Your guide to co-buying a house

When it comes to buying a home, you may not always want to do it alone. The thing is, not everyone has someone they can take that leap with. Let us introduce the concept of co-buying a house. Co-buying is when two or more individual parties purchase a property and share ownership. While it may be a helpful alternative to a solo purchase for some buyers, co-buying has its own unique up and downsides. Let's take a closer look at co-buying, exactly how it works and the pros and cons homebuyers may want to consider.

How co-buying a house works

One of the first things to know about making co-buying work is that it helps to genuinely like your co-buyers. But beyond issues of personality and politics, co-buying is a somewhat layered practice — one that involves legal and financial implications, and potentially a lot of paperwork. That said, if you’ve been wondering if you buy a house with a friend and the answer is yes, note that there are some relevant legalities involved.

Types of co-ownership

When it comes to buying property with friends and family, there are few types of ownership that come into play. None of them require occupancy, which means co-ownership is an option if you want to buy another home without making the commitment to live in it.

• Tenancy in common (TIC): With tenancy in common, owners can divvy up the property in different ways, making it possible for people with different financial situations to own pieces of the same home. If one owner contributes a 30% investment while the other contributes 70%, the latter will likely have greater ownership. This doesn’t necessarily mean one person is entitled to occupy a greater percentage of the home. All owners are entitled to occupy and use the entire property in this type of ownership, meaning it may be a solid option for people who want to live on the property they’ve invested in. In the event of a sale, each owner would receive profits according to their percentage of the investment. Should one of the co-owners die, their heirs may inherit their share of the property and owners have the option to sell their share at any given time, without consent from co-owners.
• Joint tenancy: In a joint tenancy situation, each co-owner will own an equal percentage of the property, regardless of investment. They'll also be equally responsible for costs such as maintenance, mortgage and taxes. If a co-owner dies before selling their share of the property, the share (and all the responsibilities that go with it) will be taken over by the remaining owners. Selling a property in a joint tenancy situation requires the consent of all parties, which could create roadblocks down the line if one co-owner wants to sell while the others object.
• Forming an LLC: While less common and occasionally more complicated, forming an LLC with friends or family is another method of co-buying a home. Forming an LLC is usually done when parties are interested in constructing a building for the purpose of cohousing or rental development. While forming an LLC may help protect individuals during the construction process, it may also prevent co-owners from deducting property taxes and mortgage payments on personal taxes during tax season.

As is the case with many real estate situations, every locality has its own rules regarding co-buying and co-ownership. If you're buying property with friends, consider looking into the home’s local zoning laws. Please consult with a legal expert for all of the three above.

Zoning laws and co-buying a house

Zoning regulations dictate the types of property that can be built in a specific area, or how a property can be used. There are several ways local ordinances may affect the co-buying process.

• Occupancy restrictions: Whether or not you can build a multi-family dwelling or convert a large home for this purpose often depends on zoning laws. Local regulations might even limit the number of unrelated occupants in a home.
• Building restrictions: Some zoning laws pertain to building size or height, which may affect a large group of co-buyers looking to build certain types of large dwellings.
• Density restrictions: If you’re looking to purchase land and build individual homes for each co-buyer, be aware that some localities restrict the number of dwellings that can be built on a lot. These restrictions are often tied to the amount of greenspace the local regulations require a given area to have.
• Parking restrictions: In some neighborhoods, if you’re looking to build a multi-family dwelling (or convert to one) you’ll need to adhere to regulations surrounding parking. Many local governments are concerned with parking availability, and these restrictions are intended to prevent a building’s occupants from hogging all the parking in an area.

Financial considerations of co-buying

Even the best of friends may have vastly different financial situations and standings. This may not be cause for concern when going out for dinner as a group, but buying a home is a larger commitment. As such, it might help to consider some precautions that may protect individual buyers in a co-buying situation.

• Discuss your budget: Before entering any sort of legal or financial agreement with someone, it’s generally a good idea to understand the other parties’ financial situation. Talking about money can be awkward, but it’s necessary for proper planning. For example, if one co-buyer makes more per month than the other, but the other has a healthier savings account, the latter might put down more for the down payment while the former takes on more of the monthly mortgage contributions. As taxes and maintenance can add up, it’s probably smart to understand their yearly income and whether they’re dealing with debt so you can plan accordingly. If a co-buyer seems evasive during these conversations, it may not be a good idea to invest in a home together.
• Understand the risks of financing: Taking out a loan may be challenging when you apply with more than one person. Each party is equally responsible for the loan as long as their names are on it. This means if one of your co-owners has a financial setback, the responsibility will fall on you and the rest of the owners.
• Consider a cohabitation agreement: Even careful planning, financial literacy and a sizable savings account may not be enough to weather every circumstance. A cohabitation agreement is a legally binding agreement designed to protect co-owners in the event of a drastic change or dissolution to your relationship as co-owners. Like a pre-nuptial agreement, a cohabitation agreement clearly states how ownership is broken down, how expenses are to be shared and how assets will be divided should complications occur. Without a legally binding agreement, this process may become taxing to navigate — both financially and emotionally.

