• Fiffik Law Group, PC

Co-Owning Property: This Could Change Your Mind

Shared ownership of real estate offers an alternative route to ownership for buyers who are otherwise unable to afford to buy on their own. But co-ownership comes with a complex set of issues and pitfalls. Before you purchase real estate with another person, weigh these considerations.

Business partners

Co-owning property with someone is equivalent to going into business with that person.

  1. Do you want to be in business with that person?

  2. Do you and your partners have shared goals for the property?

  3. Should you go into business with someone with whom you do not agree or see eye-to-eye?

You could have new co-owners without your permission

Co-owners can sell or give away their share of the property without first seeking permission of other co—owners.

  1. Your co-owner could give his or her share to a surviving spouse or children at death. Do you want to be in business with the spouse or family members?

  2. A co-owner can transfer their share to a business entity that is owned or controlled by one or more unrelated persons.

Lack of control

You will have no control over decisions relating to the property or your financial interest in the property.

  1. You have no right to sell/convert your share of the property to cash without cooperation from the remaining co-owner(s). Your co-owners are not required to “buy you out” in the even you want to “cash out” your interest in the property. It is unlikely that an unrelated person would be willing to buy your partial interest in the property.

  2. Co-ownership makes decision-making more difficult. Decisions about the property will require unanimous consent – sale of the property; borrowing money and giving a mortgage in the property; amending or signing a new lease; majority ownership does not equate to control.

  3. When unanimous consent is required, it gives the person with the least ownership interest “veto” power over key property decisions that are important to other owners. That owner may extract unfair commitments in return for agreeing to desired transactions.

Personal Liability

By owning the property in your own name, you are personally liable for all claims arising from or relating to the property.

  1. If someone is injured on the property and files suit, you will be named as a defendant.

  2. If you need to borrow money and pledge the property as collateral, as an individual owner of the property, you will be personally liable for the entire amount of the loan in the event of a default.

Increased Risk to Your Investment

By owning the property in your own name, the property is subject to claims of other persons against each owner, even if those claims are unrelated to the property.

  1. A judgment against any owner (for any reason) is a lien on the property;

  2. A judgment creditor for any owner could force the sale of the property if the judgment lien is not paid off (and the owner against whom the judgment is entered may be unable or unwilling to pay the judgment to avoid the lien).

Divorce

Each owner’s interest in the property is a marital asset.

  1. A divorce could require that an owner’s interest in the property be sold to convey a share of that ownership interest to the owner’s spouse. This may result in your share being sold as well.

  2. A divorce could result in an owner’s spouse becoming a one-half owner of that owner’s share. You get a new, unwanted business partner who may not get along with your old partner and is unwilling to cooperate with decisions relating to the property.

Loans may be more expensive

In the event you need to borrow money for the property, your ability to obtain a loan and the loan rate/terms is generally based on the lowest credit score among the co-owners. If you pick a co-owner with bad credit, it can cost you in the way of a higher interest rate.

Expense Sharing

Co-owners may be unable or unwilling to share expenses relating to the property. If you pay the expenses yourself, it may be necessary for you to sue your co-owner for reimbursement or contribution. Your co-owner may not have the finances to pay you back.

Sharing Management Responsibilities

Properties need to be managed. Dealing with renters, repairs, bookkeeping, etc. Your co-owner does not have a legal obligation to equally share in these responsibilities. If they are unable or unwilling to share these duties, you may end up bearing an unfair share on your own, without any compensation.

Estate Planning

The value of your real estate may be a significant part of your overall estate. Co-ownership makes it difficult to easily translate that value into actual cash distributable to your family. Your family probably does not want a partial interest in the real estate that you co-own. If they want to cash out, the co-owner is not required to comply, leaving your family with limited and costly options for converting your real estate interests into cash.

If purchasing real estate with a co-owner is something you are considering, we can help you better understand how these considerations affect you. One of our experienced real estate attorneys can help you put together a partnership agreement that will help you avoid the many downsides of co-ownership and get the most out of it. If you have a question about real estate, you can start getting answers here.

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