What You Should Know If You Buy Property With Friends

Dated: December 20 2017

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"Tenants in common" may sound like a term rental property managers throw around, but it's actually something that affects homeowners. It's an arrangement that can come into play when multiple people decide to buy one property together, be it a primary residence or a vacation home.

For some peoplebuying a house with friends sounds ludicrous. You love your friends, but taking on a shared financial responsibility? No way! But others may see this as a real opportunity with a serious payoff, and could one day become part of a tenants-in-common agreement.

What is a tenants-in-common agreement?

Tenants in common split homeownership among a number of people, says Jeff Miller, a real estate agent and team lead at AE Home Group in Baltimore. A tenants-in-common agreement allows people to own different percentages of the same property.

"For example, one owner may take responsibility for managing the property and in return receive a higher share of ownership," Miller says. "It may also be the case that after a number of years someone sells part of his or her ownership to the other owners and maintains a smaller stake in the property."

The tenants-in-common agreement provides a legal framework for the buyers to structure how the property will operate, from deciding how to split costs to choosing who makes major decisions about the property. So while each individual will own a share of the property and have rights to live in and use the property, the mortgage, taxes, insurance, and maintenance costs will all vary based on the share of ownership.

Advantages of a tenants-in-common agreement

Because a tenants-in-common agreement brings a number of people together to split costs, there can be a clear financial advantage for people who don't have the means to buy property on their own. The flexibility of the arrangement can be especially attractive to people who may plan to use a home for only part of the time (say, during the holidays or summer months), and thus may opt for a smaller share in the house.

Such an arrangement also allows the individual owners to decide what happens to their share of the property in the event that they die. They can choose to sell their ownership share or pass it on to someone else.

Disadvantages of a tenants-in-common agreement

Of course the autonomy of tenants in common has its drawbacks says Michele Lerner, author of “Homebuying: Tough Times, First Time, Any Time."

"At any time, any owner can sell their share of the property or give it to someone else without requiring the consent of the other owners," Lerner says. "This may result in you owning a house—and perhaps living there—with someone that you don’t know or don't like."

Be smart when entering into a tenants-in-common agreement

To help things run smoothly, experts advise getting everything in writing, especially a tenants-in-common termination plan which all parties are comfortable signing. Miller suggests that a buy-sell agreement that's backed by life insurance policies be part of that plan; it will give existing owners the right to buy out a newly inherited owner if one party dies. The buyout amount can be predetermined or the result of a third-party appraisal at the time of new ownership. The life insurance policy comes in handy in cases where the surviving owners don't have cash on hand for a buyout.

Whatever plans are drawn up, Lerner advises all buyers seek independent counsel from an attorney and a tax professional to walk them through both the legal process and the tax ramifications of purchasing a shared property.

"While owning a home with friends as tenants in common can be a great experience, it’s important to recognize purchasing property together makes the partnership more difficult to dissolve than simply renting a home with friends," she says. "Professional advice is crucial to a successful agreement."

By  | Dec 13, 2017


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