Should Friends Buy Property Together?

• June 23rd 2008

by Mark Wellborn

With the arrival of the first of the month comes a sense of agony for home renters everywhere as they sit down to write another check to their landlord. While it is not exactly flushing money down the toilet, in the eye of the renter it is not far off.

Unfortunately, many renters do not have a large enough nest egg to afford a down payment to buy their first home. That reality sometimes leads people to consider buying a property with friends.

It is an option that has become increasingly popular in recent years, but one that requires a good deal of research and planning.

“The obvious upside of buying with friends is that rather than handing over money to the owner to put a roof over your head, you are the owner and that money is now an investment,” Long and Foster broker Kevin Shirley told UrbanTurf. “However, there are a lot of things that should be spelled out before you close the deal.”

Andrew Kline, a DC-based real estate lawyer, agrees.

“There are basic issues that you need to consider when buying with others,” Kline said recently. “On the most simplistic level, it is ‘Who is putting in what?’ and ‘Who is getting what?’”

Among other things, Kline noted that the following questions should be answered and put in writing before the purchase is completed:

• What is the equity breakdown among the buyers? People will probably be putting up different sums of money, so the division of equity will vary.
• Who will pay for major repairs and expenses? Will the majority owner pay or will all be responsible?
• How will title be held, and will there be buyout clauses?

Title for the property is critical. When a husband and wife purchase a home, they hold a title known as “Tenants By Entirety” which means that if one party dies, the other becomes the sole owner. If friends buy a house together it is much more likely that they will hold title known as “Tenants In Common” which means that if a party dies, his or her equity is transferred to the individual’s relatives. Kline indicated that it is important in the latter instance to make sure that all parties are aware of this arrangement. If anyone is uncomfortable with the possibility that equity could be transferred to relatives, buyout clauses can be included in the original agreement that will allow the other owners to buy a person’s share in the property in case of death.

Other important questions include:

• What happens if someone can’t pay their portion of the monthly mortgage?
• If the owners start to rent the property, how are the profits split up?
• How long must each owner plan to wait before selling their stake?

So, after all this preparation, does this buying method work?

Two years ago, Shirley remembers a group of three people in their late-20s that approached him with the idea of buying a place together. After much deliberation, they realized that their end goals — specifically what they were going to do with their lives and what they wanted to do with the house — were very different. In the end, two ended up buying a property on their own and the other moved away.

“This can be a great idea, and it can be the completely wrong idea,” DC broker Shari Walker told UrbanTurf. “If you are going to be in one place for a good amount of time, it is great to accumulate equity.”

That being said, it is clear that although you may be entering into a partnership, your main concern should be yourself.

“You have to go into deals like this with an exit strategy,” Walker said. “I know people who have turned the property into an LLC [limited liability corporation] and started renting it out. Others sell off at the wrong time, and end up losing money.”

But with the state of the housing market, prospective home buyers in a certain income bracket may have no other option.

“Loans are much harder to get these days,” Kevin Shirley said. “It is going to be tough for people who want to buy, so they are looking for ways to pool resources.”

If you decide to buy with friends, here are three final thoughts:

• Treat it like a business, not a hobby. Even though you are splitting the costs with friends, you will invest a great deal of time and money.
• Have a lawyer structure the contract and flesh out all the responsibilities and details, even the most mundane and morbid, before the deal is closed.
• Make sure everyone’s time horizon to hold the property is the same, and keep in mind that you are making a commitment that will probably last three years at a minimum.

Update — 10/08/08: Time Magazine did this article on the growing trend of friends buying together. The article even coins a term for such communal homeowners: “Co-hos”.

This article originally published at https://dc.urbanturf.com/articles/blog/should_friends_buy_property_together/51.