Please consult with a legal expert for all three of the aforementioned.

Pros and cons of co-buying

There are potential upsides and downsides to any property purchase, and a co-buying situation is no different. There are pros and cons to consider regarding money, purchase speed, relationships and more. Let’s break down some of the more common considerations you may want to be aware of.

Pros of co-buying

• Better mortgage approval odds: If you’re looking to purchase a home using a mortgage, co-buying may boost your approval odds. Combining your assets may help you put down a larger down payment, which could lead to a better loan offer.
• Reduced costs: While each type of co-ownership operates differently, most allow co-owners to split costs that would otherwise fall on a single homeowner. Big repairs and mortgages may feel like less of a burden when divided between all owners.
• Passive income potential: Investing in a rental property on your own usually entails quite a bit of responsibility — sometimes too much for one person to bear. Co-buying may help make the situation more feasible, especially if you’re able to divide property management duties.
• Timing: Prospective homeowners often have to save for years to purchase a home. Co-buying, while not for everyone, is one potential way to speed up this process. A co-buying situation may also help you buy a property sooner.

Cons of co-buying

• Financial risks: If one or more buyers fall behind on payments, it’s the responsibility of the others to pick up the slack. If they can’t, delinquency could have a negative effect on the credit scores of every co-owner, not just the offender in question.
• Loan qualification issues: Taking out any loan will generally affect a person’s debt-to-income ratio. In a co-buying situation, all parties are responsible for the entirety of the loan, which may complicate calculating DTI, and in turn, make lenders think twice before approving any additional credit.
• Lack of control: If you’re a person who relishes control, co-buying may not be the best option for you. Many decisions may require the approval of all buyers, which might slow down important processes and potentially create conflict among the group.
• Trouble in paradise: Making big decisions with close friends and family may be an exciting experience, but it may also inspire conflict among even the closest confidantes. If there’s any uncertainty regarding communication, money or responsibility, it might be worth preserving the friendship and exploring other buying options instead.

How to buy a house with a friend

Now that we’ve explored the pros, cons and methods of co-buying a house, here are some tips that might help you purchase a home with a friend, with minimal risk.

• Explore financing needs for multiple parties: If you’re wary of the responsibility of a traditional mortgage, you may want to explore a fractional loan with your co-borrowers. With a fractional loan, each owner is responsible for their own share of the loan. While less responsibility may seem enticing, interest rates for fractional loans tend to be higher than the alternative, so it may be worth weighing your financing options accordingly.
• Make sure you’re on the same page: If you’re buying a house with a friend, it’s generally a good idea to ensure your goals are aligned. Are you purchasing a home in the hopes of passive income? Do you want to own it for years down the line? Do you want to renovate the home and then flip it? If your intent diverges in any of these areas, among others, it may be time to reconsider co-buying with the friend in question.
• Dispute resolution mechanisms: As much as we all want to get along, some disputes are likely when working with other people. Regular, clear communication may help prevent misunderstandings, and crafting a written agreement that outlines methods of decision-making and conflict resolution may spare some feelings down the line. If proper planning proves insufficient in this area, you may want to consider hiring a dispute resolution specialist to help with mediation.
• Exit strategies: Nobody wants the worst-case scenario happening, but sometimes life just happens. Being prepared with an exit strategy might make a difficult situation a little simpler, whether that’s the end of a friendship or a financial hardship. This may mean agreeing that one owner will buy the other out, selling a share to a new party or selling the entirety of the property and splitting the proceeds accordingly.

In summary

Co-buying a house might be an attractive option for people who may not be able to purchase a home otherwise. While going in on a property with friends, family or a domestic partner may alleviate some of the financial burdens and responsibilities of homeownership, it doesn’t come without its own unique considerations. Fortunately, with proper planning (both financial and interpersonal), buying a house with friends doesn’t have to be a scary feat — it might even be fun.