Written Agreements Can Help Avoid Future Problems
All sorts of people are opting to buy property in partnerships these days. Friends who might not be able to afford a home on their own are pooling their resources. And a sizable number of elderly couples are choosing to live together instead of remarry so that they’re not held responsible for the staggering medical bills of their significant other.
Friends or lovers who are buying a piece of property are advised to consider a written partnership agreement that spells out their rights and obligations. Many people, however, find it uncomfortable to sit down and talk about all the what-ifs with their life partner or with their friends. Most real estate agents are also of little help when it comes to helping buyers with partnership agreements. But a little bit of homework and some frank conversation can really help avoid conflicts in the future.
“There are hundreds of what-ifs, so these are some of the toughest agreements to draft,” said Michael M. Silver, real estate partner at the Encino law firm of Grayson, Givner, Booke, Silver & Wolfe.
Where should people begin? Sit down and work out the economic details with your soon-to-be business partner. Then, Silver suggested, visit an accountant and be sure that your financial calculations are fair and realistic. Next, he said, create a rough draft of an agreement that you think covers most of the important aspects of your partnership. Finally, after you have a rough draft of what you want in an agreement, consult a lawyer, who can transform it into a legally binding format. The cost of the attorney, he said, will range from $500 to $10,000, depending on how complicated the partners want their agreement to be.
Some of the things to include in an agreement are contributions of each partner to the down payment and monthly mortgage payments. Partners should be clear on all of the tax benefits and burdens. Decide in advance who will pay how much property tax and how to allocate tax-deductible interest payments. What kind of mechanism is there to decide when to sell or refinance the property? And, Silver said, outline the responsibilities of ownership--such as gardening duties and how decisions will be made about capital expenditures.
“There’s no way to provide for everything, and I wouldn’t make a mountain out of a molehill,” Silver said, “but you have to cover the issues.” And, he added, any agreement related to real estate should be in writing to satisfy what’s known as the Statute of Frauds.
Despite the advice of attorneys like Silver, most people who buy real estate as lovers or friends don’t sign a written agreement, said Judy Christy, vice president and sales manager of Fred Sands Realtors in Studio City. In fact, Christy said, she owns a property in Studio City with several partners, and they never bothered to create a partnership agreement. “It’s a gentlemen’s agreement and I have not had a bit of a problem with it,” she said.
Christy’s most important advice is to “be wary of who you’re getting involved with,” she said. “Don’t go into partnership with a person who has very different tastes than you do. You’ll always be arguing.”
Also be sure that your partner has a very good credit rating. Even if two partners are splitting a duplex, they’ll have to get one loan, and each is responsible for the debt of the other.
“People should write something down and make up the ground rules while they still like each other,” said Ralph Warner, an attorney and author of “The Living Together Kit,” published by Nolo Press in Berkeley. “You must treat these purchases as a business deal and look forward to the possibility of a breakup in the future.”
The first issue to consider is whether the parties want to hold title as tenants in common or as joint tenants--with rights of survivorship. And, frequently, one partner has more resources than the other, Warner said. This means that the partners have to consider whether to have unequal ownership of the property or to equalize their ownership by having the wealthier partner lend or give money to the less well-heeled partner.
The agreement should also include a clause providing for mediation to try and work things out amicably and for arbitration if mediation fails. There should be a mechanism to get an appraisal of the property when one partner wants or needs to sell their share. If one partner is unwilling or unable to make mortgage payments, it’s advisable to include an agreement that the partner making the payments gets reimbursed with interest. Other issues to consider include the right to purchase from an inheritor if the parties are holding title as tenants in common, and some mechanism to figure improvements to the property should also be part of the agreement.
Planning ahead is important because things can go awry, warned Susan Stearns, an agent at the Prudential California Realty in Woodland Hills. Three years ago, she sold a home in North Hills to two longtime friends who decided to pool their resources. The two house mates aren’t such good friends any more, however. Both of them are in the construction business--so their income isn’t what it used to be. One of them has been falling behind in his share of the monthly mortgage payment, causing both of their credit ratings to suffer. Even worse, the house is worth about $20,000 less than what the two paid for it three years ago.
“You never know what’s going to happen,” Stearns said. “Only get into these deals after you have a clear idea of what can go wrong.”
Stearns said she’s now counseling her two clients about how to extricate themselves from what has become a touchy situation. Some of the options include one partner buying out the other or just selling the home to a third party and accepting the fact that they’ll be losing most of their down payment because of depressed home prices.
Stearns’ clients wanted to know everything about their purchase agreement and escrow instructions, she recalled. Ironically, they never made a written partnership agreement. “They didn’t want to put anything in writing,” Stearns said. But now, she said, they wish they had.
Would-be buyers or people who are thinking of co-ownership should consult their attorney and/or CPA. A less expensive resource is “The Living Together Kit.” The book, which includes sample partnership agreements, costs $17.95. It can be ordered by calling (800) 445-6656.
