Co-Buying

Could co ownership be the new way of buying in today’s Toronto market?

It’s difficult to enter the market and buy a house on your own in Toronto when the average selling price is $523,000. Could co ownership be the new way of buying in today’s Toronto market?

Although it’s not unheard of in Vancouver or Montréal, co-ownership is not that common here.There was a house in Trinity Bellwoods
recently that was being sold divided up into units, which threw my buyer clients for a loop and/or scared them off. (It wound up selling as a whole) They were a little reticent to get involved because of possible legal and financial complications.

Whether you’re friends, family, or investors looking to find an affordable property, co-ownership could be the best way to get what you want at an affordable price… as long as you know what you’re getting into.

So what is it exactly?

Property co-ownership is when two or more people share the ownership of a property.

Simply put this means:

Pooling your money with others to put a deposit down on a home.
Combining your borrowing power to borrow the rest from a loan provider.
Paying off the mortgage on your home instead of paying rent (for owner occupiers) or earning a stream of rental income (for investors).
Having the flexibility to move out or sell out if you need or want to.

Advantages

Firstly, it lets you split the cost of running a home (e.g. rates, repairs and renovations).

Secondly, all the costs of purchasing a home (e.g. purchase price, legal fees, land transfer tax, home inspection reports etc) are split between the co-owners. This means you can enter the property market at a fraction of the cost you’d expect to pay if you were buying on your own.

With a number of people paying off the mortgage, you’ll usually pay your mortgage off faster.

How to Deal with Possible Pitfalls—a Co ownership Agreement

Know whom you’re investing with and have an iron clad agreement in place BEFORE you buy.  A co-ownership agreement covering all the pitfalls, drafted by an experienced real estate lawyer, can make all the difference between a harmonious business arrangement and a disastrous one.

Make no mistake, this is a business agreement and all the good intentions in the world between friends can sour once you hit an unforeseen circumstance, where money is concerned.

Treat the agreement as though you were dealing with all the worst case scenarios possible and add contingency clauses to deal with them.  Start with how you will dissolve your business relationship before you enter into it so that there are no surprises later on. I can recommend a good real estate lawyer who draft one for you, but check out what you should consider.

Things to consider:

Ownership and payments.

The kind of arrangement that’s most favoured for the situation in which friends own a home together is called “tenants in common.” The big difference from that of a married couple, or “joint tenancy”, is that if one owner dies in a tenants-in-common situation, there’s no “right of survivorship”— that is, the home doesn’t go to the remaining owner. Instead, the share of deceased owner passes to his or her family. Unless there’s a contract that states otherwise, the law views owners who are in a tenants-in-common relationship as equal owners in a property. So if you contribute more to the mortgage and to the down payment and to repairs but haven’t put it in writing with your housemate, you might lose that money if the relationship goes south and things have to be settled in court.

Deposits and mortgage payments.

If you are all putting down separate deposits for your mortgage, you need to record who has contributed each amount. If they are not identical amounts, you will need to work out the proportion of the value of the property each deposit equates to and agree, should the property be sold, how the proceeds should be split. Everyone involved in the transaction is responsible for the mortgage payments, so if one person defaults on payments, everyone is liable. Make sure you are all open and honest about any potential cash-flow problems that might impact on your meeting the collective mortgage repayments.

Expenses.

From road salt to the Internet bill. How will the expenses be split? If one person pays the bigger expenses, when does the other settle up? Determine how the expenses of the property will be allocated among the owners. Expenses include: maintenance, property taxes, insurance, utilities, loan payments and any other operating expenses.

Management and Maintenance Obligations:

Determine who is responsible for managing and maintaining the property (or the partitions thereof). Who shovels, takes out the garbage, tends to the garden?

Habits and daily life.

How will the home be split up for daily use? Who gets to throw parties when? Who gets to use the yard or parking? What’s the policy on smoking? Pets? Overnight guests? Can one owner’s unit be rented out if they want to go away for a few months?

Who makes the decisions?

This is huge. You need a decision-making process for when disputes come about…and they will. Say the hardwood floors are old and worn and one person wants to refurbish them at a low cost, while the other owner wants to replace them entirely at a much higher cost.  How do you decide? Before such disputes arise, it’s better to have an agreed-upon process on paper.What would decision-making mechanisms look like? It could be a prior agreement that you submit to mediation or arbitration if you just can’t reach a conclusion. Or, agree on a impartial third party relative or friend to help guide you to reach a mutually acceptable solution.

No “encumbering” the property.

Let’s say Party A needs to borrow $30,000 and doesn’t have any collateral except his interest in the property. He could secure a loan based on his interest in the property. But if Party A didn’t pay off the loan, a lien could be placed on the home. And though Party B didn’t even consent to using that property as security for the loan, that lien could now complicate his ability to use the property. To avoid these problems maybe neither side should be allowed to “encumber” the property in such a way without the consent of the other owners.Another way to avoid such problems is to take title of the home in the form of an entity that you create — a limited-liability corporation, or LLC — in which all parties own an interest. If the LLC owns the property, it’s not so easy for one owner to take actions that would gum up the property for another owner or owners.

Deal with the end at the start.

The right to transfer ownership of the property.  All good things come to an end. And so will this joint house — someone wants to move, someone gets engaged. So make sure you plan for the end. How will you agree upon a sale price – perhaps hire two appraisers and average their findings? If one owner wants to sell, does the other get right of first refusal? How about right of first offer (that is, an agreement to negotiate)?

Toss in a put-call provision.

This is a ripcord: It allows one owner to tell the other he wants to sell at any time, or if the other owner doesn’t want to sell, it allows the first owner the first chance to buy out the other.

Death of an Owner:

Determine each owner’s rights in the event of the death of an owner. Possible options include:

• Having the interest pass to the deceased owner’s beneficiaries in accordance with his or her estate plan;
• Giving the surviving owners the right to purchase the deceased owner’s interest in the property; and
• Having the interest of the deceased owner automatically go to the surviving owners.

Default and Remedies:

Determine each owner’s rights in the event another owner breaches its obligations under the agreement. Possible rights upon an owner’s default include:

• the right to sue for breach and collect damages;
• the right to perform on behalf of the defaulting owner and be reimbursed for the cost of such performance;
• the right to purchase the defaulting owner’s interest in the property;
• and the right to force a sale of the property.

Financing:

Financial institutions offer a variety of products aimed at home buyers wanting to jointly buy property.

RBC Royal Bank, Scotiabank, TD Canada Trust and other financial institutions offer what are known as “co-borrower mortgages,” which let friends, family and partners own a property together. Applicants must complete a co-ownership agreement and are required to buy home and life insurance.

Also talking with a reputable mortgage broker provides customer service at no cost and can save you the hassle of shopping around for the best solution for you. Ask me, and I can recommend a couple.

Buying with friends, family or business partners can be a very successful way of getting onto the property ladder, however the pitfalls can be considerable if proper care is not taken to ensure that all parties are happy and agreements are water-tight. This requires open, honest communication about a myriad of small matters that, if not dealt with correctly, can quickly and easily escalate into much larger issues. The upside is an investment that increases in value as well as a home to live in and friends to enjoy it with.

Call me at 416 805 8084 if you’d like to discuss which kinds of properties are available out there in your price range. Or, if you’re interested I’m even juggling with the idea with my colleagues to match co-owing buyers together.

The content provided is for information only. In all cases, independent and professional advice should be sought before buying, selling, letting or renting property, or buying financial services products.

Sources MSN real estate, prime location, single edition