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Buyer Beware - Partnership Homes

Aug 31, 2008
Even though realty prices have dropped recently, it can still be difficult to get started on your own. This is one reason why some home buyers share their first investment in realty. Usually this joint venture will be with a friend or with a 'common-law' type partner. In either instance a break in the friendship can make things difficult, as can a sudden change in the original set-up by one of the partners.

For instance, one of you may lose their job and can no longer afford the planned renovations; another scenario is that one of you decides to move in the fiance which obviously was not the original set-up. Perhaps the finance pushes up the power bill by having long showers twice a day and spending all evening cooking. Or maybe there is a personality problem - whatever the problem, it had not been anticipated or legislated for in the contract.

When buying with a partner, real estate deals always start off with the best of intentions. It is an exciting thing to be buying your first home and everyone is agreeable to everything. As long as the status quo can remain the same, the partnership will likely flourish.

When entering a joint deal like this, the rules are usually a 50/50 financial split and no arrangements are made formally for changes to occur. When an ownership split such as this is entered into, it means that losses are also divided in this way. Under the tenancy in common contract that you will govern your sale, all partners must own an equal percentage.

One of the difficulties of being in a partnership is that all decisions must be shared. This will mean that some compromises will have to be made by each of you. One of the first steps to initiate, either when or before you buy jointly, is to make sure that you do- at the very least - have a financial contract showing that all the expenses of the home are split 50/50.

This mean the houses taxes, the home insurance, the repairs, the mortgage payment and any other expenses, as well as living expenses are shared 50/50. Or, if one of you is doing all the cooking, for instance, and the living expenses deal is 40/60, then put this in writing.

The 40/60 split can only apply to the living expenses, as the value of property must always be held in equal percentages, e.g. if there are four home owners they all must be invested into the deal for 25% each. This is a legal requirement, not a choice.

A formal contract about the money side of it is a must. This will avoid the "well, I did all the labor to get the wooden flooring in, so I will put in less cash this month" type of argument. It is not that this 'labor for rent' system is a bad idea; it is just that it is not something that can be sprung on a partner.

If you have a financial contract in place, you at least have a legal starting point for any changes that you do not like and that you need to address. It is abit of a stretch to use the financial contract to ask a fiance to leave (who would be so brave?), but on the other hand, it may be that your contract wording will help.

For instance, if it says Fred Smith and Joe Bloggs are the joint tenants who will share all costs 50/50, then this means that a fiance is only a temporary guest. If it says all costs will be shared by the tenants and names are not specified, you will need to address whether the fiance is a rental tenant regarding living costs, (in which case a fair share must be paid).

However, an additional tenant in common who will participate in profit and loss distribution cannot be added without a whole new re-assessment, sale and contract.

Unfortunately, anything like this can sometimes ruin the pleasant atmosphere in the home, and often, should such problems arise, the partnership will be dissolved and the home sold. Since this would mean that you would not be able to 'choose' the best time to sell your house, and you may have to drop your profit margin with a rush sale, it proves that the best policy is to wrap a home owning partnership in a water-tight contract!
About the Author
Philadelphia Real Estate Guide: Find Rittenhouse condos and real estate for sale. Easy-to-use search and neighborhood info from Todd Levinson, Philly Buyer's Agent.
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