Although the U.S. economy is the strongest on record in recent years, home ownership for individuals and couples has remained a difficult dream to achieve. As a result, some are partnering with friends to purchase land, homes, or rental properties to ease the burden of financing this goal. However, co-ownership with people besides a legal spouse comes with potential pitfalls you should consider before taking the leap.
The Houston real estate attorneys at Feldman & Feldman PC offer this educational guide to six things to know when buying a property with a friend. If you need further information or have questions about this process, contact us to arrange a meeting at your convenience.
1. Understand the Risks of Buying a Home or Other Property
Purchasing any real estate comes with caveats and issues, whether it’s getting a thorough inspection to identify needed repairs or securing the right financing. Couples are often on the same page when it comes to verifying their economic situation, and individuals don’t usually have to worry about unexpected problems from others. Yet, going in on land or a building with friends means everyone must be very honest and committed to the enterprise.
Financial institutions will inspect every part of your income and expenses, ensuring you have the ability to complete the purchase and honor the terms of your loan. If four people decide to buy a place, but one or two have undependable incomes, it could lead to stress, arguments, and foreclosure. If the parties try to lower expenses by skipping inspections or rushing to purchase something quickly, they could all end up with a money pit that costs more to keep up or fix than anyone bargained for.
Ultimately, you want to partner with level-headed, financially responsible people who have experience with big decisions. It’s fun to dream about sharing property as friends or investing in real estate as business partners, but it’s vital that all parties approach the venture with common sense and appropriate caution.
2. Strong Legal Contracts Are Crucial
Along with picking the right friends to invest with, you should all have a long conversation about crucial factors, such as:
- What kind of property makes the most sense for the group’s needs
- What location serves everyone’s personal preferences and work commutes
- Each person’s financial situation and ability to contribute
- Potential negatives for buying property together
- Each person’s expectations for their contributions
- What happens if someone has to drop out of the group
- How ownership rights will transfer in the event of death
Single people and couples benefit from greater legal protection in passing property along to heirs, but they also carry a greater financial burden to pay for everything themselves. With friends, you can likely afford a more expensive property with pooled resources. Yet, it’s essential that you have clearly defined rules and expectations to head off problems before they arise.
You may also choose to establish a business entity that actually owns the property, with your friend group serving as officers or members.
A qualified real estate lawyer with experience in business contracts can help you customize a strong legal contract that identifies everyone’s duties and rights.
3. Decide Your Ownership Terms
Texas is a community property state for married couples. Depending on the terms of any will, this may allow for a surviving spouse to maintain the full property when one partner dies. Family groups who want to buy property together should take this into account.
Unrelated people may find tenancy in common more acceptable, where each partner has an ownership share with full rights to the property. However, if a party dies, their ownership is handed down to their heirs, not the other owners. To keep the property within the group, you may want to consider an arrangement such as a joint tenancy with the right of survivorship to enable the deceased’s share to revert to the group.
4. Establish Clear Responsibilities for Each Party
Part of your conversations with your potential property-buying friends is to hash out who will be responsible for what. Some people may only want to contribute financially and reap any benefits from the investment without doing the dirty work of repairs or upkeep. Others will be well-suited to redecorating, updating, and maintaining a rental property.
If you are creating a communal living space with friends, everyone should be very clear on cooking, cleaning, repairs, and other necessary responsibilities. You should also discuss what happens if someone shirks their duties and what constitutes a hard line that means that person is asked to leave the partnership. If you trust everyone to be honest with themselves and each other about their commitments, you have a stronger chance of success when buying property together.
5. Make a List of Your Pros and Cons With Your Friends
It can be exciting to daydream about living together in a big home with people you enjoy, but the truth of constant contact can be sobering once you are actually there. Rather than jumping into ownership after one conversation, sit down with your prospective fellow buyers and write out the positives and negatives of your unique circumstances.
Here are some examples of the pros and cons of buying property with a friend or friend group:
Pros:
- More available funds: With more people, you can afford more houses, land, or commercial property. You can have more disposable income for yourselves because you’re not shouldering a large mortgage on one income.
- Better chance at qualifying: Those multiple incomes make it easier to get approval from banks, credit unions, or other sources. Those with higher credit scores can offset any downside of those with lower scores.
- Low to no mortgage insurance: With more investors, you can make a larger down payment, potentially eliminating the requirement to purchase private mortgage insurance (PMI).
- Faster equity accrual: If you’re purchasing a block of apartments, you can pile up equity faster by collecting rent on top of multiple partners paying for the initial mortgage. In a residential home, everyone has the chance to accumulate wealth and move up.
- Tax savings: If you incorporate as a group and use the property as your business headquarters or some partners work from home, you may have the option to write off maintenance, utilities, and other expenses on your tax returns.
Cons:
- Negative credit scores: While those with higher scores can mitigate the impact of those who don’t, too many low scores can ruin your dream of buying property together.
- Legally binding contracts are legally binding: Beyond moving in together, you’re tying yourselves to each other’s actions and finances, requiring legal action to end it.
- Relationships could suffer: You may disagree over property decisions or one party’s inability to keep up their responsibilities, potentially losing a treasured relationship.
- Unexpected changes: Include contingency clauses in your contract in the event one or more parties lose their source of income or become severely ill.
- Everyone’s finances are connected: If one party can’t pay and causes the group to default on the loan, all parties will suffer the hit on their finances. Your real estate attorney can help you create an agreement that considers and addresses these possibilities.
6. Speak With a Houston Real Estate Attorney Before You Buy
A recent survey by JW Surety Bonds revealed that as many as 15% of new home purchases in the last year were by non-romantic buyers. On top of that, 60% of Americans would consider buying a home with friends. If you are interested in understanding how to best go about this process and ensure success for you and your companions, contact Feldman & Feldman PC to arrange a consultation with a knowledgeable real estate attorney today.