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Is Co-Ownership Right For You?

by:
Editorial Staff

 

Co-ownership is becoming a popular trend in homeownership as many families struggle with expensive cost of living. Salaries have dropped on average, carrying multiple debts has become the norm, and home prices have increased, even when adjusting for inflation. 

For most adults who want to buy a home, their salary simply won’t cover the cost – unless they split the mortgage with someone else, and that’s where co-ownership comes in.

Co-ownership allows you to purchase half (or any fraction) of a property in conjunction with another party. Some choose to live with their co-owners, such as two families who might purchase a duplex together and live one on either side or in the case of family members or close friends who choose to live together under the same roof.

Alternatively, co-ownership may be an option for those looking to make real estate investments. Two parties can purchase a property which they then put up for rent, and split the profits when they’re ready to sell the property at a higher price. In the meantime, both collect half of the rental income.

There are any number of possible arrangements, which is one of the reasons a co-ownership agreement needs to be carefully considered before taking the plunge.

On one hand, the flexibility of a co-ownership mortgage gives you more buying power and provides more options for achieving homeownership. On the other, that flexibility comes with a price: there are a higher number of possibilities for things to go wrong.

Many people believe they don’t need formal agreements for these arrangements, trusting that their relationship with their co-owner is strong enough to forestall any problems. But even those who rent a home together sometimes find they have irreconcilable differences that make it a burden to share a space.

Major Pitfalls of a Co-Ownership Arrangement

The biggest problems with co-ownership lie in failure to communicate and financial instability. Being up front about any existing debt problems is essential to a successfulc-ownership agreement. 

Co-owners need to set down, in writing, the agreed-upon parameters of the arrangement, including who will live on the property, how living arrangements will be split up, and what the responsibilities for upkeep will be.

Many people believe they don’t need formal agreements for these arrangements, trusting that their relationship with their co-owner is strong enough to forestall any problems. But even those who rent a home together sometimes find they have irreconcilable differences that make it a burden to share a space.

Add the permanence of a long-term mortgage and the increased cost of repairs and maintenance, and you have a recipe for real problems between co-owners if you haven’t agreed on the arrangements ahead of time.

The second major issue is financial instability. If one of the parties cannot make their half of the mortgage payment for whatever reason – even an entirely unforeseeable one – the other party is in the frightening position of being liable for the total payments on a property.

The entire property is foreclosed upon if half of the mortgage goes unpaid every month, even if the other party is paying their half. Both parties need to be very transparent with one another about their financial status and what they intend to do in case of an unexpected loss of income to avoid putting one another in a bad position.

What will you do if only one of you wishes to sell the property?

What You Should Ask Before Signing a Co-Ownership Agreement

What follows is a substantial, but incomplete, list of considerations when entering into a co-ownership agreement. You’ll want to carefully think out the way you’d like to handle all of the applicable issues and be sure they’re included in the contract between you and your co-owner.

Buying the House

  • What is each co-owner’s interest in the property? (For example: you might split it 50/50)
  • How will closing costs and taxes be paid for, and in what percentages?
  • Do both parties have an emergency fund? Create a budget that accounts for emergencies. When will you use those funds?
  • Who will pay for property insurance? What type of coverage must each co-owner have?
  • What are the arrangements if one of the co-owners dies unexpectedly? Will life insurance be part of the arrangement?
  • What are the arrangements if one of the co-owners cannot pay the mortgage? What if one co-owner must file for bankruptcy or re-finance their half of the house?

Maintaining the House

  • Who will pay for utilities? In what proportion will each co-owner pay them?
  • Who will pay for necessary maintenance and upkeep?
  • How will the co-owners decide which maintenance is necessary?
  • How will emergency repairs be paid? What will you do if one of the parties can’t pay right away?
  • Will you be making any property improvements to increase the value of the home? How will you decide on these improvements? Who will pay for them?

Renting the House

  • How will co-owners agree on a tenant?
  • How will co-owners agree on a rental price?
  • Who will pay for utilities in the event that the tenant vacates?
  • Can both owners pay the full cost of the mortgage in the case of a tenant being delinquent?

Living in the House

  • If you are living with the co-owner, what will the living arrangements be?
  • Will there be parts of the house and/or grounds that are only open to one or the other owner? How will you agree on when you are allowed to be in one another’s spaces?
  • Are there any house rules that are important to either of you? (Possible house rules include no pets, no smoking, or no houseguests unless agreed upon in advance)
  • How will household chores be divided? How will outside chores like lawn maintenance be divided?

Selling the House

  • What will you do if only one of you wishes to sell the property?
  • Will you offer your co-owner the right of first refusal? (This means that if you choose to sell your half, you must first offer to sell it to your co-owner, and vice versa. It is also worth discussing whether there is a set price for such an offer – for example, you wouldn’t want your    co-owner proposing an astronomically high price for sale so that it was out of your ability to purchase.)
  • If both of you would like to sell the property, how will you divide the profits?
  • How will you set a price for your house and agree on which offer to take?

We've been providing professional credit counselling for Canadians for 50 years and we’ve seen co-ownership agreements that cover all of the above and more. Co-ownership isn’t to be entered into lightly, but with solid communication and openness about your respective finances, it can be a viable option for those seeking alternative methods of achieving homeownership.

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