Creating an agreement
Once you’ve decided to buy a home with someone, how’s the whole thing going to work?
Luckily, you’re not the first to try this. The kind of arrangement that’s most favored for the situation in which friends own a home together is called “tenants in common.” The big difference from, say, that of a married couple is that if one owner dies in a tenants-in-common situation, there’s no “right of survivorship,” says attorney Panaro — that is, the home doesn’t go to the remaining owner. Instead, the share of deceased owner passes to his or her family.
The devil is in the details. Create a written agreement that codifies your relationship with your buddy and the home. This is your tenants-in-common agreement, or TIC.
What’s your home worth?
“The single most critical aspect of an unrelated couple buying a house is having agreements dealing with contingencies, and that deal with their exit from the ownership,” Schkeeper says. TheTIC should lay out the relationship in as much detail as possible to eliminate future problems.
Here are some things to address in your agreement:
* Ownership and payments. Unless there's a contract that states otherwise, the law views owners who are in a tenants-in-common relationship as equal owners in a property. So if you contribute more to the mortgage and to the down payment and to repairs but haven't put it in writing with your housemate, you might lose that money if the relationship goes south and things have to be settled in court, says Craig Blackmon, a Seattle attorney who focuses on residential real estate and who has crafted TICs for clients.
* Who gets the benefits? "Who gets the tax deduction? Unrelated people cannot file a joint tax return," Schkeeper says. "Only one party is going to be able to claim that — so what is going to be the offsetting compensation to the other party?"
* Expenses. A home has expenses, from Windex to the phone bill. How will the expenses be split? If one person pays the bigger expenses, when does the other settle up?
In the case of homeowner Tackitt, the friends had no written arrangement but had talked at length about how to share financial responsibilities. "She paid the down payment, and I paid for anything that we needed as we went along," says Tackitt, who made more money at his job. "So every time that I paid for anything that was a household repair, the receipt went into a file. We kept very good records and we kept a tally" that would go against the amount she had put up for the down payment.
Marefat and her friend and co-owner, on the other hand, agreed in writing to split everything down the middle — from the down payment to regular expenses.
* Habits and daily life. How will the home be split up for daily use? Who gets to throw parties when? What's the policy on smoking? Pets? Overnight guests?
* Who makes the decisions? This is huge. "You need a decision-making process for when disputes come about," Eldred says. And don't think they won't. That's naïve. Say there's a hole in the roof and one owner wants to patch it for $500. But another wants to have the whole roof replaced for $8,000. How do you decide? Before such disputes arise, it's better to have an agreed-upon process on paper.
Marefat and her friend decided that when a dispute arises about whether to undertake a repair, the decision that prevails is the one that benefits the home in the long term.
What would other decision-making mechanisms look like? If there are three owners, it could be a simple vote with a majority rule. It could be a prior agreement that you submit to mediation or arbitration if you just can't reach a conclusion, Panaro says. "If there's only two people, they can be tied. But maybe they can have a 'Dutch Uncle' — a third party that's trusted by both sides who can mediate … and help them decide," Schkeeper says.
* No “encumbering" the property. Let's say Party A needs to borrow $30,000 and doesn't have any collateral except his interest in the property, Blackmon says. He could secure a loan based on his interest in the property. But if Party A didn't pay off the loan, a lien could be placed on the home. And though Party B didn't even consent to using that property as security for the loan, that lien could now complicate his ability to use the property. To avoid these problems Blackmon advises that neither side be allowed to "encumber" the property in such a way without the consent of the other owners.
Another way to avoid such problems is to take title of the home in the form of an entity that you create — a limited-liability corporation, or LLC — in which all parties own an interest, attorney Panaro says. If the LLC owns the property, it's not so easy for one owner to take actions that would gum up the property for another owner or owners, she says.
* Deal with the end at the start. All good things come to an end. And so will this joint house — someone wants to move, someone gets engaged. So make sure you plan for the end. How will you agree upon a sale price – perhaps hire two appraisers and average their findings? If one owner wants to sell, does the other get right of first refusal? How about right of first offer (that is, an agreement to negotiate)?
Blackmon had one situation where two couples bought a duplex together. They owned it for about two years, until one couple had another baby and needed more room. They were able to look to the agreement they'd drawn up for a way to determine the purchase price; in this case, the first step was to see if they could agree on an appraiser, which they did. The second couple bought out the first couple that was leaving. "It's just important that you anticipate conflict and have a contract in place," he says.
* Toss in a put-call provision. "It's a forced sale," Panaro says. This is a ripcord: It allows one owner to tell the other he wants to sell at any time, or if the other owner doesn't want to sell, it allows the first owner the first chance to buy out the other.
See an attorney — so you don’t need one later
After reading all this, you probably agree it’s a good idea to spend a few bucks on a lawyer. Attorney Blackmon says it might cost several hundred dollars to have one help you draft a good TIC, if you find a smaller firm that focuses on residential real estate.
Marefat, the San Francisco nurse, says she and her friend went to an attorney who had dealt with TICs previously, who helped them draft their agreement and think through what to include. The final document was 25 pages long and included everything from the above issues to what to do about guests who stay three weeks or more (answer: a mandatory discussion about where this was headed) and what to do if a boyfriend moves in (answer: he pays rent, but has no voice in house decisions).
“We were laughing about it at the time,” Marefat says of some of the issues the attorney made them address. “Because we were such good friends, we said, ‘We’d figure this out.’” But the lawyer insisted on the importance of putting it to paper to avoid problems. Marefat says now that she’s glad they did address them.