Paying high rent? Consider co-ownership

BY JAY BRIJPAUL

Let’s face the truth about purchasing homes. It’s expensive. The new financial stress test has done more harm than good because buyers must qualify for mortgages at higher interest rates. Many continue to rent, paying more than one-third their income for accommodations. I recently met two friends who decided to become partners. They are contributing around $2300 each month to rent. Individually, they cannot afford to buy, but collectively they can pool their resources and own a home. With more income, they are able to qualify for a bigger mortgage. With their combined savings, they can make their down payment. They are ready to embark on the journey of homeownership.

Joining partnership is like a marriage, however in this case both parties acknowledge and accept that sometime in the future, both parties would go their separate ways. Marriage is usually sweet, but divorce is bitter. As such, it is smart to define the terms of the partnership agreement in writing before a commitment.

Buying a home in partnership entails many aspects such as family structure. I recall an incident in which a lawyer asked partners about their relationship with their spouses. If it’s rocky, then the partnership can be heading for disaster. If you are planning on buying an investment or a home to live in, here are some ideas to ruminate on when drafting a partnership agreement.

Living arrangements. If it is a home with a basement apartment, for example, then, one party can choose to live in the basement and the other on the upper level. However, this must be arranged prior to buying. Some families choose to divide the entire payment plan based on the number of individuals living in the home. For example, if one family consists of a couple and two children and the other a couple and one child, then the bigger family can occupy the larger space and pay a proportionate share of the mortgage, property tax and utilities. All repairs and updates should be equal in an equal partnership since it is capital improvement.

Open a separate account for the partnership. This way each partner can transfer the required funds into a joint account and then use that to pay for the home. Keep three months surplus in the account in case of emergencies.

Prepare for unexpected storms along the way. I came across a situation in which one partner’s spouse had a gambling problem and racked up large debts. The creditor slapped a lien against the home and the partnership began to breakdown. In the event of such mishaps, there should be an understanding that the debt belongs to the party who created it. The other party can choose remedial actions such as to sell the home or buy out the other partner. Whatever the remedy may be, it should be in the partnership agreement.

Create an exit strategy. After living in the home for some time, there is built up equity. Some partners choose to buy out the other partner and keep the property, while in other cases the property is being sold and the proceeds are then split accordingly. In event of a buyout, it is best to have a few market evaluations done and then arrive at a realistic price. In more complex transactions, I encouraged my clients to add a “shot gun clause” to the agreement. In essence, if I want to buy my partner out, I give him a price and an option to buy me out within a specific time frame, failing which; I can then buy it at the same price. It’s similar to when I used to ask my son to divide a chocolate bar. He gets to cut it, but his sister gets to choose which half she wants.

With proper planning, partnership arrangement has multiple benefits. Instead of giving your hard earn money to landlords, like minded families can pool their resources and enjoy the advantages of great partnership, homeownership and friendship.