“You Now Need $100,000 In Income To Buy A Typical Condo In Toronto”. This was the headline on a Huffington Post article this year. As the cost of housing escalates in densely packed metropolitan, the dream of home-ownership becomes unattainable for many young home buyers. Don’t be despaired, you can still purchase your dream home if you are willing to embrace some trade-offs. I am talking about the option of purchase a house with a friend or a family member. I won’t lie, there are pros and cons to this option and the list is a long one.
The benefits of buying a house with a friend or family member are:
1 – Able to qualify for higher amount of mortgage thus able to purchase a nicer home. With combined incomes of two, it will increase your mortgage approval amount and thus giving you more funding to buy the house of your dream.
2 – Share monthly housing expenses. When you are a homeowner, it’s your responsibility to pay for utilities, maintenance, and repairs in addition to the mortgage payment. The expense of owning and maintain a house is high and thus it would be easier on you to have another person share these expenses. Also, sharing expenses will likely reduce your expense and thus allow you to save a bit more for other things that you also want.
3 – Equity gain for your own home. A house is an investment and naturally, you expect to make some gains on this investment. The good news is that the longer you live together in the property and make the mortgage payment, the more equity you will gain. Equity is the difference between your home’s value and what you owe the lender. So when you and the co-owner decide to sell the property, the two of you can split proceeds from the sale and put the money toward a down payment on your own places.
Now, it is not all rosy when you purchase a house with a friend or family, there are downsides as well:
1 – It is not easy to move out. In a perfect world, you and the co-owner will live happily till the end of time. Alas, reality can be very cruel. Problems can arise between you and you may not be able to work out your differences. When you just co-rent a place with a roommate, it’s easier to walk away.
However, it’s not so simple when you jointly own a house. Both of you are on the hook for the mortgage agreement, and therefore, you’re both responsible for the debt. To break all ties, you have to: 1) sell the house, or 2) refinance in one owner’s name. Both options will take months to sort out and require a lot of time investment from both of you to break up cleanly.
Relationship is messy in both finance and personal. I know someone who brought a condo with a longtime friend. They were great co-owners and friends for years. Then one of them got married and her husband didn’t have stable income. He was a music teacher and had a hard time finding full time employment. So, he moved in with his wife and her co-owner. Well, it did work for about five months before things got really bad. At the end, they had to sell the condo and they also ended their friendship. Yep! It was a classic case of what could go wrong in shared accommodation.
2- Potential damage to your credit score if thing goes badly. As I mentioned, both of you are on the hook for mortgage payment, thus even if you pay your half on time but if your co-owner is not you will be impacted. The bank will report you and your co-owner’s late payment to credit agencies for non-payment or in the case of foreclosure. Equal ownership and punishment!
3 – Difficulty qualifying for other loans that you may need. A big mortgage on your credit report may limit your availability to qualify for other loans. The lender/bank will look at the amount of mortgage you’re responsible to pay monthly relative to your income. Since you’re responsible for the entire mortgage payment (your co-owner is also), your ability to service additional debt will decease as a result. When I was a banker, I often encourage spouses to deal with this issue by include both of them on loan application, however, you can’t just ask your co-owner to be on your loan application
Things to Consider before buying a property with family or friend
Buying a house with a friend can work well and be beneficial for both you. I have seen several partnership home purchases and they worked out to mutual satisfactions. But as I mentioned, I also saw how bad things could be when thing didn’t work out. Though, I am bias because I jointly own three properties with my sister and one with my “then boyfriend – now husband” in the last 12 years, I am happy to say that the co-ownership model works out well for all three of us. But it takes work, trust, being upfront and honest with each other from the very beginning.
Much like getting married, you both should be very honest and transparent about what you are looking for in the joint venture before jumping in to it. Just because you are family or you are in love today, it does not guarantee that things can’t go wrong in the future. When people aren’t happy, they tend to call lawyer and then you have to call one yourself. The only person who will be happy is the lawyers, so you should proactively set the expectation before jumping in. There are couples of things that I recommend you consider before buying a property with family or friend (future husband and wife are also applicable):
1 – Have an honest conversation about what you both want and keep the communication line open.
You MUST have a candid and transparent conversation about your financial situation and you need to have a plan together. I have the same conversation with my sister and my then boyfriend when we decided to buy a property together. Though I had a lot of faith and trust in both my sister and then boyfriend, buying a house was a very large investment and faith and trust alone will not protect both of us in the event that the relationship break down.
