Buying with family or friends: Clever or crazy?
Are you sick and tired of that flushing sound every time you make a rent payment? Yet are you unable to afford a house on your own? Home ownership could be more affordable if you partner with a friend or relative, and a lot of people are doing just that.
Co-buying the right way could get you a congenial roomie and a nice investment, but cutting corners could cause massively hurt feelings and empty bank accounts.
Know your partner
Experts say selecting the right co-buyer is more important than a watertight contract. Ultimately, if you need a court to step in and sort out your arrangement, you haven't chosen your homebuying partner very well.
"I emphasize that it is not the written agreement but the people you are dealing with that will determine whether it proves to be a harmonious arrangement," says Gary Eldred, author of "The 106 Common Mistakes Homebuyers Make (and How to Avoid Them)."
"Don't count on a contract to compensate for someone who you can't rely on," he says.
Many successful co-owners have shared properties before and have learned to tolerate their partner's quirks. You could use your agreement to specify down to the penny how much each person will pay in expenses each month, whether the toilet seat gets left up or down or if dishes are permitted in the sink. However, you're probably better off buying a home with someone who feels the same way you do about important things.
Begin at the end
Unless you're buying a home with someone who is the love of your life, prepare for the venture to be temporary. People marry, change jobs and go through other life changes. So, expect that the arrangement won't last more than a few years and plan accordingly.
Discuss with your co-buyer how the property value will be determined when you sell and how one partner may buy out the other. You may also want a "ripcord" provision that allows each partner to get out at any time--triggering a situation where the other buyer either agrees to sell with you or agrees to buy you out.
Deciding these questions in advance can help preserve your money, your friendship and your sanity later on.
Everyone goes on the mortgage
You can buy a home with someone and leave his or her name off the mortgage, but it's not the best idea. If your co-buyer is listed on the title but not on the home loan, the law says that person still owns part of the home. However, the responsibility for repayment falls solely on the person named in the mortgage.
Avoid co-buyers whose credit score isn't good enough to allow them onto your mortgage. Even if they pay the home loan faithfully, neglecting other bills or taxes could result in liens against your property. If neither you nor your co-buyer qualifies for conventional financing at a decent mortgage rate, check with FHA mortgage lenders, which are more forgiving.
Before shopping for a home, lawyers suggest that you hash out and put in writing the proportionate amount of each person's financial interest in the property, how the maintenance costs will be divided and who pays the bills.
There are several ways of working this out. Some buyers open a joint account and deposit a set amount each month for the mortgage and household expenses. Others split expenses as they come up, and agree on when payments are due and what the charges are for being late.
One way to deal with unmet expenses and late fees is to deduct them from the partner's equity in the property. For example, if the home was purchased for $100,000 and one co-owner owes $1,000 in unmet obligations, the equity positions at selling time change from 50/50 to 49/51.
There are many ways to take title when you purchase real estate. One way for unmarried co-buyers to take title is as tenants-in-common. This means that each buyer gets an undivided interest in the property (any decisions made about the property are made together, regardless of percentage owned). A co-buyer's tax benefit on mortgage interest, real estate taxes and capital gains is based on his or her ownership percentage. If one co-buyer dies, his or her share of the property goes to heirs--not to the partner.
Unless there's a contract that states otherwise, the law views owners who are tenants-in-common as equal owners in a property. So if you contribute more to the mortgage, down payment or even to repairs, get your ownership position in writing. Otherwise, you could lose out when the home is sold.
Getting legal help
You'll want legal help with these agreements; the costs associated with mistakes are just too high.
Craig Blackmon, a residential real estate attorney with Blackmon Holmes, PLLC and real estate broker with WaLaw Realty in Seattle, says that while a real estate lawyer can do the work, a general law practice may do a simple agreement for less.
How about skipping expert legal help and simply using a form you purchase from an office supply store?
"Absolutely not," he says, "The laws of every state are unique, and a form that might work in one state may be void and unenforceable in the next. There are many horror stories of people who relied on the 'drug store form contract' to their serious detriment."
Instead, Blackmon says you should pay for an attorney.
"If you will benefit from legal counsel, then you need to hire an attorney," he says. "There are no shortcuts."
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Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte. She graduated with High Distinction from the University of Nevada with a BS in Financial Management.