Friends in deed
Donna EDMONDS thought she had realistic expectations when she started looking two years ago for a $500,000 house.
“I just wanted a place on the Westside that was not worse than my apartment,” said Edmonds, who was outbid by $30,000 to $60,000 each time she made an offer.
After commiserating with friend and neighbor Debbie Basch, who was house-hunting in the same price range, the two decided to try co-buying a duplex so that they could broaden their search to $1 million.
“We’ve both been looking for such a long time,” Edmonds said. “It’s the kind of market where you have to do something different, rethink the situation.”
Since the two combined forces a few months ago, Edmonds said they are feeling more hopeful about finding a place because there’s more available in their new price range.
Edmonds and Basch are among single house-hunters in the Los Angeles area eager to get in on the real estate market. Linked by friendship and bidding-war stories rather than family ties, they are pooling their resources and buying properties together.
“Buyers are getting any leg up on the market they can, and they feel that the sooner they do it, the better,” said Betty Graham, president and chief operating officer of Coldwell Banker Residential Brokerage in Los Angeles.
Only 18% of households in the state could afford to buy a median-priced house in June this year, compared with 27% in June of last year, according to the California Assn. of Realtors. A rise in rates could reduce the number of eligible home buyers even further.
“Entry into the market without equity or a large amount of cash is really difficult,” said Josh Breaux, a Prudential Realty broker in Encino who has had several recent clients, novice house-hunters, who were exploring co-ownership.
First-time buyers are also vying for fewer homes. Since January, housing inventories have averaged at or below two months in Los Angeles County, reaching an all-time low in March of 1 1/2 months. The inventory measure indicates the number of months it would take to sell all homes on the market at the current sales rate. The long-term average is 10 months.
“Because of the low rates and the improved technology for approving loans,” said Robert Kleinhenz, deputy chief economist for the California Assn. of Realtors, “we’re looking at a larger pool of qualified applicants at the same time that current inventories are at an all-time low.”
Competing with dual-income households under these conditions can be daunting, prompting some single buyers to team up with a friend.
“I was 31, so I was thinking, ‘I really need to invest,’ but I wasn’t even looking around here because I didn’t think I could afford it,” said Kelly Cheston, who bought a three-bedroom house in Lake Balboa with friend Dana Mazzochi this year. Cheston was inspired to house-hunt by Mazzochi, who was looking at townhouses in Las Vegas because she could not find anything in Los Angeles in her $160,000-to-$200,000 price range.
Although they were outbid on houses in their first-choice areas of North Hollywood and Valley Village, they both said they were confident with their purchase of a home in Lake Balboa for $374,500.
“You may have to buy on the fringe,” Cheston said, “but buying in L.A. is still a smart investment.”
Other buyers have found that co-owning has allowed them to upgrade their living standards significantly. Robert Setari was looking for a house in the $800,000-to-$1-million range when his friend Ray Nettles suggested they pool their capital and buy something together.
Their combined resources allowed them to buy a home for $1.8 million.
“We found this gorgeous house” in the Hollywood Hills, said Setari, who moved in March. “We just couldn’t believe we got it.”
The 10-year-old, five-bedroom traditional was owned by the band the Scorpions. Setari and Nettles are renovating to create a more contemporary three-bedroom bachelors’ house.
Owning and working on the house has brought the two friends closer, Setari said. “It’s like having a roommate you’re renting with, but it’s better. We’re sharing ideas about what to do with the kitchen and outside; we’re talking about all the barbecues we’re going to have. It’s great.”
But co-buyers warn that it is not a commitment to make hastily.
“You have to do it with someone you trust completely,” Mazzochi said. “Kelly and I have known each other for a number of years, and we had very good credit, so we could do 100% financing.”
Cheston and Mazzochi do not have a legally binding contract spelling out the terms of their 50-50 co-ownership, but both say they feel bound by their mortgage agreement, which imposes a prepayment penalty if dissolved during the first three years of the loan.
“We’re in this for three years together,” Mazzochi said. “After that, if one of us gets married or wants to move, they can buy the other out or we can sell.”
Lawyers suggest, however, that the commitment involved in buying property together warrants a legal agreement.
“You never know what people will want to do, so it’s always good to have some kind of contract that deals with how they hold title to the property and their exit strategy in case someone wants to sell early,” said Phil Nichols, a lawyer and partner at Pircher, Nichols & Meeks in Los Angeles. Even though it’s likely the co-owners will be friends, Nichols said, they also need to recognize that they are investment partners.
“You have to deal with what happens when one person fails to put up money for the mortgage payment,” he said. “What rights does the other party have?”
It is also important to recognize that one owner may want out earlier than the other.
Because of the potential for these types of complications, some singles who have considered co-buying have ultimately shied away from it. Ted Sun had been looking at condos for several years when he considered co-buying with a friend.
“I knew we could get something nicer than a condo -- a duplex that we could split,” said Sun of Mar Vista.
After looking for a few months in West L.A., however, Sun decided the two should not invest together because they would not have been equal investors, a relationship that made him apprehensive.
“He would have put a lot more money down but couldn’t make high monthly payments. I didn’t have much to put down, but I could make high payments,” Sun said. “I haven’t ruled out finding someone else, but this just wasn’t the right person.”
Jennifer Lisle can be reached via e-mail at jenlisle1119@aol.com.
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A binding contract -- just in case
While co-buyers are not required by law to have a co-ownership contract in place, lawyers strongly recommend it.
The best contracts, according to Phil Nichols, partner at Pircher, Nichols & Meeks of Los Angeles, include the following key issues:
* Title to the house. Nichols recommends that a contract state the parties co-own the property as “tenants in common” rather than “joint tenants.” This ensures that if a tenant dies, his share of the property passes to his heirs instead of to the co-buyer.
* Use of the house. If one roommate wants to lease out his half of the house, because of a work transfer or leave of absence, for example, it might be wise to have an agreement in place that gives the remaining roommate the right to approve the new roommate or stipulate the terms of the lease.
* Deadbeat roommate. If one roommate does not or cannot pay his or her share of the mortgage payments, there should be an agreement stating the rights of the other roommate.
“Essentially, the non-deadbeat roommate would be making a loan, and so there should be a written agreement to establish the terms,” Nichols said.
* Exit strategy. If one buyer needs or wants to sell before the other, there should be an agreement about the terms since it would be difficult for one roommate to sell a 50% share of a house.
Nichols recommends an agreement stating that both agree not to sell for at least two years, as this would exempt them from paying capital gains taxes if the profit was less than $250,000 each. They might want to stipulate that if one wants to sell then, they would have to put the house on the market.
-- Jennifer Lisle
