Buying a property with someone else is a great way to share the fun, stress, and cost of the venture. Often people buy a house with their significant other, to make a home or invest together. Others buy property with friends, relatives or business partners. Joining forces with someone else can increase your borrowing power, and pooling savings can bring a deposit within reach.
However, there are pitfalls to buying a property with someone else. It is better to think about these issues up front and take steps to ensure that everyone is protected.
Joint Tenants or Tenants in Common?
One of the fundamental questions is how the property will be held. During a purchase, buyers are asked if they want the title to be held as “joint tenants” or “tenants in common”. It is important not to rush this choice. It has a significant effect, and everyone involved needs to be comfortable with the decision.
The most common form of ownership is joint tenancy. This means that both people own the property, and neither can sell their “share” to a third party. If either person dies, the property will automatically belong solely to the surviving owner. In that case, it is not possible for one of the owners to make testamentary arrangements to leave their share to someone else. Joint tenancy is common for couples who own a family home together, but it is not the right choice for every partnership. Some couples, for instance, may wish for their share of a home to benefit their children rather than their spouse, particularly if they have children from a previous relationship.
In contrast, if a property is held as tenants in common, the owners each possess a distinct share in the property. A share can be bequeathed through a will to someone other than the co-owner. This share can also be mortgaged or sold (with or without the consent of the other owner/s).
One of the advantages of tenancy in common is that the shares can be held unequally. Imagine that three siblings decide to buy a property, they can hold the property equally (each having 33%) or, if one person contributed more than the others this additional contribution can be reflected in an unequal holding. If one sibling puts up the whole deposit, it may be fair for them to own 50% of the property, while the siblings who contributed nothing up-front (but who will contribute to the mortgage and ongoing costs) each hold 25%.
It is also possible to have a mix of joint tenants and tenants in common. For instance, if a couple decide to pool their resources with a friend to buy a property, the couple can be joint tenants while the friend is listed as a tenant in common. This means that if one of the couple dies, their partner will receive their share of the property, while the ownership of the friend remains unchanged.
Potential Issues of Buying with Someone Else
Unfortunately, the best laid plans do not always work out. Relationships break down, people die, are sued, and go through bankruptcies. Any of these circumstances can complicate the co-ownership of a property.
Broadly speaking, joint tenancy is the best arrangement for couples who want their partner to own the whole property if either of them die. The change of ownership is automatic and only requires notification to the relevant Titles Office. However, a joint tenancy can be a burden if a relationship breaks down. Neither person can make decisions about the property without the other, so it forces the separated parties to work together to take actions such as selling or renting the home. After separation, it is necessary to deal with the property, whether this involves selling or refinancing it into one person’s name, or even just applying to sever the joint tenancy.
People at risk of bankruptcy or being sued sometimes think that holding property in joint tenancy will protect the asset. This is not correct. A court can order a joint tenancy to be severed, the ownership apportioned equally between the owners, and the share of the property owned by the debtor sold. In fact, a tenancy in common may offer greater protection in such scenarios, because the debtor may own less than 50% of the property.
Benefits of a Co-Ownership Agreement
Whether a property is owned as joint tenants or tenants in common, it can be very useful to have the additional insurance of a co-ownership agreement. This agreement is essentially just a contract used by people who buy property together.
A co-ownership agreement sets out each owner’s rights and obligations and should also include provision for what will happen if an owner wishes to sell or mortgage the property. A well-drafted co-ownership agreement can help avoid disputes in the first place or help guide the parties to resolve any dispute that does occur.