So be PROACTIVE and don’t assume you know what the other person wants because he/she may surprise you. I called it “open kimono” conversation because all parties should be very transparent and don’t hide anything even the smallest issue. Wow! I just got the visual of that statement, but I really want to emphasize the important of it.
Also, ensure that you have open dialogue and communicate what issues bother you frequently. Don’t hold it inside and then explore at your partner out of the blue. My hubby was a classic example. It took many flights and me reinstating that I wasn’t a mind reader for him to get into the habit of communicating to me instead of internalizing the issue and let it festered.
2 – Have a home-ownership ‘prenuptial’.
OK, I can practically see the judgment in your eyes. It sounds really bad and negative that I want you to think of how to end the relationship before the relationship even starts. I always prefer to think that the glass half full and giving peoples the benefit of the doubt, but this is one situation that I advocate for a pessimistic mindset. You need to lay down some ground rules and clearly define your “red lines”. That’s where co-ownership agreements come in. These documents are the prenuptial agreements of home-ownership and they are the only way to resolve ownership issues aside from court proceedings. When so much of your hard earned money is at stake, it’s important to address at least these concerns:
- How much each of you can contribute to down payment? I highly recommend the 50/50 contribution because it is much easier to decide on ownership percentage and how to divide the house expense.
- What are the ownership percentages? If you are a Canadian residence, you could jointly own the property as: 1) tenants in common or 2) joint tenants with right of survivor-ship. As tenants in common, each person would own a percentage of the property, and could sell his/her share or leave it to any beneficiary upon death. On the other hand, joint tenants means that each of you would have an equal, undivided interest in the property so if one of you dies, the share would go automatically to the survivor. There are pros and cons with both of these arrangements. With joint tenants option, you can bypass estate administration and taxes which is really nice solution if you want to avoid paying tax to CRA. The downside is the obvious, if you want to leave your share to someone else (rather than the co-owner) you can’t. Now, tenants in common would allow you the financial control over your share of the property and the power to leave your share to a beneficiary of your choice. Nice option heh! But there is also downside. You both have the option to sell or give your share to someone else without consent. Thus you could end up sharing ownership and/or living with someone that you don’t want as a result. I highly recommend you both to sit down with a real estate lawyer and flush out these details before deciding on the ownership model and percentage. This is an expense that you should pay because it will save you a lot of grieve in the future.
- How are ongoing expenses divided? You need to decide who will take care of home maintenance tasks and how the bills for utilities, insurance, and unexpected repairs will be handled. Again, money causes problem so you should proactively address it.
- How to divide up the joint household task? Silly joint household stuff like: who will take out the trash? or who have dip on the kitchen or have the bigger room should be ironed out. I am serious about this. My “then boyfriend” and I had many mini fights over whose turn to take out the trash. He can’t cook but hate washing dishes. I am the cook but I am not gonna wash dishes when I cook the meal too. You can see how this can get ugly quite fast right? So be proactive and set the expectations before you cohabitate.
- What happens when one of you want to sell? When one of you wants to sell your share in the house, you are not required to sell to someone approved by the other owner. Well, now that is a winkle. But if you have a co-ownership agreement in place, it can grant the co-owner the right of first refusal. Again, a real estate lawyer will be very useful in helping you put in place agreements so you don’t have to deal with this headache if the worst case scenario happens.
I will say it again, co-ownership is not a decision you should rush into much like a marriage. This is a decision that you should take the time to consider and investigate. Do what the bank will do to qualify someone for a loan:
- Do a credit check on your co-owner/owners. Know for a fact how his/her income and assets to get a better sense of how likely he/she will make timely payments as well as his/ her ability to make payments if income is lost
- Hire a real estate lawyer to create a cohabitation agreement which outlines important details that I mentioned above
- Lastly, it is worth considering taking out a term life insurance policy on each other. The payable amount on the policy should be enough to cover the mortgage in the event that one owner dies
Now that I sufficiently scare you off with my negative prenuptial talk, I would also like to highlight that there are benefits to co-ownership that I also highlighted above. A home co-ownership is just another relationship. If you are being honest, transparent and considerate of your co-owner, the relationship will last and you both can gain from the joint investment. I am an example of how well it can work out. 12 years later, I co-own three properties that worth over $2.5 million and my relationship with both my sister and husband are still going strong. Well, I haven’t poisoned his foods and he learns to take the trash out. My sister and I are building this blog together and we haven’t attempted to choke each other yet. I consider that a success…well…you be the judge.
How about you? Consider buying a home with a friend or family? Write to us about your co-ownership experience.