Should Co-Buyers Have a Shelter Prenup?

Buying property with friends, relatives, and partners (romantic or not) may make financial sense–but what happens if you break up?

When you crave a home of your own and want to get started on the homeownership ladder, the idea of buying property with your best buddies, your favorite sibling, multiple generations of relatives or a partner is enticing.

Combining resources for the down payment and monthly housing costs can be a smart move, but it takes more than just pooling funds to make co-buying work. A “prenuptial” agreement similar to those signed by both partners before a marriage could help.

“Potential co-owners should discuss every possible issue they can think
of and put as much of it in writing as possible,” says Aaron Sokolow, a managing partner with Battino & Sokolow in Washington, D.C. “Perhaps most importantly, they should agree upon what happens if there is a dissolution of the relationship. Does one party get to buy out the other? If so, at what price? Does the property get sold and the proceeds split? There are many ways to deal with these issues, but having an agreement on the front end can save a lot of stress and money on the back end.”

The relationship dynamic should determine if co-buyers need a “prenup,” says Derrick Nutall, vice president of Citi Mortgage’s Community Lending Team. * 

Many co-buyers opt for a complete division of all mortgage obligations such as principal and interest, taxes and insurance, and homeowner association fees, he says.

“The division percentage would be based on what each party considers fair,” Nutall says. “Regardless of the dynamic, all parties involved should come to an agreement on how the costs will be handled. Doing so after the fact is a recipe for disaster.”

Why Buy Together

Co-buying may be the right strategy for buyers who may not have all the required resources to purchase a home or investment property and need another party to help facilitate the application process in order to achieve a successful transaction, Nutall says.

“The most common benefit of co-buying is the economics,” Sokolow says. “It can be difficult to afford the purchase of anything more than a condo unit if you are alone, but if you split the costs with another person you can enjoy the benefits of homeownership before you may otherwise be able to afford it.”

However, Nutall warns, there’s a definite downside to co-buying, which is “knowing that this is an arrangement that can be terminated at any point and whose resolution can be quite difficult and problematic.”

How to Buy Together

Legally, it’s typical for co-buyers to choose between tenancy in common or joint tenancy ownership options. Tenancy in common means you can divide ownership shares however you want, according to Experian. Also, you don’t have to get approval from your co-buyer to sell your share–which could be a problem if your best buddy doesn’t want you to sell your share to a stranger. In addition, the ownership share goes to the heirs of a co-buyer who passes away.

Alternatively, with a joint tenancy agreement, all owners have equal access and an equal stake in the home, regardless of how much they pay. You need approval before you can sell your share of the house, and if a co-buyer passes away, their share goes to the other co-buyers.

It’s best to discuss those options with an attorney to make sure each co-buyer’s rights are protected.

“In circumstances where there is no romantic or marital relationship, the prototypical arrangement often is based on a 50/50 division of all mortgages and home associated costs,” Nutall says. “The ownership percentage is not set in stone; perhaps one party made a more significant contribution to the down payment or the mortgage payment itself.”

This is a business arrangement between all parties involved, he says.

“A split arrangement ensures an equitable distribution of both the underlying asset, the home (if and when it is sold or transferred), and the financial costs associated with purchasing and maintaining it,” Nutall says.

Qualifying for Co-Buying Financing

Since co-buying among friends, relatives and partners is common, most lenders can handle a mortgage application from two or more borrowers.

“More borrowers on the application will require more collective paperwork of course, but that is to be expected because each buyer will have their own income and asset documentation,” Nutall says.

It’s best for all buyers to discuss the process with a lender before starting a loan application so they can understand the nuances of financing a property together.

“Lenders typically determine the credit risk based on the profile of the borrower that earns the most, basically viewing that borrower as the primary for the transaction,” Nutall says. “Which borrower is viewed as the primary can also have an impact on the pricing that is offered because their credit score will likely determine what is available for the transaction.”

Clarify Responsibilities in Advance

Whether you want to drill down to who does the dishes and who scoops the kitty litter is up to you, but at the very least, it’s important to establish a system for managing ongoing expenses as well as unexpected repairs before settling into your new home.

“Whenever co-buyers are involved, having an agreement that outlines the division of responsibilities is essential for a smoother homeownership experience,” Nutall says. “Beyond the obvious expense such as the mortgage payment (including taxes and insurance), there is also the cost of maintaining the property as well as any improvements that will be considered. These are just starting points, as there are additional considerations to address, such as purchasing appliances and decorative items.”

Sokolow says many of his clients establish a joint bank account to pay all joint expenses.

“The co-owners can contribute to the account equally,” he says. “This helps make sure all expenses are paid on time and in a fair manner.”

What To Do When It’s Over

Without an actual written agreement in place, the process of dissolving co-ownership of a property can be messy, Nutall points out.

“Ending the co-buying arrangement will often require one party to buy out the other,” he says. “Without written protections for each participant, this process can turn into a legal quagmire due to the questions that may arise, such as whether the buyout is based on the original mortgage amount or purchase price of the home, or on the amount of equity in the home.”

Ending the arrangement will likely require the remaining buyer to refinance the property to remove the departing buyer or buyers from the mortgage and title to the home, too, Nutall says.

“Though different from the romantic/marital ownership structure, the co-buyer dynamic will share a common thread – commitment,” Nutall says. “Each party must be committed to not only the purchase process, but also the ownership process. ‘Prenups’ provide a level of protection for the involved parties should they decide to go their separate ways. This process can be extremely difficult and emotional, somewhat similar to determining custody in a divorce, though of course not the same.”

*Please note that the information provided by Nutall is for general guidance only and should not be considered legal advice. Individuals considering co-buying should consult a qualified attorney to ensure their rights and responsibilities are fully protected.

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