Many people consider buying a house together for many different reasons. Whether it is your first-time home or an investment property, buying a house together does have its perks. If done with care, this arrangement can be very beneficial in getting you a house that you may not have otherwise been able to afford. Be sure to figure out the details explained in this article prior to buying a house together, though, in order to avoid financial and legal chaos.
Decide Between Tenants in Common and Joint Tenants with Right of Survivorship
When you take ownership of property, you receive a piece of paper, called a “deed,” that shows you have title. This deed explains how you want to own the property. When you and another person or persons are buying a house together, you can own the property either as tenants in common (TIC) or as joint tenants with the right of survivorship (JTWROS). You still own the home in each scenario, but the implications of each are different.
Tenants in common
Each tenant in common owns his or her own separate and distinct share of the same property. The size of this ownership share may vary, but each person has an undivided, equal right to use and occupy the entire property. When a tenant in common dies, his or her share of the property goes to his or her beneficiaries, rather than to the other tenants in common. This form of holding title is most common with unmarried persons, especially if they each contribute a different amount towards the property.
Joint tenants with right of survivorship
Each tenant has the right of survivorship, meaning that if one owner dies, that owner’s interest in the property will pass to the surviving owner or owners. The interest in property of the deceased owner simply evaporates, and cannot be inherited by his or her beneficiaries. Unlike a tenancy in common, where co-owners may have unequal interests in a property or fractional ownership, joint co-owners each have equal shares in the property. This form of holding title is most common between husbands and wives or parents and children, where the joint tenants want title to pass automatically to the surviving tenant.
In both TIC and JTWROS, when one of the tenants wants to sell his or her part, he or she would sell his or her interest in the property. This is because it would not be feasible to divide the house down the middle and each own respective portions. The buyer would get the same rights and interests as the seller had. If you are buying a house together as a rental property, each tenant would be entitled to a portion of the rental income, proportionate to his or her share.
Compose a Written Co-Ownership Agreement
Some people make the mistake of assuming that any issues or disagreements that arise will be worked out when the time comes. This approach can put a lot of strain on you, your time, your money, your relationship, and can even end up with you in court. Instead, try and think of anything that may arise during the course of your co-ownership, and write out what should happen in those instances. After the agreement is satisfactory to all tenants, each of you should sign it. Below are some issues that you absolutely should include in your agreement.
What is each tenant’s fractional ownership?
This is probably the most important agreement to be made, since it affects the property once you decide to sell your share, or after you die. This decision is easy if you have a JTWROS. In that case, you simply divide your interest into equal parts. For example, if there are two of you, you would each agree to divide your shares 50/50.
If you have a TIC, you have more options, because you don’t have to divide your interests 50/50. Instead you can divide the shares into fractional ownership. Some people decide who owns what based on how much money each tenant contributes. You could also agree that tenant A is going to receive a larger share, because of all of the maintenance she does; or that tenant B deserves a larger share, because he pays all of the property taxes each year. However you want to divide it up is fine, just as long as you all agree.
How will ongoing expenses be paid?
Ongoing expenses, like mortgage payments, property taxes, utilities, maintenance costs, and insurance premiums should all be allocated according to what all of the tenants thinks is fair. Some people decide to split everything completely equally. Other people divide it based on the same percentage as ownership, or based on the percentage of a down payment each person made. Many times, if the home is a vacation home, the tenants divide up the expenses based on how much time each tenant will use the home.
How does a tenant destroy his or her interest?
You have every right to destroy your interest in the property by conveying your interest to someone else. You do not need any of the other tenant’s permission to do this, as it is your property right to keep or sell your interest as you wish.