Something about being in your 30s just gets your clock ticking.
No, not your biological clock. Your homeownership clock.
My conversations with friends these days tend to revolve around our real estate fantasies. Take, for example, a recent convo I had with my friend Kat. She asked about my dream home, I asked about hers. We quickly discovered we had much of the same criteria: two or three bedrooms, lots of natural light, a small yard for grilling and chilling on warm California nights.
There's only one problem: In this crazy-hot real estate market, neither of us can afford it on our own.
You see -- despite living within the orbit of Silicon Valley's "Man Jose" -- we're both single. But why should we single millennials be penalized for not having the dual income needed to make a down payment on a home in our area?
Then it hit us. What if we combined forces, pooled our money, and bought a place together? Our friendship is bound to last longer than 50% of marriages -- oops, make that 40% -- right? And we'd both get equity in the place, making it easier if we wanted to buy on our own next time.
Our collective mental wheels were turning, but before I started shopping for our new patio furniture, I reached out to our stable of experts to ask how this might go down. The good news? It can be done. The bad news? It probably shouldn't be.
How it works
Apparently, Kat and I aren't the first pals to have this idea. Lots of friends (and more than a few siblings or cousins) try their hands at buying a home together. If you're thinking about going this route, you'll definitely want to consult with a real estate attorney, because these arrangements can be tricky.
"Having a lawyer draft such an agreement should cost under $1,000 and is well worth the money if you can afford it, especially if you get into a conflict while in the agreement," says Bruce Ailion, a Realtor and attorney in Atlanta.
Who holds the title?
This determines who can sign documents and how the property is transferred in case of an owner's death (buzzkill, I know). Co-buyers who aren't married to each other may share a title as tenants in common or as joint tenants with right of survivorship. You can also look into creating an LLC, but that's usually most advantageous if you're buying a rental/vacation property.
Tenants in common: How to get in, how to get out
Let's assume Kat and I are looking at a TIC. Our shares in the home may be equal or unequal, but each of us would have a separate legal title. In a TIC, there's no right of survivorship, so the home doesn't go to the last surviving owner.
But at any time, either of us can sell our share of the property or give it to someone else without requiring the consent of the other owner. That means we could end up sharing ownership -- and living with -- someone we don't even know or quite possibly hate.
As co-owners, we both would have equal rights of possession, meaning that we each may occupy and use the property. If we decide to rent out the home, each of us is entitled to rental income from the entire property in proportion to the ownership share.
And if we want to call it quits? One of us can buy out the other, or we both can agree to sell the property.
The homeownership 'prenup'
If you're buying with friends or family, you're going to want to lay down some ground rules. That's where co-ownership agreements come in. These documents are the prenuptial agreements of homeownership -- and they're the only way to resolve ownership issues aside from court proceedings. When thousands of dollars are at stake, it's important to address at least these three concerns:
- What are the ownership percentages? Tenants in common may choose to divide the shares, perhaps based on the amounts contributed for the down payment.
- How are ongoing expenses divided? You'll need to decide who will take care of home maintenance tasks and how the bills for utilities, insurance, and unexpected repairs will be handled. Consider setting up a joint checking account so that any co-owner may draw from it to pay shared bills and expenses.
- What happens when one co-owner wants to sell? When co-owners want to sell their interest in the house, they aren't required to sell to someone approved by the remaining co-owners. However, a co-ownership agreement can grant the remaining co-owner the right of first refusal.
How it can go wrong -- so very, very wrong
So, it's a little complicated. And there's some extra paperwork. But as long as everything's documented, it should be fine, right?
Maybe. Maybe not.
"All things might have started equal, but it is unlikely it will remain so," says Ailion, who's assisted with several TIC transactions over the years. "Most of the time I am helping someone out of a deal gone wrong: former friends, former lovers -- gay and straight -- parents who bought with children that did not work out."
Individual circumstances change -- relationships, employment status, financial status, just to name a few. Ailion recalls his first transaction like this in 1980. Interest rates were high, and people were having a hard time affording property in high-demand locations. A friend asked him to help structure a deal with two other friends: Three young couples wanted a unique home built, a four-bedroom house with three large master suites with master bathrooms, a large great room and kitchen they would share, and additional space in the basement.
"Over time, my friend bought out the two other couples as their lives changed," Ailion recalls. "My friend was stuck with an unusual home. The stress of that and the debt to buy out the other owners no doubt contributed to their divorce and the foreclosure of the home in 2001."
Instead, it's better for one friend to be the full owner and rent out space (just make sure you know what you're getting into). If you do decide to buy with friends, Ailion says, designating one person to act and make decisions is important.
"You do not want a 50-50 deadlock," he says. "You also should not want to be the 49 of a 51-49. It may result in you being locked out.
"I think you really have to question if the reward is really worth the risk," he adds. "It's similar to the advice I give when loaning money to a friend. Is it worth losing money or the friendship? You may end up losing one or the other, or both."