Tips for Purchasing a House With a Pal to Save on Rent

Many twentysomethings who are tired of renting are joining up with friends to buy homes. But the risks and complications of buying property are heightened in an arrangement where two individuals are linked by nothing more than a deed and a mortgage.
By: Diana Ransom: The Wall Street Journal Online
Kelly Furlong is fed up with renting. After sending a sizable chunk of her pay to her landlord each month, the 25-year-old sales professional in Springfield, Va., has decided she is "making someone else rich."

But she doesn't have the financial resources to swing a big down payment and hefty mortgage payments on her own. So she and a longtime friend are now looking for a house that they could buy together, Ms. Furlong says, "because it's way too expensive to do on my own."

Like most home buyers - even in this dicey market - Ms. Furlong and her friend are banking on the home appreciating in value over time.

They also seek tax benefits in being owners rather than renters: People who itemize their tax deductions can deduct payments of mortgage interest and property tax.

But buying a home is risky - in part because it's a large investment that can take a lot of time and expense to sell. And in an arrangement where two individuals are linked by nothing more than a deed and a mortgage, the risks and complications are heightened.

So Many Questions

Say your co-owner gets a job transfer to another state. Do you sell the home? Do you buy your partner out or bring in a new co-owner? And what if you don't even like a prospective replacement housemate?

If you're the one who decides to move on, meanwhile, getting your cash out of the deal may be more complicated than if you owned a home on your own and immediately put it up for sale.

If you and a friend buy a home together, real-estate brokers and attorneys generally recommend you do so as "tenants in common." In that way of holding property, you can each sell your interest individually and choose who will inherit your interest if you die. Depending on how much you each have to invest, the split could be 50-50 or whatever you decide.

But there is something else to consider on a joint purchase: Tenancy loans are typically shared, meaning that if one owner balks at paying, the other one is liable.

Plan to accompany any such purchase with a legal agreement between the two investors, typically called a tenancy-in-common or TIC agreement, that spells out how you will handle various contingencies. Figure about $1,000 in legal fees for that agreement.

Among key points, the agreement should spell out how expenses including the mortgage and tax payments will be split. The agreement should also cover how you will proceed if and when one of you wants out.

Get an 'Exit Strategy'

You need "an exit strategy," says Andy Sirkin, a real-estate attorney in San Francisco.

Typically, the agreement provides that when one owner wants to leave, either the house will be put up for sale or the remaining owner must buy the other out at a price based on the property's appraised value.

Another option would be for the departing individual to sell his or her share to someone else.

Typically, the remaining owner would have the "right of first refusal," or first dibs at buying the other's share. In case you don't want to buy your co-investor out, and you want the ability to approve a new co-investor, put that in the agreement.

Consider jointly funding a reserve account, with enough cash to cover one or two mortgage payments along with a little extra for emergencies.

Not That Color!

Property usage rules are also key to the agreement and your sanity. If you don't like orange paint, here's your chance to say so.

Spell out a method for resolving disputes. To avoid expensive court proceedings, co-owners typically choose either mediation or arbitration.

"You absolutely have to have an agreement," says Clifford A. Hockley, a real-estate broker in Portland, Ore.