Legal Considerations When Purchasing Real Estate with Friends

Buying a house or property with friends may be enjoyable, but it can also have legal ramifications. Learn how to safeguard your investment here

What you will discover:

What are the advantages of purchasing a home with a friend?
What are the disadvantages of purchasing a property with a friend?
What is the process of co-ownership?
Are there any specifics that my buddy and I should work out before purchasing a home?
What should I do or have ready before purchasing a house with a friend?

Purchasing a home with friends differs from purchasing a home for yourself or with a spouse. When there are many owners, the legal issues and ownership dynamics alter. Before you begin, you should talk about your financial condition, your objectives for shared property ownership, and any contingencies in case those goals or plans change. The benefits and drawbacks of purchasing a property with friends are discussed more below.

What are the advantages of purchasing a home with a friend?

While there may be substantial and intricate legal concerns when purchasing a home with a friend, there are several advantages.

First, when acquiring property, combining income and assets may make it simpler to qualify for a bigger loan. Second, you may improve your buying power, allowing you to purchase a nicer house than you could on your own. Furthermore, if you and your buddy can put down 20%, you may be able to avoid private mortgage insurance, cutting your monthly payment. Not to mention that looking for and assessing houses with a companion is much more enjoyable than doing it alone.

You may also profit from dividing expenditures such as electricity, water, gas, or sewage after acquiring a home. You might also divide any unforeseen expenditures, such as a leak or a malfunctioning equipment. Sharing management tasks might assist ease your burden if the shared property is a rental or revenue property.

What are the disadvantages of purchasing a property with a friend?

While there are several advantages, there are also possible disadvantages. Some of these disadvantages might lead to future misunderstandings, legal issues, a damaged credit score, or a ruined relationship if you are not prepared.

Splitting expenses is undoubtedly advantageous, but it may also be disadvantageous if one individual is unable to pay. Before completing a purchase and financing, consider everyone’s financial capabilities. What happens if one individual runs into financial difficulties? As we all know, life can throw lemons at you when you least expect them. How will you deal with this financial shift? Financial concerns may lead to a slew of complications if you do not prepare ahead of time.

If you both want to reside in the house or property, additional friends, family members, overnight visitors, new housemates, or significant others may cause problems. Some eccentric personal characteristics that you previously thought appealing may suddenly become pet peeves.

Although you may not believe it is necessary at first, having an exit strategy from the start is a good idea. Having the exit plan chat while the friendship is still strong might result in a more effective termination later on.

Friendships, like any other connection, may ebb and flow. If you and your co-owner have a falling out, it may be more difficult than simply one person leaving. If your relationship is no longer viable, you may find yourself refinancing the mortgage, selling your part, or selling the whole house.

What is the process of co-ownership?

When you buy a house or property with a buddy, you both become co-owners. But what exactly is co-ownership? What distinguishes non-marital co-ownership from married co-ownership?

When co-owners marry, there are additional title ownership possibilities available, depending on the location of the property. If a married couple purchases a home in Texas or California, they may hold title to the home as common property.

Spouses may claim title to a house as tenants by the entirety in several states, such as Florida. This gives survivorship rights as well as asset protection. Because marriage is required for this sort of tenancy, it is not accessible to unmarried people.

So, what choices do non-married friends have as property co-owners? Consider two frequent legal choices.
Tenant in Common

A joint tenancy is a legal arrangement in which you and your buddy have equal rights and duties to the property. This implies that you and your buddy must have equal ownership, for example.

Joint tenancy also includes the right of survivorship. When a co-owner dies, his or her stake in the property passes to the remaining owner rather than to the co-owner’s heirs. Furthermore, if you intend to sell the house, you must get the approval of your co-owner. In a shared tenancy, you cannot make this choice on your own.
Shared Housing

The ownership stake in a tenancy in common (TIC) may be split equally or unequally, allowing you greater freedom than a joint tenancy. This adaptability applies to the sale of the property as well. In contrast to a shared tenancy, a co-owner may sell their portion without the consent of the other. Finally, if one of the co-owners passes away, the home’s stake might be transferred immediately to the deceased’s heirs. In other words, no right of survivorship exists.

A Tenants in Common Agreement may include the following provisions:

Percentages of ownership.
The financial liabilities of each owner, including down payment amounts and taxes.
Responsibilities for maintenance.
Any use restrictions, such as the acceptance of dogs.
The sale of the property, including first refusal rights.
Resolution of disputes.

A lawyer can assist you in determining which choice is best for you.

Are there any specifics that my buddy and I should work out before purchasing a home?

To begin, you should consider your objectives for acquiring a property. Is it an investment property or a first house that you plan to sell in five years? Is it a condominium or a single-family residence?

You may also bring up the subject of money. Are you and your partner financially secure? Is your credit fair, good, or excellent? How will you deal with the economic ups and downs that affect your capacity to pay the mortgage or make repairs?

You will share more than simply the burden of mortgage payments. How will you divide expenditures, upkeep, and responsibilities? Who, for example, will mow the lawn? Who will pay for the dishwasher if it malfunctions?

Answering these questions upfront, as with many legal partnerships, can assist you handle challenges when they emerge. Talking about the specifics may also assist you in determining some of the bigger issues, such as how to take title or calculate ownership percentages.

What should I do or have ready before purchasing a house with a friend?

You may wish to create a Home Purchase Worksheet to help you analyze the purchase. This might give you a better idea of how much it will cost.

You should also draft and sign a contract outlining the terms of your partnership. You want a written instrument that can give clarity should things go wrong, whether it is a Tenants in Common Agreement, a basic Roommate Agreement, or a Partnership Agreement.

Lenders may want one to two years of recent tax returns, as well as evidence of income in the form of “pay stubs or W-2s.” You should also collect current bank statements as well as descriptions of any other assets, such as a vehicle or investment accounts. If you have rented before, you may be required to give a rental history.

Although your credit report will be seen by the lender throughout the mortgage application process, you may wish to keep track of your current credit score. Improving it may be beneficial since it influences your interest rate and ability to qualify for a mortgage.