A small but growing share of home buyers is forging an alternative path to homeownership: purchasing a property with friends.
With affordability near an all-time low, it’s easy to see why some consumers, unattached to family or a partner, would consider such an arrangement prudent. However, these transactions likely will introduce legal issues you wouldn’t typically have to address as a homebuyer purchasing a home with a life partner or with family members.
You may not be seeing the trend of friends purchasing homes together in your neck of the woods just yet. There’s a likelihood, though, that you will soon. Only 2% of buyers in 2018 described themselves as “other,” meaning they could be in an unmarried romantic relationship or an alternative family relationship, says Jessica Lautz, vice president of demographics and behavioral insights at the National Association of REALTORS®.
“Marriage rates in the United States have dropped while, at the same time, home prices have increased, so buyers are finding unique ways to enter homeownership,” Lautz says. One result of this trend, she adds, is the share of unmarried couples purchasing homes with roommates is increasing.
While the process of buying a home with friends is similar to purchasing with a partner or alone, there are specific legal aspects of this type of sale.
“The most important thing is for the friends to be on the same page on legal issues and to have everything in writing,” says NAR Senior Counsel and Director of Legal Affairs Chloe Hecht.
The major issues that could have legal implications include:
How will the down payment be split?
In whose name will the mortgage be?
How will the title be held?
Will the ownership stake be equally split?
How will decisions be made about repairs and improvements?
How can one of the owners exit the partnership?
What happens if one of the owners passes away?
The piece of the puzzle that may cause the biggest legal concerns is the plan for transferring ownership in the event one friend wants to exit the partnership. ”The parties may want to consider allowing the person who is staying a right of first refusal to purchase the other person’s interest in the property they jointly own,” Hecht says. “Related issues to consider are how the parties will determine a fair market value for the house and what happens if the person staying can’t afford to purchase the other’s interest in the house.”
Beyond legalities, the decision-making process also may be trickier between friends than partners or family members. Couples, for example, usually have a firmer understanding of what they want in a home, while friends may need more time to come to an agreement.
Before starting the purchase process, firmly establish what’s important to them in a home, including which spaces they’re willing to share, such as the kitchen, family room, and outdoor area. Friends may also need help figuring out how to equitably cover utility bills, maintenance costs, and expenses for common home goods. While it’s exciting to consider living with your best friends, it’s important to figure out what the friends really require in their spaces.
Before you consider buying a home with a friend or three, ask yourself a few questions:
Would you trust your friends to do the right thing, with or without a legal document? (Spoiler: You should always have a legal document in place when purchasing with friends.)
If, for some reason, you were unable to make a decision regarding a problem with the property, would you trust your friends’ judgment?
If you are considering a House Hacking situation, let’s talk about it first!
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