In high-cost markets like the Washington area, where the median sales price rose to $445,000 in December, according to the multiple listing service, it can be tough to buy a home by yourself. That’s why friends eager to leave their renting days behind sometimes opt to become homeowners together.
While pooling finances to build equity can work, it takes careful planning for every possible exit scenario, as well as written documents, to avoid complications.
Choosing the right friends to room with isn’t always easy, but the stakes are even higher when you enter into the legally binding, long-term relationship required when you buy a home. Compatible lifestyles become even more important when you’re signing more than a one-year lease.
In addition to making sure you and your co-buyer friend or friends have similar attitudes about quiet hours, guests, pets and cleanliness, you’ll also need to consider:
- How open you need to be: While renters need to pass a credit check from the landlord, if you’re buying property with someone, you’ll need to be completely open with each other about your finances. Sharing credit reports is one place to start, since every borrower’s credit will impact your interest rate on the loan and your ability to qualify for a mortgage. You also need to discuss available cash for a down payment and future expenses as well as a monthly housing budget.
- How to share the property: If one buyer puts in less down payment or lives in a smaller area of the house, you’ll need to determine how to split the ownership. Not only does this affect your monthly payment, but it will impact your taxes if you deduct your mortgage interest payments and property taxes. When you eventually sell the property, you’ll need to have a written agreement about how much you own in order to split any profits and seller contributions to the sale.
- How to divide expenses: The cost of homeownership includes ongoing expenses such as taxes and insurance as well as homeowner association dues, maintenance, repairs and upgrades. You should have a written agreement to address how expenses will be shared to avoid arguments.
- How to make decisions: As co-owners, you’ll need a process in place to figure out how to decide when to replace the flooring or to buy a new refrigerator as well as smaller decisions such as the temperature setting and whether you want to plant flowers or vegetables.
- How to legally establish ownership: You’ll need an attorney to help you evaluate the pros and cons of becoming tenants in common or joint tenants with the right of survivorship, which means that an owner automatically inherits the property if one tenant dies. Either legal decision has implications for the future sale of the property or what happens if one of the owners dies.
- How to plan for the future: Jobs and relationships change, so you’ll need a written agreement about how you’ll handle it if someone needs to move out and sell their share of the house or if everyone wants to sell at once.
An attorney can help you write the agreements you’ll need in place for the legal and financial well-being of you and your friends. But first, you need to find your most compatible friends to start the conversation about buying together.
Jon Coile, chairman of Rockville-based multiple-listing service Bright MLS (formerly MRIS) and president of Champion Realty in Annapolis, Md., writes occasional commentary on the Washington area housing market.