Buying property with friends can be a risky investment
By AdvocateDaily.com Staff
Toronto’s inflated housing prices have forced would-be homeowners to get creative when it comes to finding a place to call their own, including teaming up with friends, says Toronto real estate lawyer Matthias Duensing.
He uses the example of a group of four young friends — all single and tired of renting, but unable to afford a home on their own.
“By pooling their resources, the four millennials exemplify new opportunities in affordable living,” says Duensing, principal of Duensing Law.
“This innovative approach is something that we will probably see more often, but it makes the financial considerations much more difficult,” he tells AdvocateDaily.com.
Before proceeding, Duensing says the friends should have open and frank discussions about credit scores, spending habits, and outstanding debts.
“They should disclose everything. Be upfront now to avoid future trouble,” he advises.
Duensing also cautions that friendships are not automatically subject to any regulating laws on the dissolution of property.
“That needs to be explicitly outlined in the legal protocol. Many people do not consider what will happen to their investment when someone wants to leave the group,” he says.
“Everybody in the group really should have their own legal adviser to represent their interests,” Duensing says.
Independent legal advice is crucial because each person is in a unique situation and may be contributing different amounts towards the purchase of the property, he says. If it isn’t an equal partnership, each person’s ownership shares should be calculated so that when the property is sold, the money can be divided using the same ratio as each person’s initial investment.
“Knowing exactly what each person is accountable for is also vital in negotiating the mortgage,” Duensing says, suggesting that payments should be based on the percentage of their ownership.
He says a lawyer can help negotiate mortgage terms.
“When people are shopping for mortgages, they may not be aware that many terms are negotiable with the bank or lender,” Duensing says. “For example, in a traditional arrangement for a married couple, both individuals are equally responsible for the entire amount of the mortgage. Lenders like this because if one person loses the ability to pay, they can still retrieve payments from the other person.”
Duensing says a lawyer can also help broker a better deal.
“Try to get terms that allow each co-owner to be on title for a percentage based on their contribution to the purchase price. Alternatively, determine an amount that everyone will be responsible for. This will be useful to determine ahead of time because traditional mortgage terms — usually favourable to the bank — will apply.”
He says it’s also important to work out exit strategies for co-owners.
“When someone wants to get off title, lenders often make it necessary for the remaining co-owners to re-apply for a mortgage. This is not always in their best interests, as they often have to re-qualify.”
And things can really get complicated if one of the parties dies, says Duensing.
“There are many things to consider. Was it a joint tenancy? Does the group have the first right of refusal? Is there an ownership agreement that outlines how to retrieve your share in the investment?”
He says the estate may force a partition and sale of the property.
“I highly recommend drafting a co-ownership agreement,” Duensing says. “It forces people to consider unusual situations before they happen. When you commit to living with someone, and owning property together, you are tied together for the long term. It’s a risk. Relationships fail.”
He says it’s best to work out all contingencies in advance, during the honeymoon phase.
“For example, it’s very helpful to know who will do the chores, how to pay for emergencies, and what is the guest policy.”
A lawyer will navigate participants smoothly through the process, and ensure that each party’s interests are protected, Duensing says.