If you’ve been in the rental market for a while you can relate to the feeling that you are just throwing money down the drain without building any equity. If you want to get into the real estate market but you don’t have the funds to do it on your own, an increasingly popular solution is property co-ownership, an agreement between two or more people to share ownership of a property. By pooling your money with another person you may be able to more easily afford a down payment and increase your borrowing power. Co-ownership also gives you the option to move out of the property and use it as an investment property, or to sell out if you decide to end the co-ownership agreement.
Before making this decision, it’s important to understand all of the potential risks and benefits as well as the the legal aspects. Many of the risks of co-ownership can be taken care of by drawing up a solid co-ownership agreement, so a good property lawyer is vital. Things can change drastically over the life of a mortgage and you are going to want to have a rock-solid co-ownership agreement in place.
Let’s look at the big benefits first. First of all, you can get into the property market for a fraction of the cost. That’s a pretty big selling point. One of the hardest things to do when buying alone is saving up enough for a deposit, stamp duty, legal fees, building and pest inspections reports and more. In can take years and years. Also, property ownership can be expensive. As a co-owner you can split costs of things like mortgage repayments, rates, renovations and repairs. You’ll even be able to pay off your mortgage at a much faster rate. Co-ownership knocks down so many of the barriers that stop buyers from getting into the market, so it can be a very appealing option.
It sounds great doesn’t it? But, now it’s time to consider the risks. What happens if you and your co-owner have a disagreement about the property? If one of you decides to sell their share the other will be forced to raise the funds necessary to buy the other person out or be forced to sell their share of the property whether or not it’s what they really want to do. Also, if one of the co-owners defaults under their finance agreement and misses repayments both parties credit scores are affected unless the other steps in and contributes to the defaulting party’s share of the mortgage. That’s a big responsibility.
Also, you need to consider what would happen in the occasion of a disagreement. Some disputes that can arise could involve if/when to sell the property, if/when to refinance the home loan, whether a party can be bought out or not, how to distribute income generated (for investors), how to manage costs involved with the property, repaying the mortgage and managing finances. A co-ownership relationship involves a considerable amount of trust and consideration. You want to choose a co-owner who’s going to be on your team.
Legal Aspects of Co-Ownership
Now that we understand some of the risks and benefits, let’s look at some of the legal aspects. Co-ownership is legally referred to as a ‘tenancy in common’, which in Australia’s property law allows two or more people to own a property together. A co-ownership agreement outlines the rights and obligations of the co-owners, or as they are known “tenants in common”. You don’t necessarily have to choose to own equal shares; you can own different percent shares. The agreement your property lawyer draws up will set out all the parameters and details of your co-ownership. This agreement will allow each party to fully understand the terms of the deal that you are entering into when it comes to mortgage repayments, percentage of ownership and exit strategies in the occasion that one of you wants to sell-out. Making things crystal clear for both parties can help eliminate misunderstandings are disputes in the future.
Another important thing to understand before going into a co-ownership agreement is the difference between co-ownership and joint tenancy. Something you may not have thought of is what will happen to your property in the event of a death. If you are a co-owner you can leave your share of the property to whoever you nominate in your will instead of having to leave it to the co-owner. If you are a joint tenant, you don’t own part of the property as an individual, you own the entire interest of the property together as a unit, so you can’t nominate a property heir. If one person passes away, their share is passed onto the remaining owner instead of other beneficiaries. This is an important thing to consider when deciding which option is best for your individual situation. In the tragic event that something should happen to you, is the person you are buying property with your preferred beneficiary or would you want it to be someone else?
Now that we’ve explored all the aspects of co-ownership, you can make sure you make the right choice about entering this kind of agreement. Choose your co-owner carefully and write a clear contract that outlines all the details. By being prepared and considering possible future changes in circumstances and creating exit strategies you protect yourself and your co-owner you can open the door to the exciting world of property ownership and building equity.