Homeownership may seem like an unachievable goal these days, especially for those trying to accomplish it alone. Joint property ownership may be the perfect solution. Generally, that translates to purchasing a home with a spouse or domestic partner but it doesn’t have to. Cultural norms have shifted and couples aren’t the only ones coming together to purchase real estate. Over the past few years, there’s been a growing trend of co-ownership between friends and relatives. To determine if this pathway to homeownership is right for you, let’s explore how it’s accomplished and some of the benefits and drawbacks.
Why Consider Co-Owning Property with Friends or Relatives?
Soaring home prices have kept many individuals trapped in the cycle of paying skyrocketing rent year after year. With mortgage interest rates on the rise, some friends and relatives are joining forces to break into the housing market sooner than they could on their own. Doing so can provide the following benefits:
- A sense of stability
- Easier to qualify for a mortgage
- Split the costs of the down payment and monthly mortgage payments
- Ability to curtail the expense of monthly utilities and household expenses
- Opportunity to build wealth through home equity
Co-owning real property can also come with limitations of rights and options to the home – not only while you own the property but also when you want to sell it in the future. Read on to learn how.
Co-Ownership Title Options
To co-own property, you’ll need to decide how you want to take and hold title to the property. State laws will dictate the full details of co-ownership options where you live, but here is a general overview of the two common choices:
- Tenancy In Common (TIC). This is the most popular form of co-ownership because of the flexibility it provides. Each owner, or co-tenant, owns an individual undivided interest in the entire property, even if the ratio of ownership is not equally divided.
For instance, three friends decide to buy a home and take title as TIC. Owner A can own a 50 percent interest, while Owners B and C can each own a 25 percent interest, but all three owners will have an equal right to possess and use the property. In some instances, co-tenants will agree to own a different portion of a building such as a certain unit or floor. The mortgage, property taxes and maintenance expenses are generally shared between co-tenants according to their ownership interest. Each co-tenant also holds a share in the value of the property as it appreciates and begins to build equity.
Under a TIC, a co-tenant can transfer their interest in the property to another buyer but cannot transfer or sell another co-tenant’s interest. Once a co-tenant’s interest is transferred, the new co-tenant assumes the same role and becomes a tenant in common with the other tenants. Returning to the above example, if Owner A agrees to sell their interest to Buyer D, then Owner D becomes a tenant in common with Owners B and C with 50 percent interest and equal right to the property.
Upon the death of a co-tenant, that co-tenant’s ownership interest must pass through the deceased tenant’s estate for disposition by will or through state intestacy statutes if there was no will. The other co-tenants in the TIC do not automatically receive the deceased co-tenant’s interest in the property. The TIC can be dissolved when one or more co-tenants buys out another. Likewise, if co-tenants have opposing views about the property’s use, improvements or whether to sell it, they must all work together to move forward. In the event co-tenants cannot come to an agreement, a partition action, which forces the sale of jointly owned property, can be voluntarily made or court ordered.
- Joint Tenancy. With this form of ownership, joint tenants share an equal interest in the rights and financial responsibilities of the property. It is often referred to as Joint Tenancy with Right of Survivorship because upon the death of a joint tenant, that joint tenant’s interest in the property automatically passes by operation of law to the surviving joint tenant(s), avoiding the need for a probate case or any other legal proceeding. The last surviving joint tenant takes full ownership of the property.
Joint tenancy is more restrictive and must include what is often referred to as the four unities of ownership – time, title, interest and possession. In order for a joint tenancy to be valid, all joint tenants must acquire equal shares of interest to the property through the same deed at the same time. If any of the four unities are broken, the joint tenancy reverts to a tenancy in common. Typically, to create a valid joint tenancy, the phrase “as joint tenants with right of survivorship” should follow the names of the grantees in the deed.
For example, let’s say Owners A, B and C own a property as joint tenants. Owner B decides to move out of the country, so he sells his share of the property to a new owner – Owner D. Because Owner D doesn’t share all four unities with Owners A and C, Owner D does not enter the co-ownership as a joint tenant, but as a tenant in common.
Co-Ownership Best Practices
The decision to own a home with friends or relatives should not be taken lightly. It’s important you sit down together and discuss what you each want to get out of home ownership. Then, confer with a real estate attorney to execute an agreement that lays out the rights and responsibilities of all parties involved. The agreement should include, but not be limited to, the following:
- How you plan to take title to the property
- Percentage of down payment, mortgage payments and property taxes for each co-owner
- What happens if a co-owner is delinquent on monthly payments
- What to do in the event the co-ownership arrangement is dissolved
- How interest will be conveyed in the event of a death of a co-owner
Buying a home with a friend or relative can be financially rewarding, but it can also be financially and emotionally taxing if you don’t fully understand the process. Make sure to do your research, fully communicate your desires and expectations, and take measures to protect yourself and your relationships – like learning what different generations tend to value in a home.
Courtesy of Old Republic Title