It’s not uncommon for friends to group together and purchase a home, especially in today’s economic climate. Millenials are especially more open to sharing a space until they feel stable enough to branch off on their own (after all, millennials are currently the largest group powering the housing market). For example, many entrepreneurs are finding that working under the same roof helps them to be more productive during the work day. This is exactly what the 11-person Enplug team did to keep their business afloat. In an interview with Fast Company, Enplug CEO told the publication, “I actually think the company would have failed if we didn’t live together.”
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But you don’t have to run a business together to purchase a home as a unit. A New York Times article found that in cities like New York, friends and siblings were pooling together to share mortgages, and for them, the risk is worth it. One married couple with a child decided to purchase a two-family townhouse with a longtime friend. The three of them realized that they were much better off getting a better deal if they joined forces.
This is an upward trend in real estate that doesn’t seem to be disappearing any time soon. Whatever the reasons are for you getting a home with your friends, it’s still important to err on the side of caution. Even if you plan to be friends forever, it’s better to be safe than sorry, and with the right preventative measures, all parties are protected from any unfortunate circumstances. Co-owning a home can be a great, fiscally responsible decision if done right. Here are some things you can do to protect yourself:
Be Open About Your Finances
Getting a home together requires total transparency. There is very little room for privacy when it comes to money and credit. Sit down and have an open discussion about what everyone has and can contribute, based on the space they’re willing to take. For example, the married couple took the bigger space in the house and they decided not to split space or mortgage equally. This is something you want to get out of the way early on to avoid an discrepancies later down the line.
Discuss How You’ll Split Costs
You can expect your group of friends to be splitting a mortgage, and this matter shouldn’t be taken lightly. It’s critical that you discuss the down payment, utilities, maintenance, closing costs, homeowner association fees, and mortgage payments before you start your house hunt.
Another decision you’ll want to make is regarding ownership of certain areas. All Los Angeles luxury homes, and even single-family traditional homes, will have a master bedroom. It’s important to set the rules ahead of time: if there will be an extra charge for the biggest bedroom, make it known well before you’ve made any purchasing decisions.
Prepare For Worst-Case Scenarios
In the unfortunate event that one member of the household isn’t able to pay their portion of the mortgage, what would happen? This isn’t a fun conversation, but it’s a necessary one. Decide whether the other person or people would take over the mortgage and ownership, or if the entire group would decide to put the home back on the market. Your decisions here should be put into writing to create a sense of accountability. Everyone should understand that this isn’t personal: it’s to protect everyone in the home.
You might want to discuss your stance on “live-in” significant others that weren’t a part of the original agreement. Some friends won’t mind, while others will expect compensation for another household member. This also depends on the type of property you have. If a group of friends is splitting a brownstone and each friend has their own floor, residents might care less about a live-in spouse situation, but if you all share a kitchen and common areas, maybe not so much.
Discuss How The Property Will Be Used
If you’re using the home as your permanent new residence, you’ll want to create a set of household rules that allow everyone to live amicably. If you’re purchasing the the property as a vacation home or investment, you’ll need to work together to create a rental agreement and list of responsibilities. Map out a plan for how you’ll maintain the property and what you’ll do to market it. Each person involved in the agreement should be on the same level, and keep in mind that all your plans should be written and signed. Any changes to the plan involve regrouping and re-drafting your agreement.
Have A Plan For The End
Most likely, you won’t be living with your friends forever. At the beginning, have a discussion about the end of your agreement. Decide what will happen if one person decides to leave, and understand from the start that this will eventually happen. When you discuss the end, you’re less likely to have hard feelings when the inevitable happens. You may decide to sell the house, or choose to buy one another out.
About the Author: An acknowledged expert in luxury coastal properties with more than fifteen years of real estate experience, Kym Talbert is devoted to serving the needs of homebuyers and sellers in coastal Orange County. Known for integrity and perseverance, Kym combines unparalleled customer service with a state-of-the-art web marketing presence.