Tips to avoid misunderstandings with a property ownership agreement.
Money Girl
306 MG How to Buy a Home With Someone Else (Part 2)
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In this episode, you'll learn how to create a property ownership agreement that prevents future misunderstandings and protects your finances, no matter what happens in your relationship. Buying a home or investment property with a domestic partner, friend, or business associate can be very exciting, but it's also a serious leap of faith. What happens if you don't agree on how to manage the property? What if one person has an unexpected financial hardship and can't pay the mortgage or wants to sell out? What if your romantic relationship turns sour and you break up? These are the kinds of issues that need to be worked out when you commit to buying real estate with someone else. Otherwise, you risk getting into fierce arguments or even a lawsuit down the road. The best way to avoid problems is to create and sign a property ownership agreement before you commit to a real estate purchase. While anticipating every possible disagreement with a co-owner might be impossible, especially when the future looks bright, there are five major issues to flesh out in a property ownership agreement. Number one, ownership percentages. These must be determined if you take title as tenants in common, which I covered in part one of this series. So be sure to go back and listen to episode number 305 if you need clarification. You can create ownership splits based on how much money you contribute to the purchase, but that isn't required. For instance, if you decide that one owner will be responsible for maintenance, he or she could receive 60% ownership, even though you both pay 50% of the down payment. The second issue for your property ownership agreement are ongoing expenses. These are regular costs and unexpected repairs that are just part of life as a homeowner. You'll be responsible for monthly mortgage payments, property taxes, home insurance premiums, utilities, and many other maintenance costs. So specify how you'll allocate them and who will remit payments. If you contribute more to the down payment than your co-buyer, perhaps he or she could pay for all the expenses until you're caught up. Then you could split all costs down the middle going forward. Another option is to divide costs in the same percentage as your ownership shares or down payment contributions. And if you own a vacation property with someone else, you could split expenses based on the amount of time you spend there each year. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans or travel. Planning ahead is crucial in life, especially when it comes to what happens when you're gone. 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Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixl.com/moneygirl. Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. The third consideration for your property ownership agreement are tax benefits. These can really add up for a home. You can claim tax deductions for certain expenses, such as mortgage interest, mortgage insurance premiums, property taxes, and purchase points. However, to claim mortgage-related benefits, you must own the property, be legally responsible for the debt, and be able to prove that you actually paid the expenses. If you aren't on the mortgage or don't have a legal agreement that shows you're accountable for the debt, you won't be entitled to the mortgage interest deduction. So consider how you'd compensate a partner who doesn't qualify for money-saving tax deductions when another partner does. It's a good idea to consult with a tax accountant for help when it comes to sharing tax benefits for a home owned with someone who isn't a spouse. The fourth topic to cover in your agreement is called encumbering. This is when you use your interest in a property as collateral for a loan. Since tenants in common can use their interest as security without consent of co-owners, that could lead to big trouble if one owner doesn't pay their debt. Therefore, I recommend that your agreement prohibit owners from encumbering the property without getting prior approval of all owners. And the last topic is selling out. This can be the most difficult part of owning real estate with someone else. What if your relationship ends, or one of you wants to move cross-country for work, or you discover that you don't like the neighborhood after all? It's a good idea to have protections in place if you want to keep your home, but a co-owner wants to sell. That's because a co-owner doesn't need your approval to sell or give away their interest in a property. For instance, let's say Jay and Lisa are tenants in common with 50/50 ownership. Lisa wants to move out, so she quietly sells her interest in the property to her mother. Jay, he's not happy about that. If Jay and Lisa had had an ownership agreement giving him a right of first refusal to purchase her interest, then he would have had the opportunity to buy Lisa out. Also, consider how you'll decide on a sale price if one owner buys out another, or you put the property on the market. No matter if you buy a home on your own, or with a partner, always view it as a business decision, and consider what would happen if you absolutely had to sell a property in one year. It's easy to get swept up in the beauty of a home, its decor, its neighborhood, or the new lifestyle that you envision there. But take a step back and view every real estate purchase as an investment, even if it's going to be your home sweet home. To read a transcript of this show, connect with me on Facebook or Twitter or sign up for the free Money Girl newsletter. Visit the Money Girl page at quickanddirtytips.com. This is episode number 306 called "How to Buy a Home with Someone Else?" Part 2. I'm glad you're listening to change. That's all for now. Courtesy of Money Girl, your guide to a richer life. H5N1 bird flu is spreading in some animals. If you work with poultry, dairy cows, wild animals, or with raw, unpasteurized milk, wear protective gear, and take precautions, cdc.gov/birdflu. A message from CDC. A Capella University learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think with Capella University. Learn more at Capella.edu. [BLANK_AUDIO]