Want to buy a home, but still looking for that special someone? Consider this: A lot of legal documents are required at closing, but a marriage certificate isn’t one of them. The person sitting next to you at closing could be your best friend, your cousin, or even someone you might marry down the road.
And the two of you would be in good company. Last year, nearly 400,000 couples who bought homes did so outside of a traditional marriage, according to the “2015 Profile of Home Buyers and Sellers” from the NATIONAL ASSOCIATION OF REALTORS®.
Why’s that? In part, because people are saying “I do” later — about seven whole years later than in 1950, according to the U.S. Census Bureau. Despite this trend, home ownership is still a smart financial choice for many adults. Just ask Louise Machinist, co-author of “My House Our House: Living Far Better for Far Less in a Cooperative Household,” who has bought not one, but two homes with friends over the years.
She purchased the first abode in the Pittsburgh suburbs with two pals from church.
“We’d been talking about buying a home together as a way to reduce expenses in retirement, which was 15 years away at the time,” she says. “But then we realized, why wait?” Instead, Machinist combined resources with her friends to buy a spacious home. They lived happily together for almost 10 years, until Machinist and one of her housemates decided to trade Pittsburgh’s gray skies for the sunny beaches of coastal Florida.
For many, splitting the costs of home ownership with a friend means lower monthly bills and a nicer home than they could afford alone, not to mention the chance to build home equity. Still, the decision to enter into a business partnership shouldn’t be made lightly. Disputes happen, life goals change, and it’s much harder to sell a home than it is to break a rental contract.
If you’re thinking of buying a home with a friend or unmarried loved one, here’s how to be sure you’re doing it in the smartest way possible.
Do Your Lifestyles and Goals Match?
Are you fussy about the thermostat? What about cigarette smoke or drug use? Do you have pets? You can gamble with a roommate when renting, but the stakes are much higher if you’re buying with another person. So find out if you’re compatible before moving forward.
“If you’re in an agreement with someone who you’re not in a serious relationship with, you need to dictate what will happen in the next two, five, or 10 years,” says REALTOR® Adam Bray-Ali of Pasadena, Calif.-based Podley Properties. “Is the goal to have somewhere to live for a few years? Or are you looking to keep the house as a long-term investment property?”
Is Everyone Financially Sound?
When it comes to money, you’ve got to be brutally honest with your prospective long-term roomie. After all, even the most solid of relationships can be wrecked by financial disputes.
Before Machinist and her housemates embarked on the hunt, they had a serious heart-to-heart about their individual money situations. “We shared all of our financial information before we made a decision,” she says. “We gave each other our credit reports and a complete accounting of our financial status. If someone is derelict on their finances, you should run away.”
What's Your Exit Strategy?
Odds are, buying a house with a friend will be a medium-term arrangement. But even home buyers who have made lifelong vows to each other are rarely as committed to their homes.
“In general, people don’t stay in a home for more than seven years,” says Bray-Ali. Shared home ownership may benefit everyone for those years, but eventually, one of you may meet a life partner or get transferred across the country. Occasionally, housemates decide they just don’t enjoy living together.
Consider how you’ll collectively address each of these circumstances before signing any dotted lines. Prospective co-owners should discuss how to handle end-of-contract issues and work with an attorney to put them in writing. Potential scenarios include:
- How much notice will you require if someone decides to leave the agreement?
- What buy-out options will exist for the remaining owner(s)?
- How will you determine the fair market value of the home?
- When, how, and under what circumstances will you ask an unsuitable co-owner to leave?
- For older co-owners, what end-of-life conditions are in place for surviving co-owners? How will those choices affect estate planning decisions and the rights of heirs?
Without a written contract, exits get messy. That’s what Lauren Bowling, author of the millennial personal finance website “L. Bee and the Money Tree,” found out when she and her then-fiancé broke up after buying a house together. “Everything was in my name, but it was still a tricky situation because he’d given me money for a down payment, renovations, a portion of the mortgage, everything,” she says. “He threatened legal action after the breakup because he had given me that money.”
In the end, Bowling reimbursed her ex for all the funds he’d put into the house — even his portion of the mortgage payments. Without a contract in place, it was up to Bowling to make the decision about what was fair — and it was an expensive call.
4 Steps to Co-Ownership
Ready to get started? Here’s how to make sure you and your friends have your home buying ducks in a row.
- Talk to lenders. There’s no marriage requirement to obtain a loan, except with VA loans. The most important thing is that all the buyers are on the title so they’re all protected.
- Find an experienced agent. Finding an agent who is enthusiastic about making your situation work is also critical to success. Non-related buyers come to the table with different expectations about how the house-hunting and buying process will be handled, and the right agent can help make sure the whole thing runs smoothly, from the first offer to your closing date. “You’ll need an experienced agent who understands how to get deals done,” Bray-Ali says.
- Work with a contract lawyer. Don’t put your expectations for how to handle co-ownership issues on the back of a napkin. For all the reasons discussed above, getting it all in writing — legal writing — is crucial to co-owning success.
- Go find a great home! With a friend (or friends) in tow, you’ll be able to afford more house than you could on your own. Maybe those vaulted ceilings or that spacious yard is possible after all.
Even despite what happened, Bowling says buying her home was worth it. She boosted the home’s value by completing a number of renovations and rented out a few rooms to offset costs.
“I wouldn’t have been able to start my own business without my roommates helping me pay the mortgage,” she says. “After fixing up the home, I also have equity in it that I can leverage for future ventures and to make a profit when I go to sell the home.”
So, here’s to friendship — and a new adventure together.