Shared homeownership: The pros and cons of buying with a friend or family

Shared home ownership is commonly practised among couples but as property prices continue to soar, some buyers, particularly younger ones, are changing tack and exploring the idea of buying a home with their friends or family members.

If you’re struggling to get into the property market on your own, teaming up with family members or friends could help get you into the real estate market sooner. However, you need to be careful with this arrangement as it is quite different from buying with your partner.

• Benefits of buying with friends or family
• Risks of buying with friends or family
• Methods to minimise potential risks 

Benefits of buying with friends or family

Splitting costs is one of the most significant advantages of buying a home with a friend or family member. Not only are you likely to save for a deposit faster utilising this arrangement, but you may be able to enter the market sooner than you would otherwise be able to on your own. After all, not everyone has a partner or a spouse to buy a property with.

When you consider that it can take more than ten years (or longer) to save a 20% deposit on the median house price in some Australian capital cities, it makes sense to pool your funds with a friend or relative to speed up the process. It also means you’re combining your borrowing power, enabling you to borrow more and potentially get a bigger property in a better location than you would have been able to afford on your own.

Risks of buying with friends or family

The “two heads are better than one” adage might not always ring true when it comes to buying a property with a friend or family member given the potential risks that could arise.

Buying a home is a big financial commitment and both parties must own up to their responsibilities. Your own personal plans can also hinder this endeavour and could complicate or even strain your relationship with your co-owner. For instance, problems can arise when one person wants to sell and the other doesn’t.

There is also a downside when it comes to applying for other loans. If you are planning to apply for another home loan, the lender will consider the first loan as your sole responsibility. This means that your borrowing capacity may potentially become compromised.

Methods to minimise potential risks

It is essential to obtain advice from a conveyancer or solicitor before buying a house with a family member or friend. There are several steps you and your co-buyer can take to minimise any potential risks.

Draw up a co-ownership agreement

To avoid disputes between co-owners, it is a good idea to establish a co-ownership agreement to cover every conceivable issue. Costly disputes can be avoided if these issues are considered, and solutions are agreed upon before the property is purchased.

The agreement does not have to be complex, but it will require you to have rules and agreements worked out in advance – this is crucial. For example, co-owners may agree that if one wishes to sell, the other co-owners have first right of refusal to buy their share.

Some of the things that need to be discussed in your agreement are the following:

• A sinking fund which could be used to cover repairs and for periods when the property is vacant
• The agreed time to hold the property before selling
• A plan to pay for unforeseen maintenance costs
• How various insurance issues will be handled
• Taxation/depreciation and capital gains tax issues clarified
• How the price will be determined on the sale to another co-owner
• Who determines the rent and the tenant
• Contribution of deposit and cost of the property
• Which of the co-owners will live in the property and on what basis
• How sale proceeds will be distributed and why a sale would take place and how to resolve disputes
• Decide on the co-ownership structure

There are two co-ownership structures that set out the rights of each co-owner.

Tenants in common

Each co-owner has a percentage share of the property, which may or may not be equal. Think of it as like owning a part of a business. This structure is often used by co-buyers of an investment property.

Under this structure, each co-owner is free to sell or otherwise deal with their interest in the property at anytime provided that there are no terms in the co-ownership agreement stating the otherwise.

The interest in the land of each co-owner is also separate and distinct from the other.

Joint Tenancy

Under this structure, the co-owners own the property equally. Each has a right shared with the others to the whole property but no individual right to any particular share in it. It has an ‘all or nothing’ nature.

This means that there are limits to what each owner can do with their share of the property, especially in terms of a potential sale.

This is the most common structure of co-ownership in Australia, as it is commonly used by married couples.

The right of survivorship is an essential and necessary characteristic of joint tenancy. On the death of one joint tenant, the surviving joint co-owners will split the shares equally. If there’s only one other co-owner, they’ll inherit the whole share. This is regardless of what may be in the deceased person’s will.

Establish a legal will

Make sure you get a will drawn up by your solicitor to show who will inherit your assets. If you already have a will, ensure that it is updated with the new property details.

Thought should also be given to whether the co-owners give each other a Power of Attorney if one of the co-owners becomes incapacitated.

Check on the structure of mortgage

You should ensure that the co-ownership agreement details the financial side of things, particularly about mortgages.

It is also crucial that you take financial advice and talk about the options available for you and your co-buyer especially if unforeseen circumstances cause one of you to default on the mortgage.

Given that a mortgage is generally secured by the whole property, either of you might be at risk of the bank foreclosing on the loan if one defaults.

There are special arrangements available in some lenders that will allow you to iron out financial issues between you and your co-buyer. This is called a property share loan.

This type of loan will require you and your co-buyer to apply for a loan individually. While you own the same property, you will be able to choose different repayment schedules. However, both parties must have the same loan period.

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