Headaches of Shared Home Ownership
Even with interest rates dropping, buying a house in Southern California is still an expensive proposition.
Some first-time home buyers have solved the problem by convincing a friend or colleague to join forces with them and buy the house together. This is especially common with duplexes. Shared ownership can bring each buyer a tax write-off and a place to live to call his own.
It also may bring a legal headache if the buyers are not careful.
Private homes are not the only places with more than one buyer on the deed. It is very common in resort areas where, for the yuppies who can afford it, groups of three and four combine their assets to buy vacation condominiums.
Whether you plan to buy a Hawaii condo with a friend, or are about to invest with two acquaintances in a triplex in Los Angeles, you may need to consult a lawyer about the proposed transaction.
Lawyers are paid to predict what can go wrong and then write agreements to take these untoward possibilities into account. If you don’t want to see a lawyer just yet, you may be able to do some of the predicting yourself. First, you’ve got to decide how much you trust the people who are investing with you. Are they friends or relatives--trustworthy enough that you’re willing to rely on a handshake agreement? Or are they friends of friends? Do you need a written contract to be safe?
One fairly easy prediction: At some point one of you will want to sell. You should decide now--long before that day arrives--how you’ll sell the property. Otherwise, you’ll be arguing about the price, the terms of the sale and other issues, and you may not be able to agree on anything.
There are many possibilities. You could agree that you will sell the duplex only when all the owners agree to sell. Or you could decide that the house will be sold when one person wants to sell, in which case you’ll have to establish how to set a fair price.
You might agree to have three appraisers assess the property and refuse to sell it for less than the average of the three. And you might tie the minimum selling price to a standard financial index, so the selling price will increase each year. (Most local realty boards have residential property indexes, or you might rely on the Consumer Price Index.) You may be able to sell it for more, but you’ll be agreeing in advance to the minimum you’ll accept when the offers start coming in.
You could work out a buy-sell arrangement with your co-owner in advance. You may want to use the same pricing methods, such as appraisals or price indexes.
Better yet, you might agree that when you want to sell, you will pick a fair price and your partner may buy your share at that price. To make sure that you set a fair price, agree beforehand that if your partner won’t buy at your price, then you have to buy his half for the same price. Knowing that you may have to pay the price you pick, you are much more likely to propose a realistic price.
This same method has been used effectively with hungry children in the kitchen. The brother slices the apple pie, but his sister selects which piece to eat. That’s a sure way to get an equitable slice.
In the real estate context, this buy-sell arrangement works best if both owners have the financial resources to purchase the other party’s share.
Another easy prediction is that the co-owners will fight about a host of other issues, both large and small: Who should pay for improvements and utility charges (especially when one owner uses the air conditioner more than the other)? Who should decide what flowers to plant? How should any tax benefits be apportioned? Who can live in the house or duplex, and who will pay the bills? (Incidentally, when several people buy a vacation house together, one person usually is stuck handling all the administrative chores--writing checks, calling the plumber. You may want to pay that person a fee or special benefits for the work; it will save resentment in the long run.)
If you want to play lawyer, you should sit down with your co-investors and try to imagine all the things that could go wrong. Decide in advance how each of these issues should be resolved. Obviously, you won’t think of everything, but at least you can decide how to solve problems--will majority rule or is unanimity required?
Once you’ve explored these possibilities--if you’re still talking to each other--you should decide whether a written agreement is necessary to confirm your understanding. It would be best to have a lawyer draft the agreement, but at a minimum, you should have your own lawyer review any agreement you write among yourselves.
Attorney Jeffrey S. Klein, The Times’ senior staff counsel, cannot answer mail personally but will respond in this column to questions of general interest about the law. Do not telephone. Write to Jeffrey S. Klein, Legal View, The Times, Times Mirror Square, Los Angeles 90053.