber is needed. Is the cost covered by everybody or by the partner who clogged up the drain?
- The Cohabitation Agreement -- If you and your partner(s) are planning to live in the house full time, this paper can set some boundaries like rules about pets, who buys furniture and appliances, what friends and family can spend the night, etc.
- Is This Place For Rent? -- For vacation properties, some owners may want to rent the house while it’s not being used to make a little cash. An attorney can help outline the local landlord/tenant laws and give you some direction about additional insurance that may be needed.
Step 3: Prepare to Exit
It may seem counterintuitive to be figuring out a way to get out of a joint home ownership before you even get into one, but this may be the most critical step. “You can’t foresee divorces, deaths or changes in finances,” says Radakovich. “So you’ve got to plan for how you’ll handle one partner’s desire to get out of the arrangement.”
Here are some issues to consider:
- Right of First Refusal -- When one partner needs to get out of the ownership agreement, the others involved are usually given the right to buy them out based on a fair market appraisal. If one party feels the appraisal is off, they can do another one and negotiate between the two.
- Marriage -- When an unmarried couple enters a legal agreement, no matter how committed they may be, there can be problems down the road for a joint ownership agreement if the relationship crumbles. “When there’s a divorce between a married couple, there’s a clear remedy for the court to decide on property obligations,” says Radakovich. “But when it’s a domestic partnership, it can get messy and expensive.”
- Life Insurance -- Once you’ve purchased property with another party, it’s wise to re-examine your life insurance to see if it can comfortably cover your share of the mortgage, taxes and upkeep.
- Open Warfare -- In a worst possible scenario, the partners sue each other for breach of contract, damages, etc. Consider adding a clause to your ownership agreement in which everyone would seek out a mediator to handle an unresolved dispute.