A guide to property co-ownership
With property prices still increasing considerably faster than wages, the issue of affordability isn’t going away any time soon. Plus, the tightening of lending regulations means it is harder to even get a loan.
With the urgency to buy ever present, some savvy Gen Y’s are collaborating with friends and family to buy a property together and get onto the property ladder sooner – this trend is called co-property ownership.
Before you pick up the phone and ring your bestie…be warned whilst it can work really well for some people, it does come with risks. Here is a look at the pros and cons of buying a property with friends or family and how you can avoid things turning nasty.
What are the benefits of co-ownership
- Ability to pool your money with friends or family to buy your first home or enter the market as an investor sooner than you would be able to do on your own
- You can borrow more money than you would have been able to on your own
- Reduces how much each owner needs to save in order to purchase a property
- More options as to the type of property you can buy
- Reduces the transaction costs, maintenance and household bills
What are the risks of co-ownership
- Co-owning a property may effect future borrowing power as lenders assess the whole co-ownership loan as your responsibility not just your share of the loan
- One of the owners wants to sell up and the other doesn’t
- One of the co-owners isn’t sharing the on-going costs causing tension
- Joint responsibility for home loan repayments can become a problem if one partner defaults
- Situations change, relationships break down and one or other co-owner may need to sell the property urgently
How to reduce risks of co-ownership
Before you enter into any arrangement it is critical you talk to your solicitor / conveyancer / accountant as everyone’s situation is different. When working out the legalities, think about the worst case scenario and plan to address that...better to be prepared than not.
1. Choose your partners carefully
Buying a property with a friend or family member is a massive decision – make sure you choose someone you trust, who shares your views and passions about property. Protecting your friendship and relationships should be paramount.
2. Finances discussed in DETAIL
Make sure you clearly understand your family or friend’s financial situation; can they cover their share of the home loan, are there any potential cash flow problems that might impact on your meeting the joint home loan repayments. All financial decisions must be discussed and documented.
3. Check you have aligned property goals
Ensure your property purchase goals aligned. Make a list of the must have’s and nice to have’s. List down the suburbs that you agree on, neighbourhood features, and property specifications such as an apartment, house, block size, structural requirements, whether it is an investment or whether you are going to live in it together etc
4. Discuss how you will exit from the co-ownership partnership
Having an exit strategy is important. Make sure you consider what will happen if one of you dies or becomes seriously ill or disabled (not a nice thing to consider, but important), or if one of you gets a cut in pay or a losses their job, goes bankrupt, the relationship changes, the property is sold at a loss or one owner wants to sell before the other. Having clarity from the beginning can help you be prepared for the worst.
5. Determine the structure of the property ownership
There are 2 main ways to structure co-ownership purchases – Joint Tenants or Tenants in Common.
Tenants in Common refers to ownership over a property where the owners don’t automatically have a right to survivorship (for example friends or siblings). There can be a number of owners and the shares in the property don’t need to be equal. For example 2 people can buy a property for $400,000 and one of the buyers may put in $300,000 therefore owning a share of three quarters. Or the 2 people may decide to go 50/50 and own equal number of share.
Joint Tenants refers to property ownership in which each party on the title holds an individual interest in the property. It comes with the right of survivorship meaning that when one of the joint tenants die, the interest of the deceased passes to the surviving joint tenant and is not considered part of the estate of the deceased.
Before you decide on the best structure for you talk to your conveyancer or solicitor about your individual situation and objectives.
6. Co-ownership agreement drawn up by your solicitor / conveyancer
Avoid arguments by agreeing things in advance and getting it written up by a solicitor. A co-ownership agreement can help protect you and your friendship and should cover every possible issue, rule and solution. Think worst case scenarios and determine how to resolve the issues. For example you may agree that if one wishes to sell, the other co-owner has first right of refusal to buy their share of the property. Forward planning can help prevent dramas later on.
7. Find the right home loan
Talk to your home loan provider about the right loan for you. There are options to have joint home loans and ones that are specifically designed for co-owners. Make sure you get independent advice on what will work best for your personal circumstances
8. Get independent legal advice
It is essential that you get independent legal advice from your friend or family member, to ensure you lead with your head not your heart.
9. Document everything
Keeping a record of every discussion, all payments, expenses and an inventory of individually owned items and shared items.
10. Research the market
Rushing in and buying the first property you see without doing any research into the national and local market, the neighbourhood and even the street is a mistake. Knowing how much similar properties are selling for in the area is important so you don’t pay too much. Your local LJ Hooker agent have local market reports that can help you understand the market, plus attending multiple open for inspections and auctions will all help ensure you become a bit of a property expert. Use our handy inspection checklist and keep notes on why certain areas offer higher prices than others…don’t rush into any purchase you might regret.