How to Buy a House With Someone Else (Part 2)
Money Girl has tips on how to protect your finances and relationship when you buy real estate with a partner, friend, or business associate.
This is the second episode in a 2-part series about how to buy a home with someone else. In Part 1, I covered ways unmarried and married co-buyers can legally own property and what to know about getting a mortgage.
In this episode, you’ll learn how to create a property ownership agreement that prevents future misunderstandings and protects your finances—no matter what happens in your relationship.
How to Buy a Home With Someone Else
Buying a home or investment property with a domestic partner, friend, or business associate can be very exciting. But it’s also a serious leap of faith.
What happens if you don’t agree on how to manage the property? What if one person has an unexpected financial hardship and can’t pay the mortgage, or wants to sell out? What if your romantic relationship turns sour and you break up?
These are the kinds of issues that need to be worked out when you commit to buying real estate with someone else. Otherwise you risk getting into fierce arguments or even a lawsuit down the road. The best way to avoid problems is to create and sign a property ownership agreement—before you commit to a real estate purchase.
Related Content: How to Save Money to Buy a Home
How to Create a Property Ownership Agreement
While anticipating every possible disagreement with a co-owner might be impossible, especially when the future looks bright, here are 5 major issues to flesh out in a property ownership agreement:
1. Ownership percentages must be determined if you take title as tenants in common, which I covered in Part 1 of this series. You can create ownership splits based on how much money you contribute to the purchase, but that isn’t required.
For instance, if you decide that one owner will be responsible for maintenance, he or she could receive 60% ownership even though you both pay 50% of the down payment.
2. Ongoing expenses and unexpected repairs are a part of life as a homeowner. You’ll be responsible for monthly mortgage payments, property taxes, home insurance premiums, utilities, and many other maintenance costs. Specify how you’ll allocate them who will remit payments.
If you contribute more to the down payment than your cobuyer, perhaps he or she could pay for all the expenses until you’re caught up. Then you could split all costs down the middle going forward.
Another option is to divide costs in the same percentage as your ownership shares or down payment contributions. If you own a vacation property, you could split expenses based on the amount of time you spend there each year.
3. Tax benefits for a home can add up to big savings. You can claim tax deductions for certain expenses, such as mortgage interest, mortgage insurance premiums, property taxes, and purchase points.
However, to claim mortgage-related benefits, you must own the property, be legally responsible for the debt, and be able to prove that you actually paid the expenses. If you aren’t on the mortgage or don’t have a legal agreement that shows you’re accountable for the debt, you won’t be entitled to the mortgage interest deduction.
Consider how you’d compensate a partner who didn’t get the benefit of money-saving tax deductions. It’s a good idea to consult a tax accountant for help when it comes to sharing tax benefits for a home owned with someone who isn’t a spouse.
4. Encumbering is when you use your interest in a property as collateral for a loan. Since tenants in common can use their interest as security without consent of co-owners, that could lead to trouble if owner doesn’t pay their debt. Therefore, I recommend that your agreement prohibit owners from encumbering the property without getting prior approval of all owners.
5. Selling out can be the most difficult part of owning real estate with someone else. What if your relationship ends, or one of you wants to move cross-country for work, or you discover that you don’t like the neighborhood after all?
It’s a good idea to have protections in place if you want to keep your home but a co-owner wants to sell. That’s because a co-owner doesn’t need your approval to sell or give away their interest in a property.
For instance, let’s say Jay and Lisa are tenants in common with 50/50 ownership. Lisa wants to move out so she quietly sells her interest in the property to her mother. Jay is not happy about that.
If Jay and Lisa had had an ownership agreement giving him a right of first refusal to purchase her interest, then he would have had the opportunity to buy Lisa out. Also, consider how you’ll decide on a sale price if one owner buys out another, or you put the property on the market.
No matter if you buy a home on your own or with a partner, always view it as a business decision and consider what would happen if you absolutely had to sell the property in one year.
It’s easy to get swept up in the beauty of a home, its décor, its neighborhood, or the new lifestyle that you envision there. But take a step back and view every real estate purchase as an investment, even if it’s going to be your home sweet home.
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