When two long-term friends decided they would pool their resources and buy a home together instead of continuing to rent, they consulted Dean deTonnancourt, broker owner of RE/MAX Revolution in Warwick, R.I.
“While they were aligned on lifestyle, what stood out was their level of preparation,” he says. “Before beginning their home search, they had already consulted with an attorney and established clear agreements around ownership, expenses and a potential exit strategy. As a result, the transaction itself was smooth and when decisions arose, there was little friction because expectations had already been defined.”
Nearly half of prospective homebuyers (48%) say they would consider buying a home with a friend – and about 15% have done it. Buying property with friends is one way to achieve the American Dream – but it takes planning to avoid becoming a nightmare.
Co-ownership can be a powerful tool for people trying to break into a tough housing market, says Tina Reeder, a senior mortgage consultant at Priority Home Lending, an affiliate of Cornerstone Capital Bank’s national lending division in Puyallup, Wash., who helped two sisters buy together.
“Neither had the solo income or savings to secure a home in a neighborhood they liked,” Reeder says. “By joining forces, they were able to increase their buying power to qualify for a much higher loan amount. They lived in the home together for several years while the property value appreciated. They recently sold the home and split the proceeds 50/50. Each sister walked away with $150,000 in cash, a life changing sum that has allowed them both to buy their own individual homes. What started as a shared investment became the financial stepping-stone they needed to achieve independent homeownership.”
While these two stories showcase successful outcomes of friends or relatives buying a home together, in both cases the buyers took steps to avoid issues such as fighting over bills and house rules or, worse, ending up with a legal battle when they decide to part ways.
Shop Right: Focus on Long-Term Affordability
All homebuyers need to look past the upfront cost of a home to consider the long-term operating costs of a property. Affordability isn’t just about the price per square foot of a home – it includes the sustainability and resilience of the home. Buyers need to recognize how those aspects of the house play into ongoing costs, including utility bills, home insurance, repairs and maintenance, and budget accordingly.
While there are similarities to the home search process no matter who buys a home, there are differences that should be addressed from the start of the search, deTonnancourt says.
“When working with spouses or domestic partners, there is usually an assumed level of alignment with financial goals, timelines and long-term goals,” he says. “With friends, that alignment isn’t always built in. It has to be discussed intentionally.”
Co-buyers want to understand how to make the purchase work now and how to protect themselves in the long-term, he says.
“In a co-buying scenario, buyers’ priorities will focus on flexibility, having an exit strategy such as if a buyer wants out or if they decide to sell in the future, and clearly defined expectations around space, expenses and future plans,” deTonnancourt says. “The conversations are more strategic. It’s less about ‘what do we love?’ and ‘what are our must haves?’ and more about ‘what works fairly for both of us?’”
While agents don’t need to know every detail about how co-buyers will split expenses or plan for the future, they should make sure the buyers have a plan in place that’s been clearly discussed, he says.
“Where an agent can best add value is by helping to prompt these conversations early, ideally before a property is under contract,” deTonnancourt says. “Once a transaction is underway, timelines move quickly. Clarity upfront leads to smoother decision-making throughout the process.”
He suggests that buyers discuss whether all contributions are equal and, If not, how the ownership is structured. Co-buyers need to decide how repairs, maintenance or a change in financial circumstances are handled.
“It’s also strongly recommended that buyers formalize their agreement with a real estate attorney,” deTonnancourt says. “It’s not about anticipating conflict, it’s about protecting both parties and respecting the investment.”
Financing with Friends
The loan application process for co-buyers is virtually identical to the process experienced by married couples and domestic partners, Reeder says.
“From a lender’s perspective, the primary focus is your collective financial profile,” she says. “Whether you’re applying with a spouse, domestic partner or a lifelong friend, the lender evaluates the same four core pillars: Credit scores, debt-to-income ratios, assets and employment.”
It may be easier to qualify for a loan when you combine two incomes and two sets of assets, Reeder says. You may be approved for a higher loan amount and better interest rates than you would individually, but that depends on each buyer’s credit score, income and financial profile.
“Lenders don’t need to see a plan about how upfront costs and the management of ongoing expenses will be split,” Reeder says. “As for who brings the funds, that’s up to the borrowers. The lenders care only that the payment will be paid on time. In our eyes we see the co-borrowers as jointly liable.”
However, co-buyers must be cautious and take extra steps when it comes to home insurance and taxes compared to a married couple.
“Because you are two separate legal and tax entities, you’ll need to be intentional about how you report your homeownership to the IRS,” Reeder says. “If you both pay a share of the mortgage and taxes, you can both claim a deduction for the portion you actually paid. Even if the bank only sends one Form 1098 (mortgage interest statement) to the ‘primary’ borrower, the other friend can still claim their share by following IRS guidelines for "multiple owners."
Reeder recommends consulting a tax advisor for specific advice about mortgage interest and taxes.
“Tax deductions and how expenses are tracked are best addressed with a qualified tax professional, but should be discussed early in the process,” deTonnancourt says. “Insurance is another area that people often overlook. Policies should properly reflect both owners and clearly define liability and personal property coverage.”
Plan for Future Scenarios
Financial planning for the purchase should be step one when buying a home with friends, but the legal aspects of homeownership should also be addressed early and thoroughly.
“The fundamental difference between buying with friends or when you’re married is that when you’re married, there’s an exit strategy,” says Eric Teusink, a real estate attorney and managing partner of Williams Teusink in Atlanta. “Divorce is a common area of the law with a large number of practitioners. Judges are intimately familiar with the law and what is required in regard to the separation of assets. For unmarried parties, the pathway to resolution is less established. For example, if you can't come to a resolution, in Georgia, your likely only option is a partition action. There are exponentially fewer lawyers available to represent you. Translation: it will be more expensive. Additionally, courts see far fewer of these actions, which tends to slow down the decision-making process.”
One important element of an exit plan is how you hold title to the property: as tenants in common or as joint tenants with a right of survivorship.
“Unless you want all your equity to go to your co-owner upon your death, as opposed to your family, you should not own as joint tenants with a right of survivorship,” Teusink says.
Beyond a title discussion, a written owner's agreement will reduce stress and save money, he says.
“If you’re going to buy a house with someone to whom you are not married, talk to a lawyer,” Teusink says. “A solid property ownership agreement will only cost you a few thousand dollars. An equitable partition will cost you tens of thousands of dollars and your mental health.”
Some questions coborrowers should address with an attorney for a written co-buyer agreement include:
How will costs be split for the down payment, closing costs, monthly bills and repairs?
How will disputes be resolved?
What happens when one person wants to move?
What happens if one owner can’t pay their share of the bills?
When one buyer wants to sell the house, does the other have a right of first refusal?
How will the value of the house be determined if one owner wants to buy out the other?
If the house is sold, how will proceeds be divided?
“These conversations may feel uncomfortable in the moment, but having a game plan is critical for creating clarity and confidence moving forward,” deTonnancourt says.
He also recommends assembling a team with a knowledgeable lender, a real estate attorney, an experienced real estate agent and a tax professional to help ensure everything is set up properly from the beginning.
“Remember a co-ownership agreement isn’t a sign of lack of trust; it’s a tool to protect your friendship,” Reeder says. “By putting it in writing, you ensure that financial stress doesn’t end up ruining the relationship.