Co-ownership an obvious option in a high-priced property market
With sky-high prices locking young people out of the property market, more Australians are pooling their resources and buying property with friends.
Frustrated by expensive property prices, younger generations are now joining forces with long-time school friends, sporting club members, church groups, social circles or cashed-up relatives to purchase their first home.
At first glance, this appears to be an optimal solution. However, there are pitfalls in co-ownership which need to be addressed before committing to such an investment.
Buying property with friends can involve significant financial and emotional risk. It can end friendships if things go awry. I have often seen people caught up in co-ownership deals that go wrong for various reasons and then they find themselves in unexpected difficulties.
Protect your interests with a formal legal agreement
With property likely to be the biggest investment that most Australians make, when buying property with friends it's important to ensure each owner's interests are protected.
For instance, in the future, one owner may wish to withdraw from the property and sell their share equally among the other partners. This sounds fair, but what if they insist on one particular person getting their share? Or what if they want to cash in and sell the entire property? Or if they want to sell their share to someone who is not a party to the original co-ownership?
This is why it's important for everyone involved to have a properly drawn up legal agreement, protecting their interest in the joint investment.
Determining the form of property ownership is important
Before buying property with friends, co-owners need to decide whether to hold ownership as tenants in common or as joint tenants, as the differences are significant. (For more information, please see our earlier article Joint tenants or tenants in common – which one should you choose?)
Or, if it's an investment property, many buyers will form a trust.
Understand your obligations and responsibilities as a joint owner
Any legal agreement between co-owners needs to have the capacity to meet dozens of potential changes in circumstances, including marriage, children, divorce, ill health, death and bankruptcy.
The agreement also needs to address certain events, such as the property needing urgent repair and only one of the co-owners having the cash to pay for it. How will they be compensated? Or what happens if someone defaults on repayments?
When buying property with friends it's vital that everyone knows their obligations and responsibilities. Setting these out in a legal document will formalise everyone's agreement and minimise difficulties that could arise in the future.
Be prepared to compromise and get involved in any decision-making
Compromise is an essential element for ensuring the long-term success of property co-ownership. Keep the conversation open and make sure all parties are involved in property-related decisions, particularly regarding finances and future plans.
Excluding a co-owner or becoming entangled in a financial argument can cause serious rifts and ultimately destroy trust. For this reason it is also recommended to have an exit plan which is suitable to all co-owners.
To learn more about successfully co-owning property, speak to an experienced conveyancer or property lawyer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.