How does co-ownership work?
Co-ownership works differently depending on how you set it up. But setting it up to protect yourself, and documenting it, is the one thing that needs to get done when you purchase a home or property with a friend. For example, if you're buying an investment property to rent out, you likely want to register an LLC so the LLC can be the owner of the property, and you and your friend become co-owners of the LLC.
When co-owners are married, there are more title ownership options available, depending on the property's location. For example, if a married couple buys a house in Texas or California, they can hold title to the home as community property.
In some states, like Florida, spouses may hold title to a home as tenants by the entirety. This provides for survivorship rights and asset protection. Marriage is essential to this type of tenancy, which means it is not available to non-married parties.
So, what options do non-married friends have as co-owners of property? Let's look at two common property ownership options.
Joint Tenancy
In a joint tenancy, you and your friend enter a legal arrangement where each of you has equal rights and obligations to the property. This means, for example, that you and your friend must have equal ownership.
Additionally, joint tenancy includes the right of survivorship. Survivorship means that when a co-owner dies, that co-owner's interest in the property will pass to the surviving owner, and not to their heirs. Further, if you decide to sell the home, you must have your co-owner's consent. You cannot make this decision unilaterally in a joint tenancy.
Tenancy in Common
In a tenancy in common (TIC), the ownership interest can be equally or unequally divided, giving you more flexibility than a joint tenancy. This flexibility extends to selling the property as well. Unlike a joint tenancy, a co-owner may sell their share without the approval of the other. Finally, if one co-owner dies, the home's interest can be passed directly to the deceased's heirs. In other words, there is no right of survivorship.
A Tenants in Common Agreement may describe the following:
- Ownership percentages.
- Each owner's financial obligations, including down payment amounts and taxes.
- Maintenance responsibilities.
- Any rules on the property's usage, such as the allowance of pets.
- The sale of the property, including rights of first refusal.
- Dispute resolution.
To determine which option is best for you, it can be helpful to talk to a Legal Pro.
What are the benefits of buying a property with a friend?
While there may be significant and complicated legal issues when buying property with a friend, there are also numerous benefits.
First, when purchasing property, it may be easier to qualify for a larger loan with pooled income and assets. Second, you can increase your purchasing power, helping you buy a better property than on your own. And, if you and your friend can come up with a 20% down payment, you may avoid private mortgage insurance, lowering your monthly payment. Not to mention, shopping for and evaluating properties with a friend is much more fun than doing it alone.
After purchasing a property, you may also enjoy benefits such as splitting expenses, like electricity, water, gas, or sewage. You might also split those unexpected costs, such as a leak or broken appliance. If the shared property is a rental or income property, sharing management responsibilities can help lighten your load.
What are the drawbacks of buying a home with a friend?
While many benefits exist, there are also potential drawbacks. If you are not prepared, some of those drawbacks can lead to future misunderstandings, legal problems, a damaged credit score, or a tarnished friendship.
Splitting costs is certainly a benefit, but it can also be a drawback if one person is unable to pay. Consider everyone's financial capacity before finalizing a purchase and financing. If one person encounters financial hardship, what will happen? As we all know, life can hand you lemons when you least expect it. How will you handle this change in finances? If you do not make a plan at the outset, financial issues can lead to a multitude of problems.
If you both plan to live in the home or property, there may be issues involving other friends, family members, overnight guests, new roommates, or significant others. Some quirky personal traits that you once found endearing may soon become pet peeves.
Although you may not think it is needed at the outset, planning an exit strategy from the very beginning is smart. Having the exit strategy conversation while a friendship is still strong can lead to a more efficient ending down the road.
Also, like any relationship, friendships can ebb and flow. If you fall out with your co-owner, it may be more complicated than just one person moving out. You may find yourself refinancing the mortgage, selling your share, or selling the entire home if your friendship is no longer sustainable.
Are there details my friend and I may iron out before buying a home?
Initially, you may want to determine your goals for purchasing a home. Is it an investment property or a starter home you may sell in five years? Is it a condo or a single-family home?
Additionally, you may want to talk about finances. Are you both in a stable financial position? Do you have fair, good, or excellent credit? How will you each handle the economic ups and downs that impact your ability to pay the mortgage or repairs?
It is not just the burden of mortgage payment you will share. How will you split expenses, maintenance costs, and responsibilities? For example, who will mow the lawn? Who will pay for the dishwasher if it breaks?
Like many legal relationships, answering these questions up front will help you resolve issues as they arise. Talking about the details may also help you figure out some of the larger questions, like how to take title or determine ownership percentages.
What should I prepare or have ready before buying a home with a friend?
To evaluate the purchase, you may want to prepare a Home Purchase Worksheet. This can help you get the full picture of what it will cost.
You might also want to prepare and sign an agreement that outlines the relationship. Whether that is a Tenants in Common Agreement, a simple Roommate Agreement, or a Partnership Agreement, you want to have a written document that can provide clarity in case things go wrong.
If you plan to purhcase a rental property, setting up an LLC can protect you and keep your property running smoothly. Your LLC Operating Agreement can help you resolve disputes that may arise and clearly communicate how to share duties. With a Rocket Legal+ membership, your first LLC registration filing is FREE (excluding state fees).
For lenders, you may want one to two years of recent tax returns as well as proof of income, such as "pay stubs or W-2s. You might also want to gather up recent bank statements and descriptions of any other assets, such as a car or investment accounts. If you have been renting, you may need to provide a rental history.
Although the lender will access your credit report during your mortgage application process, you may want to track your current credit score. Improving it can be helpful as it impacts your interest rate and your ability to qualify for a mortgage.
If you have legal questions about protecting yourself when purchasing a home or property with friends, reaching out to a Rocket Legal Pro™ is an easy and reliable way to get affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
