“Buying a home with a friend, brother, or sister can be a wonderful thing,” says Paul Purcell, managing director of the New York City office of real estate firm William Raveis Real Estate. “But buying a home with someone other than a spouse can also be a disaster.”
Buying a home with friends or family can be a great way to pool resources and share expenses. Today, we’ll review the pros and cons of buying a house with friends and family and give you step-by-step tips so that you can co-borrow with confidence.
Pros and Cons of Buying a House with a Friend or Sibling
Here are some things you should consider before homebuying with a friend or sibling:
| Pros | Cons |
|---|---|
| Shared Financial Responsibility Mortgage payments, property taxes, and maintenance costs are split among the co-owners. | Financial Risk If one owner can’t contribute their share or has unexpected budget changes, it can strain the financial situation of the others. |
| Building Equity Together Building home equity is a huge advantage of homebuying over renting. Having multiple buyers provides the option for paying off your mortgage faster than you would on your own. | Legal and Emotional Risks Disagreements, changes in circumstances, or differing expectations can strain your relationship. |
| Shared Housekeeping Home maintenance, repairs and chores can be divided among the owners. | Decision-Making Conflicts can arise regarding renovations, selling the property or even day-to-day issues like pet ownership and chores. |
| Companionship and Support Living with someone you trust and have a good relationship with can create a supportive and comfortable living environment. | Exit Strategy Challenges It can be complicated if one owner wants to sell their share, but the others don’t want to or cannot buy them out. |
After you’ve weighed the pros and cons of co-borrowing with friends or family, you should follow these five vital steps to set your homebuying process up for success!
How to Buy a House with a Friend or Sibling
1. Choose Your Ownership Type
You can undergo several types of ownership agreements when buying a house with a friend or family member.
Joint Tenancy is a form of property ownership where two or more individuals hold equal property shares. Upon the death of one owner, the remaining owners inherit the deceased owner’s share. One of the critical features of joint tenancy is the right of survivorship, which means that when an owner passes away, their share doesn’t transfer to their heirs but automatically passes to the surviving co-owners.
Joint tenancy simplifies the transfer of ownership upon the death of an owner, avoiding the complexities of probate and ensuring the property passes directly to the surviving owners.
Tenancy in common is a form of property ownership where two or more individuals hold a share or interest in a property. Unlike joint tenancy, the ownership shares can be unequal and there’s no automatic right of survivorship.
In a tenancy in common scenario, each owner can own different percentages of the property, which can be inherited or sold independently. Unlike joint tenancy, tenants in common can acquire their shares at different times, through different means, or with varying ownership percentages.
2. Discuss Finances
There are several things all buyers need to apply for a home loan, including a thorough understanding of their financial situation. To get the house you want, you and your loved one should be on the same page about finances.
The most important financial indicators that affect how much house you can afford include:
- Credit score
- Down payment
- Debt-to-income ratio
- Employment history
It’s doubtful that you and your co-borrower will enter the mortgage market on equal playing grounds, which is why it’s essential to meet with a real estate attorney to lay out everything in advance.
“When money comes into play – and it will when buying real estate – we can all behave very badly,” Purcell said. “You’ll see people fight even over a dime. When you buy a home with a friend or family member, then you could be in for some ugly times if you’re not careful.”
3. Meet with a Real Estate Attorney
It’s doubtful that you and your co-borrower will enter the mortgage market on equal financial playing fields, which is why it’s essential to meet with a real estate attorney to lay out everything in advance.
A purchase as large as a mortgage is too big to leave anything up to question, and co-borrowing with a friend or family member doesn’t offer the same legal protections as co-borrowing with a spouse.
Married couples also face potential issues when buying a home together. If the marriage ends, these couples have to decide what happens with their residences.
However, the situation is more complex for non-married homeowners. These owners don’t have the divorce process to help them divvy up assets, including their shared residence. That’s why a contract written up by a real estate attorney is a necessity for non-married buyers, says Michael Ouziel, an attorney and real estate specialist with Los Angeles-based law firm Schorr Law.
Here’s another reason: When you buy a property with someone you are not married to, you have to file a formal civil lawsuit to force the other side to buy your interest or agree to sell the home when you want out of the joint ownership. This is known as a partition action and is far from a simple legal maneuver.
“It can be a long and expensive process for all involved,” Ouziel said.
However, a signed contract with an exit strategy for all buyers can circumvent this messy process.
4. Make an Exit Plan
It’s essential for unmarried buyers to prepare an exit strategy. This means that when one buyer wants out of ownership, everyone already knows the next steps.
Too often, unmarried buyers fail to prepare for potential pitfalls, but relationships do fall on hard times. And when they do – when two friends, for instance, are no longer on speaking terms – what happens to the condominium they purchased together?
What happens if two brothers buy a home together only to have one of the brothers fall in love and propose? The newly engaged brother will likely want to move out of the house and purchase with his new partner. What happens next? Does his brother have to buy him out? Or do both brothers have to agree to sell their shared home?
When making an exit plan, preparing for hypothetical life changes and worst-case scenarios is best. Pre-planning helps settle things before they happen instead of waiting to make decisions during tense situations when emotions are running high.
5. Get a Contract
The buyers and the attorney should draft a written contract spelling out how buyers will pay for maintenance and repairs, how and when they will sell the property, how you will split potential rental incomes or sale profits, and what happens when one party no longer wants to own the home.
It is also recommended that all buyers put their names on the property’s title. This ensures that all are considered legal owners and can exercise their rights as property owners. Buyers who don’t want to be on the title may lose out should an ownership dispute land them in court.
In case of an owner’s death, their share is passed on to their heirs or beneficiaries according to their will or state laws rather than automatically transferring to the surviving co-owners.
Without a contracted exit plan, disagreements, uncertainties or unexpected events might lead to conflicts or legal battles, potentially jeopardizing relationships and the investment. Establishing clear guidelines in advance can protect everyone involved and provide a structured way to handle any changes or challenges that may arise during the co-ownership of the property.