Reader Question: My friend and I are thinking about buying a home together. We each have saved enough to pay 20 percent down on a $150,000 home, but by pooling our down payment, we could buy a $300,000 house. We may even invite a third person to join us. We live in a high-value market, and a $150,000 home would mean a long commute. We believe prices will continue to rise and by going in together, we can avoid the commute and start building equity much sooner. Is this a good idea?
Monty’s Answer: The real estate market has fully recovered in most metropolitan areas. In some markets, the prices have reached new highs. Housing prices are out of reach for many potential homebuyers, even in markets that have not fully recovered. The shortage of inventory and the rising cost of new construction exacerbate home prices. The idea of buying a home together is not new. What is new is potential homebuyers are considering a larger pool of potential partners to join them in the purchase of a home.
In the past siblings or significant others have been the primary partners in joint living arrangements. Today that group can also include old friends, new friends, co-workers, and parents that jointly own and live in the same house.
Run it like a business
The vision statement — Will it be a party house, a monastery, or some combination? Start the conversation by seeking to understand in great detail the perception of each partner as to his or her vision of living in the house. Short of premarital counseling, but an honest discussion about interests, personal habits, pet peeves, working hours, how to deal with music, sound levels, overnight guests, pets, and much more are essential. If one of you is a neat freak, and another is messy, you will need a good set of house rules.
The operational concept — How will the living arrangement function? Do ownership interests have to be equal? Will we utilize a limited liability company or become tenants in common? How can one exit the agreement? How is value established at an exit? Can a party subdivide his or her interest? What happens if a partner becomes disabled or dies? If a partner leaves early, do they have to sell their share? Can a partner move out and rent their bedroom? Talk about your personal money issues, how to share food costs, how to pay bills, or if one partner loses a job and cannot fund their obligation? How will the household responsibilities be managed? Can the written house rules be included in the agreement?
Organize the plan — If you have made it this far, now it makes sense to chip in funds to engage legal counsel and seek feedback. Consider an attorney not acquainted with any of the participants, who would likely be representing an LLC or some other entity, rather than individual participants. When a draft document exists the participants can seek the opinion of his or her advisor. Also, consider providing your proposed house rules and operational concept to counsel in advance. Doing so will improve the quality of your initial meeting and may reduce the time required for discussion and to draft the documents. Do not be bashful about shopping for counsel. It is a good idea to ask for an estimate of time involved to accomplish the task, an hourly rate, and the expected delivery date of the documents.
Arrange your financing — There are many types of lenders. Because this twist of joint ownership is in its infancy, funding may require some sleuthing. There are a variety of methods already in existence and new startup companies that offer a range of new solutions. From making part of your down payment in exchange for equity to charging a fee to help set up your plan and introducing you to a lender, and other available options in between. Do an Internet search for “new breed of equity sharing programs” to get started.
Get educated and look for a house — Whether joint ownership is a good idea for you and your potential partners is unknown at this point. Many individuals in the past have owned real estate jointly and done very well. Others have not done well. The chance for success is higher as you invest in learning about buying, holding, and selling real estate, and applying the knowledge to your situation.
— Richard Montgomery is the author of “House Money - An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Ask him questions at DearMonty.com.