Buying with a Friend?

Whether buying a residential or investment property with a friend, encourage your clients (and you as well) to consider talking about these questions and their answers with your friend BEFORE buying. Why? Before is easier than after even when such conversations can be difficult and before is cheaper both financially and emotionally than after.

According to the National Association of REALTORS® (NAR), buying properties together among friends and unmarried partners is a growing segment of the housing market. NAR indicates that 15% of all Millennial buyers are in unmarried, friend relationships/partnerships and 8% of ALL buyers are in unmarried, friend relationships/partnerships.

That this segment of the market is growing makes sense…most first-time buyers simply cannot afford a down payment on a home and/or a home mortgage on their own. In the last decade alone, according to the New York Times, median home prices have increased +27.5% and home prices are predicted to increase at twice the rate of inflation and wage growth.

Here are some questions and conversation topics to discuss BEFORE buying residential and/or investment property with a friend/partner.

1. How will you divide ownership and equity? Who will hold the mortgage and title?
   1. Sometimes, friends/partners have significantly different incomes.
      1. Will you divide your financial responsibilities evenly in a co-ownership arrangement?
      2. Will you split the costs based upon your different income ratios?
      3. Will one person pay for the entire down payment?
      4. Will one person loan the other person(s) half of or a portion of the down payment?

2. How will you handle repairs, upgrades and labor?
   1. This question/conversation involves some of the same elements as #1.
      1. Who pays, how much does each pay, etc. based upon, perhaps, different incomes?
      2. When one friend/partner does the labor, does that person get reimbursed for time, materials, etc.?
   2. This question/conversation also involves aesthetic considerations. Who decides on paint colors and/or decorations?
   3. This question/conversation also involves how long family members and/or houseguests are welcome?
3. What happens when one person dies or if the relationship or friendship ends?
   1. Decide BEFORE the purchase who inherits the dead person’s portion of the property in the deed, will or written agreement.
   2. Once friends/partners begin to co-mingle funds and share assets, a court/judge can regard the friends/partners being in a common law domestic partnership regardless of a co-ownership agreement. You must check specific state laws on this point.
4. How formal/informal do you want your co-ownership agreement to be?
   1. Some people want an informal, verbal, hand written agreement that all parties sign.
   2. Some want to work with a mediator.
   3. Some people want a formal agreement where each party hires their own attorney, similar to a prenuptial agreement
      1. Tiffany Elkins, an Oregon lawyer specializing in real estate litigation, told the New York Times, If you don’t do it right and you have to clean it up later (after you buy), you’re spending ten times the amount of money that you would have spent if you’d hired an attorney before you purchased.”
      2. Frederick Hertz, a lawyer and mediator specializing in creating housing agreements, told the New York Times, “The difference is that the rules of relationships are dramatically different if you’re married or unmarried…if you fail to have a legally binding agreement, the law will impose a very different set of rules.”