Pitfalls When Friends Purchase Property Together

by Frances McKinney, Senior Attorney at Cook & James

Recently I was asked to comment for an article in Atlanta Agent Magazine about friends and/or unmarried couples purchasing property together. This got me thinking about how often I see this scenario in the closings I handle and whether or not these couples and friends have thought through all ramifications of co-ownership before taking the plunge.

Proceed with Caution

Whenever parties that aren’t married buy property together -- whether they are a couple, family members or best friends -- there is always a need to proceed with caution. Anyone who has ever inherited a property with their family members can probably tell a story or two of how contentious homeownership with relatives can be. Emotions and money do not mix well and can be a recipe for disaster if not addressed correctly and completely at the beginning.

There are a host of potential pitfalls when unrelated parties enter into business together…and yes, buying property together -- even if it just your home -- is entering into business together and should be treated as such. I’ll cover the most common issues here, but each individual scenario is different so people should always consult an attorney about their specific situation.

Define How the Title Will Be Held

There are several ways that title can be held when a property is purchased by more than one person. “Joint Tenants with Right of Survivorship” is the most popular and the type recommended for married couples. Simply put, when you hold title with right of survivorship if the other co-tenant passes away, their interest transfers to you without going through probate. 

If you are not married, you are probably not going to want to hold a “Joint Tenants with Right of Survivorship” title because you’ll probably want your interest to go to your heirs rather than to your friend. To designate your interest in the property for your heirs, “Tenants in Common” is the form of ownership recommended.

The final definition of holding title I’ll describe here is probably the one I would recommend most highly, especially if you are purchasing more than one property together. Parties can form a Limited Liability Corporation (LLC) and purchase the property in the name of that LLC.  Many of the decision-making issues I describe below can be eliminated and/or taken care of in an operating agreement for the LLC.

Work Out the Details Before Taking the Plunge

Just like in a marriage, there are many things that should be addressed before taking the plunge of buying property together. You should sit down and think about all aspects of home ownership…consider what could go wrong, come to an agreement about how you’ll handle it, and be sure to put it in writing BEFORE closing.

Define Financial Details -- Down Payments, Bad Credit and Potential Buyouts

I recommend an attorney draw up the agreement because they have experience with many scenarios and pitfalls, many of which may not occur to buyers or agents. Here are a few details to think about to get started covering all your bases.

Consider if the person you are purchasing property with is financially stable. If they are scraping by for the down payment, what happens when a major repair has to be done on the property? What happens if they lose their job? Can you afford to cover the payments by yourself?

Who is putting in the money for the down payment? Is it 50/50? If not, how will that affect other decisions? A matter as small as paint color can become a major issue if money is not equal and one party feels more “entitled” to have a bigger vote in small and large decisions.

If one person is making the down payment and the loan is in their name but both will be making mortgage payments, do they each have some rights to the equity in the property once sold? If they will not, you might need to consider a lease agreement to make sure there are no misunderstandings.

In a roommate situation, what happens if one of you gets married? Who moves, who stays?  How about terms of buyout if the other roommate does not have the cash to return for the equity that the other person has in the property?

If your co-tenant has bad credit, any liens that may be filed against them will attach to the property and can affect you when you go to sell the property.

No one ever wants to think about the ultimate end, but as they say, life happens. You may get along famously with your co-tenant but if they pass away, you will need to deal with their heirs and that might not go so well. You may be stuck in a new, not-great relationship and may be forced to sell the property to buy out their interest. A buyout agreement with a life insurance policy may be a strategy to have in place in case something like this were to happen.

Agents Sell – Attorney Advise

Real estate agents are experts in locating property for their clients and specific scenarios sometimes include a couple – married or unmarried – purchasing property together. When this happens the negotiations and contract can get messy, so it is best for agents to advise the couple to consider the types of nuanced details discussed here and put everything in writing. And seek advice from an attorney experienced with all types of real estate contracts, especially friends and non-married couples purchasing property together.

Frances McKinney has more than 25 years of legal experience in the Atlanta market and joined Cook & James in April. As senior attorney, her many responsibilities include purchase closings, title reviews and leading some marketing initiatives.