Two unrelated buyers splitting ownership need to consider the legal implications of this venture.
By Danielle Braff
Potential home buyers who have been priced out of the market may consider purchasing a property with friends. But chances are they’re concentrating more on the cost savings from such an arrangement than the legal ramifications of splitting ownership with nonrelatives. Though you should never give advice outside your expertise as a real estate professional, you may be able to help such clients consider the questions they should ask of each other and an attorney before signing a sales contract.
Friends may be less likely to agree on the goal of a real estate investment than couples or family members who share common objectives. So the homebuying process comes with an increased risk of misunderstandings or conflict unless the parties have consulted an attorney to draw up a comprehensive joint purchase agreement, says Chloe Hecht, senior counsel and director of legal affairs at the National Association of REALTORS®. A lawyer can help buyers determine how to split their ownership stake in the property—a decision that will affect other actions, such as how to divide the costs of property taxes and utility bills.
Small But Growing
Despite such challenges, a small but growing share of buyers are forging this alternative path to homeownership. Three percent of buyers nationwide fall outside the categories of married couple (61%), unmarried couple (9%), or single male (9%) or female (17%), according to the National Association of REALTORS®’ 2019 Profile of Home Buyers and Sellers. This buyer segment identified as “other” rose from just 2% in 2018. Changing lifestyle choices and continued affordability pressure are lending more legitimacy to the idea of friends buying a home together, says Jessica Lautz, NAR’s vice president of demographics and behavioral insights.
But that could mean more problems for you if you’re not prepared to serve those pursuing an unconventional arrangement. Make sure your clients work out their purchase agreement before you begin showing them properties to minimize stops and starts in the home search that arise from unexpected complications, Hecht says.
The biggest hurdle may be the plan for transferring ownership in the event one friend wants to exit the partnership. “The parties may want to consider allowing the person who is staying a right of first refusal to purchase the other person’s interest in the property they jointly own,” Hecht says.
“Related issues to consider are how the parties will determine a fair market value for the house and what happens if the person staying can’t afford to purchase the other’s interest in the house.”
Take Your Time
Making decisions about which home to purchase also may be trickier for friends, says Stacey Schalk, associate broker at Berkshire Hathaway HomeServices in Northglenn, Colo. Couples, for example, usually have a firmer understanding of what they want in a home, while friends may need more time to come to an agreement, she adds.
Schalk recommends sitting down with the friends to establish what’s important to them in a home, including which spaces they’re willing to share, such as the kitchen, family room, and outdoor area. While it can be exciting to consider living with your best friends, practitioners need to look beyond their clients’ initial enthusiasm to figure out what they really require in their spaces, Schalk says.
Daniele Kurzweil, a sales associate with Compass in New York, bought a single-family investment property with two friends in 2011. She says the experience tested the strength of her friendships. They never created a formal purchase agreement outlining who was responsible for which expenses but have since formed an LLC, putting in writing the details of each person’s ownership stake. Kurzweil says she acted as an adviser to her two friends when they came upon items they didn’t understand during the transaction. But Kurzweil allowed them to choose the home. “I trusted that my friends would make the right decisions,” Kurzweil says. “Had I tried to get [more] involved, it would have been a distraction.”
Kurzweil acknowledges that a home purchase with friends is a risky commitment, even when you’re not planning to live with your co-buyers. Before unrelated clients move forward with a purchase, she says, both parties should ask themselves two questions:
- Would you trust your friends to do the right thing, even without a legal document?
- If, for some reason, you were unable to make a decision regarding a problem with the property, would you trust your friends’ judgment?
“If your answer to either of these questions is no, then making it legal with a contract won’t change things,” she says.
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