Buying a property with someone else is a great way to share the fun, stress and cost of the venture. Many people buy a house with their significant other to make a home or invest together. Others purchase property with friends, relatives or business partners. Joining forces can increase your borrowing power. Pooling savings can also bring a deposit within reach.
However, buying a property with someone else can create pitfalls. It is better to consider these issues up front and take steps to ensure everyone remains protected.
Joint Tenants or Tenants in Common?
One fundamental question is how you will hold the property. During a purchase, buyers must decide whether to hold the title as “joint tenants” or “tenants in common”. It is important not to rush this choice. The decision has a significant effect, and everyone involved should feel comfortable with it.
The most common form of ownership is joint tenancy. Both people own the property equally, and neither can sell their “share” to a third party. If one person dies, the property automatically passes to the surviving owner. An owner cannot make testamentary arrangements to leave their share to someone else. Joint tenancy suits many couples who own a family home together, but it does not suit every partnership. For example, some couples may prefer their share of a home to benefit their children rather than their spouse, particularly when children from a previous relationship are involved.
In contrast, when owners hold property as tenants in common, each person has a distinct share. Each owner can leave their share to someone other than the co-owner through their will.
Tenancy in common also allows unequal shares. For example, three siblings who buy a property can hold equal shares of 33% each. If one sibling contributes more than the others, they can reflect that additional contribution in an unequal holding.
If one sibling pays the entire deposit, it may be fair for that person to own 50% of the property. The siblings who did not contribute up-front, but who will contribute to the mortgage and ongoing costs, might each hold 25%.
You can also combine joint tenants and tenants in common. For instance, if a couple pools resources with a friend to buy a property, the couple can hold their share as joint tenants while the friend holds their share as a tenant in common. If one member of the couple dies, their partner receives their share. The friend’s ownership remains unchanged.
Potential Issues of Buying with Someone Else
Unfortunately, even well-made plans can unravel. Relationships break down. People die. Some face lawsuits or bankruptcy. Each of these events can complicate property co-ownership.
Joint tenancy generally suits couples who want their partner to own the entire property if one of them dies. Ownership changes automatically and only requires notification to the relevant Titles Office. However, joint tenancy can create difficulties after a relationship breakdown. Neither person can make decisions about the property without the other. This arrangement forces separated parties to cooperate when selling or renting the home.
After separation, the parties must deal with the property. They may sell it, refinance it into one person’s name or apply to sever the joint tenancy.
Some people believe joint tenancy will protect property if they face bankruptcy or legal action. This belief is incorrect. A court can order the severance of a joint tenancy. The court can then apportion ownership equally and order the sale of the debtor’s share.
In some cases, a tenancy in common may offer greater protection. For example, the debtor may own less than 50% of the property.
Benefits of a Co-Ownership Agreement
Regardless of whether owners choose joint tenancy or tenancy in common, a co-ownership agreement can provide valuable protection. A co-ownership agreement is a contract between people who purchase property together.
The agreement outlines each owner’s rights and obligations. It should also explain what happens if an owner wants to sell or mortgage the property. A well-drafted co-ownership agreement can help prevent disputes. It can also guide the parties in resolving any dispute that arises.
This information is general in nature. You should obtain professional advice relevant to your circumstances. If you or someone you know would like more information or need help or advice, please call 02 6621 2481 or email [email protected].