As housing costs continue to rise, buyers are looking for creative ways to achieve homeownership. In recent years, more and more people have entered co-buying agreements with family members or friends. While this arrangement was once considered unusual, it’s now seen by many as an accessible pathway to homeownership.
Before co-buying a house, you should consider the pros and cons of the arrangement and explore your options for structuring the deal.
Benefits of Co-Buying
Co-buying a home can be an excellent option for buyers looking for creative ways to break into the housing market. Here are some of the greatest benefits of co-buying:
- Increased buying power: When pooling your resources with co-buyers, you can afford a much larger or nicer home. For many young adults, co-buying makes homeownership accessible when they otherwise wouldn’t be able to purchase property at all.
- Shared responsibilities: Managing homeownership on your own can be very difficult, especially as a first-time buyer. When you purchase a home with a friend or family member, you can split the chores, upkeep, and maintenance costs.
- Support and community: Owning a house with close friends or family provides a sense of companionship. As long as your lifestyles and values align, living with loved ones can be a very rewarding experience.
Downsides to Co-Buying
While there are some big advantages to buying a house with friends or family, it also carries a lot of risk. Here are the major downsides to consider:
- Risk of delinquent payments: A house is likely the largest purchase you’ll ever make, and you need a lot of trust in your co-buyer to uphold their end of the agreement. If they fail to make their payments, you’ll be held responsible.
- Higher debt-to-income ratio: Even though you and the co-buyer split the mortgage costs, the full mortgage value will be included in your debt-to-income ratio. This could make it more difficult to qualify for car loans or other lines of credit.
- Interpersonal challenges: Living with another person, even a close friend or family member, can cause conflict. You might disagree on how to split bills or manage household tasks, which can take a toll on your relationship.
- Difficulty moving out: If one person wants to sell the house and the other wants to stay, you may find yourself in a tough position legally, financially, and personally.
Options for Ownership
Before you enter a co-buying arrangement with a friend or family member, it’s critical that you create an agreement that feels fair and reasonable. Consulting with a real estate lawyer at this stage can be very helpful.
The two main options for co-buying are a joint tenancy and a tenancy in common. Both structures give each co-buyer a claim to the home, but there are some key differences.
Joint Tenancy
With a joint tenancy, each co-buyer owns an equal share of the property. If you buy the house with one other person, you’ll each own 50% of the home. If four people buy the property together, each will have a 25% stake.
In a joint tenancy, all owners must agree when making decisions about the property. For example, everyone must be in agreement to sell the house before the house goes on the market. If one owner doesn’t want to sell, the other owners would have to take legal action against them to force the sale.
Joint tenancy also establishes the right of survivorship. This means that if one co-owner passes away, the other co-owners will inherit their share of the property.
Tenancy in Common
A tenancy in common agreement offers more flexibility and independence to co-buyers. In this structure, co-buyers can own unequal shares of the property. This arrangement can be fitting when one person pays a higher percentage of the homeownership costs.
Tenancy in common also differs from a joint tenancy in that each owner can do whatever they want with their share of the property. For example, you can sell your share of the house without needing permission from the other homeowners. You can also leave your share of the house to an heir if you pass away.
Exit Strategies
When buying a house with a friend or family member, planning for the end of the arrangement is just as important as planning for the beginning. All co-buying agreements will end eventually, either with one or both homeowners moving out or with someone passing away.
It may be easy to agree on which house you want to buy and how you’ll split the bills, but setting an exit strategy that feels equitable can be much harder. Here are some key considerations:
Determine Ownership Share
Before buying the house, you and your co-buyer should agree to the share of ownership. If you plan to split the down payment and mortgage in half, a 50/50 ownership agreement probably makes sense.
However, if you’re pursuing a tenancy in common arrangement, you could agree to an uneven ownership split. For example, if you’re going to pay 70% of the down payment and monthly mortgage, you might request 70% ownership of the home while your co-buyer owns the other 30%. When it comes time to sell the property, you’ll receive your percentage of the proceeds.
Include a Buyout Agreement
Co-buying agreements can go wrong when one person wants to sell the house and the other wants to stay. Even with a tenancy in common arrangement where one person is legally allowed to sell their share, the logistics can get messy.
To avoid this problem, you and your co-buyer could include a buyout agreement in your contract. This would allow one owner to buy the other’s share of the house so that they become the sole homeowner.
You could allow for a cash buyout in your contract, or you and your co-buyer could create a payment structure that lets one owner pay the other over time in installments.
It’s also important to note in your contract how the value of the house will be determined when one owner buys the other out. A professional appraisal is usually the best way to assess a property’s market value.
Include a Rental Clause
A rental clause can be a good alternative to a buyout when one homeowner wants to move out and the other doesn’t. By renting out your share of the house, you can continue to fulfill your financial responsibilities and build equity in the property.
To avoid conflict, your contract should give the co-buyer who remains in the home a say when choosing the renter. No one wants to be stuck in a house with a terrible roommate because their co-buyer decided to move out.
Sell the Property
If a buyout or rental agreement doesn’t feel feasible, you and your co-buyer could simply agree to sell the property when one of you wants to move. This should be clearly stated in your contract so that everyone honors the agreement when the time comes.
Address Succession
No matter your age, you should always have a plan for what will happen to your property if you pass away. If you and your co-buyer have a joint tenancy agreement, your share of the house will simply be passed along to them. However, with a tenancy in common arrangement, you must designate an heir.
Balancing the Risks and Rewards of Co-Buying
Co-buying comes with several advantages and drawbacks. You can mitigate the risks of co-buying by creating a thorough legal agreement before closing on a house. Not only should you and your co-buyer consider how you’ll enter the arrangement, but you should also agree to an exit strategy. When you approach the situation thoughtfully and with everyone’s best interests in mind, you can have an excellent experience with co-buying.