A small but growing share of home buyers is forging an alternative path to homeownership that is ripe for potential legal consequences: purchasing a property with friends. With affordability near an all-time low, it’s easy to see why some buyers would consider such an arrangement prudent. However, these transactions likely will introduce legal issues you wouldn’t typically have to address with clients who are married or buying with family members.
“Marriage rates in the United States have dropped while, at the same time, home prices have increased, so buyers are finding unique ways to enter homeownership,” says Jessica Lautz, Vice President of Demographics and Behavioral Insights at the National Association of REALTORS®. One result of this trend, she adds, is the share of unmarried couples purchasing homes with roommates is increasing.
“The most important thing is for the friends to be on the same page on legal issues and to have everything in writing,” says NAR Senior Counsel and Director of Legal Affairs Chloe Hecht. The major issues that could have legal implications include:
- How will the down payment be split?
- In whose name will the mortgage be?
- How will the title be held?
- Will the ownership stake be equally split?
- How will decisions be made about repairs and improvements?
- How can one of the owners exit the partnership?
- What happens if one of the owners passes away?
“It’s also important to understand how your state’s laws could impact the partnership,” says Hecht, who recommends consulting with a real estate attorney to ensure the buyers have a comprehensive agreement about the joint purchase.
The piece of the puzzle that may cause the biggest legal concerns is the plan for transferring ownership in the event one friend wants to exit the partnership. ”The parties may want to consider allowing the person who is staying a right of first refusal to purchase the other person’s interest in the property they jointly own,” Hecht says. “Related issues to consider are how the parties will determine a fair market value for the house and what happens if the person staying can’t afford to purchase the other’s interest in the house.”
Forming an LLC and drawing up legal documents describing ownership stake in the property and how to clear legal hurdles is a good place to start. Before purchasing a property with a friend ask yourself a few questions:
- Would you trust your friends to do the right thing, with or without a legal document? (Spoiler: You should always have a legal document in place when purchasing with friends.)
- If, for some reason, you were unable to make a decision regarding a problem with the property, would you trust your friends’ judgment?
If your answer to either of these questions is no, then making it legal with a contract won’t change things.
None of this is to say that buying a home with friends is necessarily a bad idea. But the possible legal and personal ramifications cannot be understated, says Jake Lizarraga, a writer for REITS.org, a website dedicated to helping people understand real estate investment. ”For those who don’t qualify for a mortgage on their own, it’s a great idea,” he says. “For those who wish to keep a friendship, not so great.”
Lizarraga likens buying a home with friends to going into business with friends: The individuals must agree on a vision moving forward for the arrangement to work. However, it’s likely with friends that, eventually, they’ll have different visions—which can sour the relationship quickly. Then again, it’s always possible that a home purchase with friends can lead to a lifelong partnership.