Can’t Afford a Home? Consider Buying One with Friends
Mary PurcellSeptember 10, 2018
Shirley Jackson couldn’t believe her luck when she scored half of a duplex in an upscale neighborhood in Berkeley, California by buying it through a Tenancy in Common (TIC) in 1994.
With a limited budget, she had been having trouble finding a place she could afford in the neighborhood she coveted. The co-owner offered to finance the purchase for her and 14 years later, her loan was paid in full. “It was really a good deal for me,” she says. “I probably wouldn’t have been able to live in this neighborhood if I didn’t buy a home this way.”
Like Jackson, many people have found it difficult to buy a home on their own. However, buying with friends or family can bring homeownership within reach by reducing your down payment, monthly mortgage and ongoing expenses like maintenance, insurance and taxes.
Different strokes for different folks
Here are the most common ways to co-own property:
- Buy a single-family home together. That means you will be co-owners and live under the same roof.
- Purchase a multi-unit property that allows you each to have your own unit. That way you just share title, expenses and common areas, such as the back yard.
- Partner with an investor in an equity share, in which the investor supplies the down payment and you occupy the home and pay the mortgage. This involves no co-habitation and very little shared decision-making. (See sidebars for more details.)
“What unites all these things is that they provide a way for people to get what they want without a lot of the costs and hassles of doing it alone,” says Andrew Sirkin, a San Francisco attorney who specializes in TIC co-ownership arrangements.
Of course, co-ownership also involves risks. If your co-owner fails to make mortgage payments, your credit score might suffer and you could even lose your home. Before you jump into co-ownership, carefully consider the risks and consult an attorney to iron out the details.
Jackson, for example, would have benefitted from some legal advice up front. Once she made the difficult decision to sell, she confronted another challenge. Her co-owner had spent decades starting – but never finishing – home improvement projects, leaving his portion of the duplex in poor condition.
“If someone wants to live that way, that’s their choice,” she says. “But now that we want to sell, it’s a real problem because we’re not going to get the money the property is worth.”
Unfortunately, she found out the hard way that a co-owner’s space can affect your bottom line: A loan facilitator told them a buyer might not even be able to get a loan for the property in its current condition. Worried and frazzled, Jackson began investigating other options.
Here’s what Sirkin advises for friends and relatives who want to buy a home together:
Get it in writing.
Co-owners – even when they are relatives or best friends – don’t always see eye to eye. In fact, Sirkin says buying with friends or family tends to be riskier than buying with strangers. “The tendency of friends and family to handle things informally and try to avoid conflict actually make the likelihood of a dispute greater,” he says. Plus, the stakes are much higher because simmering conflicts can damage or even destroy important relationships. For these reasons, “it’s critical for groups of family or friends to work out the details of their co-ownership and put those in a written agreement,” says Sirkin. Among other things, the agreement should cover things like property use, managing expenses, and an exit strategy.
Ensure your finances are in order.
If you are sharing a mortgage, make sure each of you has the income, job security and credit score necessary to secure and pay a mortgage. Banks usually consider the lower credit score when determining mortgage rates, according to the Consumer Financial Protection Bureau. Develop a contingency plan for covering costs if one of you loses a job or gets ill. Whatever your financing situation, consult a tax advisor to ensure you are getting the proper mortgage deduction and paying your share of the property taxes.
Look into a “fractional loan.”
If you are purchasing a unit as part of a Tenancy in Common, or TIC, you may be able to secure a fractional loan for your unit. This reduces your risk because you’re not responsible for your co-owner’s loan. But interest rates are usually higher for a fractional loan, and they are only offered in certain geographical locations where multi-unit TICs are common, according to Sirkin.
Figure out exactly how the property will be shared.
Battles over guests, storage and how the property is shared are frequent issues among co-owners living together. “The most common problems we see in these arrangements involve usage of the property,” says Sirkin. “It is always tempting for groups to say that, since they have always gotten along in the past, they will be able to ‘work out’ whatever comes up in their shared ownership relationship,” says Sirkin. “This temptation should be resisted.”
Draw up a budget.
Besides the mortgage, you and your co-owners need to cover ongoing expenses like maintenance, repairs, utilities, taxes and home insurance. Sirkin recommends drawing up a budget of anticipated expenses and a calendar of scheduled payments. Also, decide who will be responsible for paying the bills and how payments will be collected. Some co-owners set up a joint account while others agree on a regular schedule of joint payments.
Develop an exit strategy.
Even successful co-ownership arrangements usually come to an end. This may be a planned sale or an unexpected event – a lost job, a medical issue, or a marriage – that forces one person to sell. If you have considered how you will handle these possibilities ahead of time, it will make for a much smoother transition. Generally, if one partner wants out, you have three options: Buying out your partner, which requires significant savings; selling his or her share to a new co-owner (which may mean sharing your house or property with a stranger), or selling together and sharing the proceeds. The latter, however, requires equity in the property.
In Jackson’s case, she and her co-owner in the Berkeley TIC worked their way to a satisfactory resolution “after a lot of tension and tears,” she said. Sitting in her sun-filled apartment, decorated with beautiful art, sculptures, and antique rugs, she explained that her co-owner wanted to do the right thing – he had just been unsure what to do.
In their new agreement, her co-owner agreed to fix the most serious issues that would interfere with loan approval. In a generous move, he also offered to ask a contractor to estimate how much it would cost to get this place into the same conditions as hers – and to deduct that amount from his share of the profit. “I thought that was fair,” said Jackson. “It’s a huge relief.”
*Shirley Jackson is a pseudonym.
Mary Purcell is a regular contributor to MoneyGeek.com. She has a master’s degree in Latin American studies from Stanford University and her stories have been carried on Benzinga, Yahoo Finance, Narrative and other outlets.