CO-OWNERSHIP AGREEMENTS

We are frequently consulted by two or more unmarried individuals regarding ownership of real estate. There are four typical types of co-ownership:

1. Two people buy a home and live together. They contribute (equally or unequally) to the downpayment and the carrying costs. They can be a romantically involved couple or merely two people sharing the same home.

2. Two or more people buy an investment property for profit. They may plan on a quick fix up and resale, or plan to hold it for long term rental and profit. They contribute (equally or unequally) to the downpayment and the carrying costs. Frequently one is a contractor who will invest time and personal effort in the remodel.

3. An "investor" contributes the downpayment, and the "tenant" makes the monthly payments. This arrangement is usually called "equity sharing." Equity sharing normally works best when the parties are related, such as parent-child, rather than strangers whose sole motive is profit.

4. The other type of co-ownership is an informal condominium, where two or more people buy a multi-unit property, share the common expenses, and each occupies only his own portion of the premises, having no rights over a co-owner's portion. We have structured duplexes and larger buildings (up to 16 units) using this tenancy-in-common format.

• The biggest risk is financial. In a Tenancy-In-Common, the Owners share one mortgage. If any Owner is transferred across the country, gets fired, sick, or dies, he might not be able to make his payments. Then the other Owners must pick up the shortfall, or the Bank forecloses on the whole property for the one shared mortgage.

• The parties may end a romantic involvement;

• Co-owners may come to realize that they are incompatible;

• One might want to sell quickly while the other is looking for long term growth.

In any of these situations, planning ahead is the key. A well drafted co-ownership agreement will specify responsibilities, duties, and penalties. If an owner does not make a payment, what happens? If a roof needs repair, who pays for it? If an owner fixes something, does he get credit for his work? If a window breaks, who pays for it? If an owner wants to sell, is it possible? Is it practical? If an owner wants to rent, may he?

There are no correct answers to these questions. But these issues should be resolved early, while everyone is still friendly and optimistic and these potential problems are only theoretical and can be addressed by all parties impartially. Once a problem actually arises, if the written agreement does not specify an answer or provide a procedure for resolving the problem, conflicts are more apt to arise, and parties remember differently.

Return to Real Estate Directory