What You Should Know about Buying a Home with a Friend

Today Redfin launched Redfin Shared Search, a new feature that makes it easy for people buying a house together to share and comment on their favorite homes. The tool will come in handy for the 76% of Redfin clients who buy a home with their spouse, but it’s also useful for people who are buying a home with a friend.

There are many reasons you may consider buying a home with a friend. If you are already living with roommates, it could make sense to pool your resources for a down payment and mortgage instead of continuing to pay monthly rent. With home prices and rents on the rise around the country, the idea of buying a home now and starting to build equity is very appealing, especially if you are planning to put down roots and stay in a specific area for several years.

While these arrangements can make a lot of sense for some people with aligned interests, there are many potential snags and challenges to consider before entering into a real estate partnership. Before you sign on the dotted line, make sure you ask the right questions and take the necessary precautions to protect your friendship and your finances.

Treat the Arrangement Professionally

The first rule is to treat the purchase as a professional endeavor from the start. Sure, your friendship may be casual, but your real estate partnership should be serious and thoughtful. Even if you are purchasing a property with a sibling or other family member that you trust implicitly, this advice still holds true. By separating your personal and professional interests, you will be better able to avoid conflict that can ruin a relationship. The more each owner treats the endeavor like a business, the better.

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Review Your Finances

Entering into a business venture with someone is not the time to be shy about finances. All parties should be prepared to openly discuss credit scores, savings, monthly income, outstanding debts, retirement funds and any other relevant financial information. This information will determine what type of financing you will need and how much each party can contribute. If you are not comfortable divulging your salary to a friend, it is a warning sign. If you cannot be upfront in the beginning, how will you be able to honestly and transparently work through issues that arise down the road?

Set Clear Expectations and Ask the Right Questions

It is important to have discussions at the outset about your expectations now and in the future. Even if you live in harmony with someone as a roommate, it does not necessarily mean that person will be a compatible co-owner. Try to think through every possible scenario and lay out a plan. Don’t leave the decision-making for when the home is hit by a tornado or a co-owner suddenly loses his job. The less left up to interpretation, the better. Consider the following questions:

1. If you plan to occupy the home, what are the rules for daily living? You should agree on expectations for pets, cleanliness, overnight guests, smoking and hosting parties. Even issues that seem mundane at first can become significant when you’ve invested your life savings into a home.
2. How will you pay for repairs and other home expenses? Will you hold some funds aside in a shared account for unexpected repairs? Who will perform maintenance on the property?
3. Who will pay the mortgage, tax bills, utilities and other payments? What is the protocol if one owner misses a payment? Who will claim the tax deduction?
4. How will you handle it if one person invests his or her time and sweat equity into home improvements? Will these efforts be reflected in the ownership stake and how will the value be assessed?
5. What is your outlook on upkeep and renovations? When you make updates to the home, do you opt for high end or are you looking for a frugal fix? Does your co-owner share your philosophy?
6. What is your estimated time frame? Do you expect to live in the home for five to seven years and then think about renting or selling? Or do you envision a longer-term situation? Does this align with your co-owner?
7. How will you handle the situation if one person has to move due to a job change or wants to start a family? Will the owners allow significant others to move into the shared property?
8. Consider a loss scenario. While the market has rebounded over the past couple of years, it is important to talk through what will happen if the home depreciates or the owners must sell at a loss.

Get Legal Advice and Then Get It In Writing

Talking through these issues is vital, but it’s best to seek the counsel of an experienced real estate attorney when it comes to signing on the dotted line. An attorney can help you address any outstanding questions and help draft a legal document that meets your specific situation.

The contract should clearly document the proportionate amount of each person’s financial interest in the property, division of maintenance costs, responsibilities of the parties, a process for dealing with disputes and procedures for equitable dissolution of the partnership.

Determine How You Will Hold Title

An attorney can also help you determine the best way to take ownership of the property, which is called holding title. How you choose to hold title impacts how you can transfer ownership and what happens in the event that one owner passes away.

In joint tenancy with right of survivorship, each owner has equal rights to the property as a whole. If one owner dies, that person’s share automatically passes to the co-owners of the property, not to the heirs of the deceased.

Tenancy in common allows multiple people to hold equal or unequal portions in a property. In tenancy in common, all owners have the right to independently sell, give or will their share of the property at any time. If friends hold title this way, it is preferable to have a written agreement among owners specifying how one can transfer interest in the property.

It’s often beneficial for friends to create a Limited Liability Company, or LLC, to make the purchase and manage the property. Within this structure, the co-owners can sign an operating agreement that governs decision-making and property management as well as how an owner can sell or transfer his or her individual ownership. As part of an LLC, the co-owners are also more insulated as individuals from liabilities that may arise from the investment.

Have an Exit Strategy

Regardless of how you hold title, your contract should specifically outline how the partnership will be fairly dissolved. When one party wants to move or sell, will one owner buy the other out or will you sell the property? Consider requiring a notice period of two to three months in the event that someone has to leave. You may want to establish procedures for an appraisal to determine the value of the home and divide your assets equitably.

Buying a home with a friend (or two) can be a great way to get onto the property ladder and begin building equity, but the road to success is fraught with potential snags. Small matters can escalate quickly when money is involved, which is why open and honest communication is critical from the outset. Owning a home can be an incredibly rewarding experience. With the right friend, you can have a trusted partner with whom to share the experience and reap the benefits.

About Matt Russell
Matt joined Redfin in the summer of 2012 and is currently a senior agent in Montgomery County, Maryland. He has closed over 60 deals for Redfin and is an expert in multiple offer situations. He believes that a strong client relationship is essential to the home-buying process. In addition to helping clients find homes and negotiate contracts, Matt educates potential buyers through Home Buying Classes and mentors new agents through the Redfin Agent Development program.