Complete Guide to Buying a House With a Friend
It’s not uncommon for buyers nowadays to consider purchasing a home jointly with a friend or partner. Real estate is an excellent financial investment and can be a very advantageous venture to all parties. However, it does not come without its potential risks. There are few things that need to be approached with caution. Here’s a short and complete guide to buying a house with a friend.
The first and most important step before beginning down the path of homeownership with a friend is to thoroughly vet your friend. It’s not a time to make assumptions about others intentions, commitment level, and/or future plans. There need to be serious conversations on both sides to flesh out how committed you are to one another, the new business relationship of owning a home together, and what may happen when trouble arises.
It may also be helpful to have conversations about how one another envision using the home. Will it be a 24/7 party house? What’s the procedure if one does want to host a large event? How late can daily guests continue to hang out? At what point does a long term guest turn into a new roommate and is that acceptable? How the home will be maintained and decorated may need to be discussed too.
After you know you’re both in it for the long haul (at least commitment wise), you’ll want to have a specific conversation about finances. Having both parties disclose all of their financial information to a loan officer will help create a strategy for obtaining ownership. It’s possible that it is best to have the loan in only one person’s name but the deed in two names. There are essentially three different options of how to take title to the property. The home can be titled solely in one person’s name, titled jointly, or it can be titled jointly as “tenants in common.”
A “tenancy in common” is the most popular form of ownership. Each individual can own different and unequal percentages of the property. This is a helpful set up if one’s salary is significantly higher than the others. There is no right of survivorship, so if one were to pass away, that individual’s share would be given to whomever is designated in their will OR by default their heirs according to state law. That can get a little messy without a life estate provision in the deed. Legal specifics like this may need to get worked out on the front end to protect against those worst case scenario.
A few other specific conversations should take place about finances. The obvious one being how the mortgage is split. But outside of mortgage, there should be a plan in place for the other monthly expenses of home ownership. A plan for unexpected maintenance items and how those will be handled is also important. Consulting with a tax accountant would also prove beneficial to determine how tax deductions can best be handled.
One of the last important steps to consider while purchasing a home with a friend is to ask what’s the plan for the end? If one friend wants to call it quits, what happens? If there’s mutual agreement to sell, what happens? If someone gets married and the new spouse enters the picture, how will that be handled? And if it reaches a point of irreconcilable differences, is there a procedure of mediation? As the old saying goes “failing to have a plan is having a plan for failure.” A spelled out plan for the end game is critical to beginning this new business relationship with a pre-existing friendship.
A few additional dangers about buying a home with a friend are the following. First, when it comes to the loan, your interest rate is impacted by whomever has the worst credit score. So you may end up paying more for your loan if you are tied to somebody who has a credit score less than yours. In the same vein, if a mortgage payment gets missed, both borrowers will be penalized. Another danger is that having your name tied to the house may limit if you name can be attached to other loans. And possibly the last big danger of owning with someone else is that there is no easy out. Even with the most carefully laid out plan, it’ll likely not be a quick or easy process.
Investing in real estate is a great way to diversify your portfolio. Going in on that investment with a friend could really pay off. Making sure that they’re clear communication and expectations on the front end will prepare both parties for the years ahead. Discussing a vision for how the home will be utilized, how bills will be paid, and those other big “what ifs,” are important conversations to have. Once you’re ready, then it’s time to pick a realtor, get pre-approved, and start your online search.
Homes.com is the place to dream and discover your ideal home! Are you starting to get the itch to look for your first or next home, but don’t know where to start? You’ve come to the right place! Browse our real estate and lifestyle blog for home buying tips, mortgage guides, DIY ideas, interior design, lifestyle topics, general home inspiration, or just some homes fun. We are sure you can scratch that itch and find all the information and tools you need to help in your home search. Want to start looking at available real estate right now? Head to our home page and check out homes for sale or rent listings all over the country.
Happy house hunting!