Rising housing costs, the desire for companionship, and the need to share resources increasingly lead buyers to consider buying a home with someone other than a spouse, such as a friend, relative, or significant other.
Although this arrangement can be beneficial on several levels, it should be approached with open communication, careful planning, and a clear understanding of the financial and legal implications.
Co-Ownership Of homes on the Rise
Whether the reason for home co-ownership is affordability, companionship, shared responsibilities, investment opportunity, or some mix of these, the numbers tell the story of how non-spouse co-ownership is increasing.
Data from Zillow shows that 62 percent of buyers share ownership of their home with at least one other person, but just 50 percent co-bought with a partner or spouse—14 percent co-bought a home with a friend, and 12 percent co-bought with a relative. Affordability was a top reason cited for buying a home together.
Co-Ownership of homes: Challenges and Legal Considerations
While co-ownership offers many benefits, it also comes with potential challenges.
The pressures of shared living and financial responsibilities can strain even the strongest relationships. In addition to disagreements over lifestyle choices, finances, and property maintenance that may arise in a co-ownership situation, owning a home with a non-spouse can raise legal issues.
Expectations should be set from the start of the co-owning relationship—ideally, in a written agreement—and regularly communicated throughout. To ensure a successful co-ownership experience, it is essential to have open and honest discussions with your potential co-owner(s) about the following:
- Financial contributions. How will the down payment, mortgage, taxes, insurance, and maintenance costs be divided? Will there be a joint account for these expenses? What will happen if one person cannot meet their financial obligations?
- Exit strategy. What happens if one co-owner wants to sell their share of the property? Will the other owner(s) have a right of first refusal? How will the property be valued?
- Death or incapacity. How will the property be handled if one co-owner dies or becomes incapacitated (unable to manage their affairs)? Does the ownership structure align with each co-owner’s estate plan goals?
- Usage and responsibilities. What is the property’s intended use? Will it be a primary residence, a vacation home, or an investment property? How will household chores, maintenance, and repairs be divided?
- Dispute resolution. What mechanisms will be in place to resolve disagreements or conflicts?
How to Address Potential Co-Ownership Issues
The deed to a property is a legal document that can be instrumental in addressing possible legal and other issues in a co-ownership scenario. It names the co-owners and how they hold title to the property. Still, it might not address more complex co-ownership issues, such as rights and responsibilities for maintenance costs, how decisions about the property will be made, and a dispute resolution process.
A deed and a more comprehensive co-ownership agreement should be written to mitigate foreseeable conflicts and protect your interests. The agreement should also be reviewed frequently and updated whenever a co-owner’s circumstances change.
Establishing Ownership Structure
Understanding your options for joint ownership is essential before buying a home with someone other than a spouse. The rules vary by state, so consulting an experienced attorney can help you make the best choice. Once selected, the ownership structure must be reflected on the property deed.
- Joint tenancy with rights of survivorship. Under joint tenancy, each co-owner has an equal and undivided interest in the property. Upon the death of one owner, their share automatically passes to the surviving owner. This arrangement is typical among married couples and close family members.
- Tenancy in common. Each co-owner in a tenancy in common holds a particular share of the property, which can be equal or unequal. If the deed does not specify percentages, the co-owners are considered equal ownership. According to state intestacy laws, when one owner dies, their share passes to their beneficiaries based on their will or to their family members. Tenancy in common offers more flexibility, particularly for co-owners who are not spouses or close relatives, such as two families purchasing a second home together.
Defining Responsibilities and Rights
Clearly defining each owner’s rights and responsibilities is crucial to avoid future conflicts and ensure smooth property management.
- Financial obligations. To avoid disputes over who pays for what, a co-ownership agreement should outline each co-owner’s financial responsibilities, such as contributions to mortgage payments, property taxes, insurance, and maintenance costs.
- Usage and access. The agreement can specify how the co-owners will share usage and access if the property is a vacation home or investment property. Points to address include scheduling, allocation of time, and rules regarding guests.
- Maintenance and repairs. The agreement may outline the division and management of maintenance and repair responsibilities. Each co-owner can be assigned specific tasks, and the agreement can establish a joint fund for these expenses.
Addressing Potential Conflicts
A strong co-ownership agreement should also outline how to resolve disputes.
- Dispute resolution. A dispute resolution clause can require the co-owners to attempt mediation or arbitration to resolve disputes before resorting to contentious and costly litigation.
- Buyout provisions. The agreement can outline a process for one co-owner to buy out the other’s share if the other owner wishes to exit the co-ownership arrangement. Key terms to include in a buyout provision are the right of first refusal, valuation methods, and payment terms.
- Sale or transfer of ownership. Conditions for selling the property, such as requiring unanimous consent from the co-owners or establishing a process for handling disagreements about selling, are best addressed before purchasing the home.
Protecting Individual Interests
Consider adding provisions to your co-ownership agreement that safeguard each person’s individual interests.
- Liens and encumbrances. The agreement should clearly state that each co-owner is responsible for their own debts and that the ownership interest of one co-owner cannot be used as collateral for the other co-owner’s individual loans. This provision helps to protect co-owners from being held liable for others’ financial obligations.
- Partition action. In cases where co-owners cannot agree on major decisions (e.g., selling the property), the agreement can contain a provision allowing for a partition action, a legal process that allows the court to divide the property or order its sale, providing a resolution when co-owners reach an impasse.
After a deed has been recorded, it cannot be easily changed. To change the contents (e.g., names, ownership structure, ownership percentage) of the original deed, it is necessary to prepare and record a new deed, which requires the consent of all parties involved.
Home Co-Ownership and Estate Planning
Estate planning takes on added importance when you buy a home. Your estate plan should take the long view on homeownership and address the following points:
- If you own the property as tenants in common, your will should explicitly state who inherits your share of the property. You should also discuss with your co-owner to whom their share of the property will pass at their death.
- In the case of joint tenancy with rights of survivorship, your share automatically transfers to the surviving co-owner. However, addressing the property in your will and clarifying your intentions in case of simultaneous death or other unforeseen circumstances is still advisable.
- Placing your interest in the property in a trust can avoid the court process known as probate, create a smoother transfer of ownership, and allow greater control over how the property is handled after your death. You can specify conditions in your trust, such as requiring the surviving co-owner to buy out your share from the trust or dictating how the property should be used or managed.
- Your estate plan can include provisions to address potential disputes among co-owners after your death. For example, you could designate a neutral third party to mediate disagreements or outline a process for selling the property if co-owners cannot reach an agreement.
- Suppose you own the property as tenants in common and leave your share to multiple beneficiaries. In that case, your estate plan should describe how that share will be divided or managed to avoid conflicts among your beneficiaries.
- Life insurance can give financial security to your co-owner in the event of your death. The death benefit can cover your share of the mortgage, buy out your share of the property, or serve as a source of income or collateral for a loan.
- Discuss your estate plans with your co-owner so they understand your wishes, and you can coordinate your plans as much as possible to prevent surprises and minimize potential conflicts after your death or incapacity. Regularly review and update your estate plan, especially after significant life events or changes in your co-ownership agreement.
Homeownership continues to be a key component of the American dream, but it can become more complicated when you own a home with someone other than a spouse. Addressing co-owned property in legal documents removes as much risk as possible from the homebuying equation. It sets the stage for a partnership that can benefit you now and your beneficiaries later.
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