Are you thinking about buying a home with a friend, relative or significant other? Although most home buyers today are married couples—63 percent of all buyers, according to the National Association of Realtors—a significant number of buyers are single.
Many buyers opt to purchase on their own, but others, due to the high cost of housing and the difficulty saving for a down payment, may join forces and purchase together. This strategy is particularly popular for vacation homes, where it’s not unusual for relatives or friends to jointly purchase a place to share not only the costs but also the fun times.
But before you jump into a joint purchase, you need to deal with a host of issues, from who pays expenses to what happens if one party wants out of the deal. Ignoring these issues can lead to disputes that turn friends or relatives into enemies.
“The question to ask from the forefront is what is being brought to the table by each person and what are everybody’s expectations,” says Neil Narut, a real estate attorney and senior underwriting counsel for Proper Title in Palatine, Ill.
Each party needs to think through the issues carefully so that everyone enters into the transaction with their eyes wide open. The most important issues to be resolved: financing, holding title and managing the property.
Paying for the Property
After choosing a property, the first issue facing buyers is how to pay for it. Of course, paying cash for the house is quick and easy, but most buyers opt to finance their purchase with a mortgage.
“There’s not a lot of difference whether you’re married or friends when it comes to qualifying for a mortgage,” says Bill Banfield, executive vice president of capital markets for Quicken Loans in Detroit. “It’s going to be based upon the income, the assets and the credit of the people applying for the mortgage.”
The only thing that’s different for single co-buyers, Banfield says, is that their income, assets and credit “diverge,” whereas these things would likely be more similar for a married couple. “People who are married tend to have similar credit attributes, and they tend to share bank accounts, so there’s a little more consistency,” he says.
Single co-buyers need to understand that if they sign a note and mortgage together, they are both liable for the debt. “If you sign the note, you are 100 percent liable for the mortgage payment,” Banfield says. “There’s no splitting it down the middle.”
That means that if an unmarried couple purchases a home together and then breaks up, each will remain liable—potentially for the entire amount of the mortgage if the other party defaults. And if mortgage payments are made late, both people’s credit is adversely affected.
Taking Title to the Property
Married couples who purchase a home together usually own as “tenants by the entirety,” which is a form of joint ownership for married persons where the survivor owns the property should one party die.
But unmarried co-buyers have additional choices on how to hold title. If the parties hold title as “joint tenants with right of survivorship,” then the entire property goes to the survivor if one party dies. If they hold title as “tenants in common,” however, then the share of the person who died goes to his or her heirs, while the co-buyer continues to own his or her share.
How should co-buyers decide which form of title to choose? It all depends on their intent.
“Do they want their interest to go to their estate—their family—or do they want it to go to the survivor if they die,” says attorney Narut. “If they want to have a separation of each individual’s share of the real estate, they would want a tenancy in common.”
But there are other options as well, particularly for those purchasing vacation homes. Co-buyers can form a trust to take title to the property, but a more popular option is a limited liability company, or LLC. An LLC is beneficial because it defines each party’s interest. An LLC is governed by an operating agreement, which can—and should—include the rules regarding ownership and usage of the property and the financial responsibilities of each member of the LLC. “By defining each individual interest, if one party passes away or wants to sell, all those interests are accounted for,” Narut says.
Managing the Property
If you’ve created an LLC to take title, then management is already built in via the LLC’s operating agreement. But with other forms of ownership, it’s incumbent on the parties to create some sort of agreement—in writing—to govern the use of the property. Otherwise, disagreements may ensue.
The agreement should be detailed and should include at a minimum who pays for the expenses of the home—mortgage, property taxes, insurance, utility bills and repairs—as well as who gets to use the property and when (which is more likely to apply to a vacation home). Another essential term of the agreement is an exit strategy to deal with a situation where one party wants out. In that case, the agreement should provide a mechanism to terminate the shared ownership and either sell the house or allow one party to buy out the other.
“Stuff happens,” says Quicken’s Banfield. “Younger people have a lot of life ahead of them, and if they’re not married, they might change jobs or get married. How do you get out of the mortgage? Will your partner buy you out? Do they have enough money to buy you out? You might find yourself getting stuck in a situation where you can’t afford the obligations.”
That’s why Narut strongly recommends that people planning to purchase a home together hire their own attorneys to represent their own interests. That will also help the parties keep emotion out of the transaction and help ensure a successful partnership.