Maybe you just graduated from college and finally have the income to buy a new house. But if you’re in a new city or home, you might have few options for co-owning a house. Or maybe you just reunited with a sibling or friend from several years ago, and you really want to live with them.
Single people, married couples or large families often take the option of splitting the cost and co-owning property with close family and friends. The benefits of cost-reduction are obvious, but what are the downsides to this arrangement? At Cher, we believe you should consider all of your options before co-owning a house with close friends and family. There are pros and cons, but don’t feel limited.
What Does Co-Owning a Property Mean?
A property or an asset (in this case, a house) which has two or more legal owners is a co-owned property or a joint-owned property.
It can be a group of friends who share the costs of buying a condo, an old property with two or more legal heirs, or a newly-wed couple buying their first house in the suburbs. A joint homeownership agreement can be made between any combinations of individuals with shared mutual trust. It can be between parents and children, husband and wife, colleagues, childhood friends, siblings, cousins, etc.
Availing a second person on a home mortgage loan can greatly increase the chances of the loan being granted and reduce the burden of repayment. Does this mean it’s time to dive into a co-ownership agreement with your college roommate?
Let’s examine the benefits and pitfalls of such an arrangement.
Find your new home with friends or family with Cher.
How Do You Make Co-Owning Official?
First, find a co-owner you can trust. If this isn’t a friend or family member, Cher is full of qualified co-owners you can trust. Our patented algorithm, along with soft credit pulls, ID verification, and criminal background checks for every homebuyers creates the total package for co-borrowing like never before.
When it comes to co-owning, there’s a few questions you might have. And you can discuss the answers with your potential co-owner:
- Whose name goes on the title?
- How is financing going to be secured?
- How much of the mortgage is each person going to be responsible for? This is important to consider and there are many options depending on everyone’s finances. If one person has more saved but has a smaller salary, maybe they will be responsible for a bigger portion of the initial payment but pay less per month.
- What's each person's percentage of ownership? If you’ve decided that one person is going to pay more, maybe they will own a bigger portion of the home. This could mean a 60/40 ownership, or that they get a larger section of the home physically.
- What happens if one person can't afford to pay the mortgage or bills?
- What happens if one person wants to move out or sell? Cher offers multiple exit options that allow you to walk away with your equity.
- What happens if there is an unresolvable disagreement?
Co-Owning Ownership Options
If you are able to solve the above questions and are moving forward with your co-owner, there are two common options for unrelated people owning a home together. The first is Joint Tenancy, where both owners have equal rights to the property. This is usually used by couples who want to establish a home.
Then there’s Tenancy in Common, where both owners have control over their portion of the home. This is more often used for residential buildings, like a duplex or multi-family unit.
Sometimes co-owners will form a limited liability company to secure the financing and ownership of the home. If there’s a commercial purpose to the property that you both purchased, this is often a good choice.
If you are going with a TIC, you and your potential co-owner can secure independent financing. But if you are purchasing under joint tenancy, you’ll need to get financing together. You will need to discuss who is paying what amount and what will happen if someone can’t afford a payment down the line. You should also keep in mind how you’ll split the cost of home insurance, utilities, and maintenance and construction costs.
Sign an Enforceable Agreement
If you have figured out everything above, it’s time to sign an enforceable agreement. This should clearly define who pays for what and accounts for issues that might arise. You may want to consider hiring an experienced attorney to review the agreement to make sure you didn’t miss anything. You don’t want to do anything improperly.
Let’s examine the benefits and pitfalls of a co-owning arrangement to see if it makes sense for you.
Easier Mortgage Qualification
Banks and private financing companies examine complex credit profiles of a loan applicant before granting the money. The applicant’s income, liquefiable assets, previous repayment history, investments, and general risk appetite comes into consideration.
It could take years for a single loan applicant with a weak credit score to successfully procure a mortgage loan.
However, if the application has two or more applicants, the process becomes much smoother. Banks are more likely to finance a home loan to multiple applicants since the combined incomes and assets of the applicants would mean better rates of repayment. Shared liability and responsibility among the applicants are some of the benefits.
The people who co-own a house or apartment can opt-in to live in the same property. This can be family or friends who take up residence together after the purchase.
All living expenses including utilities (gas, water, and electricity), internet, food and groceries, electronic gadgets and even insurance and car bills can be divvied by equally among the residents/co-owners.
In times of ever-increasing living costs in metropolitan cities, this can come as a boon. The co-owners are also entitled to a share of the property’s rent and other profits.
Purchasing a house is costly, but owning a home can be equally costly. If the purchased property is a vacation destination that is only occasionally used, maintenance costs of managing the property can also be divided equally.
Roof shingle replacement, upgrading and maintaining heating, ventilation and air conditioning, repainting, electrical and plumbing system repair and waterproofing can quickly rack up the bills. Having somebody to share the costs can come in handy.
Breach of Trust
Availing a mortgage loan is a decision with long-term consequences. Opting in for a co-owned property means that co-owners are financially bonded for years or even decades.
A lot can change over the course of time as personal relationships change and evolve. People may find themselves liable for the loans of their divorced wife or estranged family member. It’s crucial for applicants to make sure of the nature and strength of their relationships before proceeding.
Heartbreaks, broken friendships, and infuriating family members can be hard enough to deal with, even without adding financial instability to the mix.
If you inhabit the property regularly, house maintenance is just a part of the financial burden. The property will require cleaning crews, landscaping services, and potentially other expenses. Unless all the co-owners live under the same roof, keeping track of these expenses on a regular basis can get messy.
What if one of the co-owners needs immediate cash and wants to sell their share? What if one of the co-owners wishes to use that condo in Aspen at the same time as the other one? Who gets to make the final call?
Communication is crucial to safely manage a co-owned property.
Use Cher for improved communication during the entire house-buying process, including with real estate brokers and more.
Splitting cyclical maintenance costs is a definite benefit, but can also be an never-ending pain-in-the-neck.
What if one of the co-owners moves out of state and refuses to pitch in for maintenance costs?
If the shares of the co-owners in the property are disproportional, how do they divide up monthly costs? A person who owns 15% of a beachside villa may not want to crack her wallet open and pay 50% of the maintenance costs.
The agreement is usually clear as far as loan repayments go, but any additional cost after that is ambiguous.
Before taking the plunge and inking the mortgage papers, take a step back and clearly evaluate the factors.
Personal relationships with other co-owners, trust level, ability to meet repayment requirements, and the exact shares of each co-owner (joint tenancy or common tenancy).
Millennials are more prone to co-own property and this trend does not likely seem to be going away any time soon. One study shows that the average national rent is at about $1,405 as of 2018 and only increases every day. Sky-high rents are driving more youngsters to opt for co-ownership mortgage loans to cut costs down and invest in property.
If you’re starting to feel like living with family and friends is not the option for you, consider using Cher to find potential housemates. In addition to our other educational and house-buying resource, we offer a social network that you can use to find housemates whose interests align with yours. This eliminates the emotional stakes that come with buying a house, and even allows you to meet new people.
Should you co-own a house with friends and family? The answer is that co-owning a home with your loved ones isn’t for everyone. If you do decide to take this route, make sure you set expectations early on, including ways to resolve conflict or hard economic times. If you don’t, realize that you don’t have to live alone. Just check out our social network at Cher and find your housemate as easily as you can find a new house.