The boom in the housing market and the changes in rules around purchasing a home have created a situation where it may be more difficult for some potential home buyers to buy their first home. It’s no surprise then that some buyers are looking for more creative ways to make their first purchase or move into something more desirable, including co-ownership. The drawback is that without appropriate guidance, co-ownership can be extremely difficult to negotiate. Read our tips if you are considering buying a home with a friend to see if this arrangement could work for you!
First, decide on the essentials
Before you start going to open houses, sit down and discuss the basics. On your own sheet of paper figure out your ideal location, necessary nearby amenities, square footage of home and bedrooms, number of beds and baths, and answer questions like how long you intend to co-own and what your next step might be. Then compare your answers to see if you have the same goals in mind. Some things are negotiable, and others are not. If you aren’t compatible on paper, this may not be a good choice for you. Co-ownership isn’t easy so it is not to be taken lightly. If you succeed in creating one common list of items that you can both agree on, it’s time to take it to the next step.
Determine a budget
If you haven’t already, now is the time to open up about all your financials. You need to be comfortable enough with each other to share what assets you are bringing to the purchase to determine what you can afford. Once you’ve established what you can both bring to the table, you need to establish your budget. Don’t forget to factor in taxes, legal fees, closing costs, joint bills, and incidentals. Conversations about money aren’t easy to have but you need to start now because co-ownership will necessitate many financial discussions. In a perfect world, you would have a 50/50 split, but more likely it won’t be perfect and that is where a lawyer will be helpful.
Co-ownership without a spouse can be complicated when it comes to protection. All parties need to agree on the purchase of insurance to protect everyone in case of the unexpected. Homeowner insurance will cover unanticipated repairs or damage to the home, while mortgage protection insurance will protect the investment should something happen to one of the people in the agreement.
Create a contract
This is where a lawyer will also come in handy. You need to sit down to determine, in a legal way, what everyone’s responsibilities will be. What happens if someone cannot make their payment? What if someone wants to rent, sell, or move out? What if someone finds a partner and wants them to move in? You should outline ongoing responsibilities for expenses such as insurance and maintenance as well as the division of one-time costs like emergency repairs.
Research the appropriate lender
When entering into a co-ownership agreement, lenders may present challenges. Both parties will have to be examined financially and those scores are blended to determine the rate. If one party enters into an agreement with debt, it might affect the rating for everyone. In these cases, it may make more sense to exclude that person from the title and instead create a legal contract to protect their stake in the home. Alternately, some lenders will want everyone to have equal ownership of the title or don’t care how the title is split.
Ensure that your mortgage has some flexibility in case changes need to be made. For example, if someone wants to buy out of the title, or if one of the co-owners gets married or needs to change location. If you are locked into an inflexible fixed-rate mortgage, you risk huge financial penalties. A variable rate mortgage or one that allows bulk payments, in the long run, may be more beneficial and have smaller penalties if you need to change the agreement in your group.
A recent survey showed that nearly 50% of millennials, and more than 40% of Canadians overall, would consider a home purchase with a friend in this current market. If you feel this could be right for you and your friends, it’s essential you start having the difficult and “taboo” conversations early to determine whether you are emotionally ready and stable enough to maintain the friendship through the process. Once you’ve decided you are truly ready, follow our steps to prepare emotionally, legally, and financially and then your next big decision will be when to host your housewarming party!
If you embarking on co-ownership, it’s important to reach out to an agent as soon as possible to help you navigate the legal field as you search for your dream property. Reach out to The Blackwell Group today to get started!