Legal contracts for shared property: what you need to know
These days, people are reacting to the home affordability crunch in different ways. One strategy people are using is to purchase property with a partner. Sometimes people seek a partnership to share costs, or to take advantage of zoning law changes that allow rental units or auxiliary buildings to be built.
But the real key to purchasing property successfully with a partner is a well thought out legal contract for shared property.
The best expert that I know on the subject of real estate law is Keith Schuman from Schuman and Associates.
Keith has more than four decades of experience in transactional real estate, and specializes in the purchase and sale of condominium and cooperative apartments, single and multi-family homes, and commercial properties. He has represented developers, owners, operators, purchasers, and sellers of industrial, retail, and residential properties throughout the United States. He also has represented landlords and tenants in commercial and residential lease transactions, borrowers and lending institutions for commercial and residential loans, co-op and condominium boards, and sponsors in the development of residential cooperatives and condominiums. Keith is particularly sensitive to the needs of first-time buyers and has extensive experience representing foreign investors. Keith assists his clients in creating limited liability companies and partnerships, helps individuals transferring their property into Trusts and LLCs, and facilitates 1031 tax deferred exchanges. Keith is licensed by the New York State Department of Education to teach continuing education classes to real estate brokers and lawyers, and has taught business law at the Cornell School of Hotel Administration.
(You might remember Keith from our previous articles on “What if only your spouse is on the mortgage or title?” and from “What does it mean to be a Guarantor?”.)
1. What sort of successful arrangements where people form partnerships to buy property have you seen in your work as a real estate attorney?
Co-ownership involves buying a home with one or more other people, such as a partner before marriage, relatives, friends, or business partner. All co-owners will be on the title and likely also the mortgage loan.
The co-purchasers must first decide how to hold title to the property. Co-purchasers will typically either take title in a limited liability company, or in the names of the individual co-purchasers, as Tenants in Common.
A Limited Liability Company (LLC) is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. Investors typically form LLCs to buy and hold property investments for financial or legal protection, tax minimization, and flexible membership.
An alternative to an LLC is co-owning property as Tenants in Common (TIC). It’s cost effective since it doesn’t require the start-up costs of forming a business entity such as an LLC, and there are no annual fees to maintain the TIC as there are with an LLC. TIC arrangements allow each co-purchaser to own a distinct, undivided interest in the property, making it easier to manage ownership shares, occupancy rights, and exit strategies.
How you decide to split ownership in the property and structure co-ownership has implications for taxes and accounting. The actions you take can affect the tax status of the jointly owned property, your personal tax treatment, and eligibility for deferral of the capital gains tax upon sale. These considerations should be discussed with your attorney and tax advisor.
2. If two parties are buying one property, what are some of the main legal issues that they should work out before they buy something (e.g. what happens in a sale, etc.)?
The co-purchasers must decide who will be a co-owner, and in what capacity they will be participating in the venture.
In addition, the co-purchasers must decide the following:
- Who will be occupying the property
- Who will be on the mortgage
- Who will be on the deed
- What are the ownership shares (percentage interest)
- How much will each person is to contribute to the down payment and closing costs
- What happens if a co-owner does not pay their share of the ownership expenses
- How are the recurring expenses (mortgage payments, insurance, real estate taxes, utilities, repairs) split among the co-owners, and paid each month
- What are the house rules if one or both of the co-owners will reside in the home
- What happens if one of the co-owners wants to move out, or sell their interest in the home
- How will the profit or loss be split at the time of sale
- What happens if a co-owner dies
These are important aspects of successful legal contracts for shared property.
3. What are some of the biggest benefits you’ve see with joint property purchases?
There are many benefits to buying property with multiple owners. By purchasing with one or more persons, you will have access to more capital and may be able to access higher value properties than you could access on your own.
Co-ownership is also beneficial from the standpoint of shared costs for large expenses like property maintenance and repairs.
4. What are some of the biggest problems you’ve seen with joint property purchases?
For all of its benefits, there is a downside to co-ownership. Co-owners may disagree on things related to the property, such as how much to spend on home improvements and when to sell. Co-owners may also disagree about usage rights, such as use of disproportionately sized bedrooms or outdoor space, along with the value of an individual’s non-financial contributions such as management, legal or accounting contributions.
A good legal contract for shared property can help reduce the possibility of problems when partnering in real estate.
5. In the case where someone contributes part of the money (down payment, contributes to repairs, even mortgage payment) but is NOT living there, what are the main aspects of a contract you’d want to have in writing?
In the case where someone is contributing financially but not living on the property, the parties should consider creating a legal agreement that outlines the terms of their financial contribution and addresses various scenarios.
Here are key aspects to include in such a contract:
- Parties Involved: Full legal names and contact information of all parties involved, including the property owner and the financial contributor.
- Financial Contributions: Specify the nature and amount of the financial contributions made by the non-resident party. This could include the percentage of ownership or a specific monetary amount.
- Ownership Structure: Clarify the ownership structure, indicating whether the financial contributor will have any ownership stake in the property and to what extent.
- Use of Funds: Define how the contributed funds will be used (e.g., for property maintenance, renovations, mortgage payments).
- Rights and Responsibilities: Clearly outline the rights and responsibilities of each party concerning the property.
- Sale of the Property: Specify the procedure for selling the property, including how the sale proceeds will be distributed among the parties. This may include the right of first refusal for the non-resident contributor.
- Refinancing: Address how refinancing the property will be handled and whether the non-resident contributor’s consent is required.
- Renting the Property: If the property is rented out, outline how rental income will be distributed and whether the non-resident contributor has a say in tenant selection or rental terms.
- Maintenance and Repairs: Clarify the responsibilities for property maintenance and repairs, as well as how the costs will be shared.
- Insurance: Specify the type of insurance coverage on the property and whether the non-resident contributor needs to contribute to insurance costs.
- Dispute Resolution: Include a clause outlining how disputes between the parties will be resolved, whether through mediation, arbitration, or another method.
- Duration of Agreement: Specify the duration of the agreement and conditions under which it can be terminated.
- Default and Remedies: Outline what constitutes a default under the agreement and the remedies available to the parties in case of default.
- Death or Incapacity: Address what happens in the event of the death or incapacity of either party.
6. In cases where someone is contributing financially AND is living on the property, what are the main aspects of a contract you’d want to have in writing and decided upon up front?
When one or more of the co-owners is living on the property, having a written contract is crucial to clarify expectations and protect the rights of both parties.
Here are some key aspects you’d want to include in an agreement between the parties:
- Names of the persons occupying the property
- The term of the occupancy: Fixed-term or a month-to-month.
- Rent: The amount of rent, due date, and the method of payment. Also, specify if there are late fees for overdue payments.
- Security Deposit: How much is to be held and the conditions for its return.
- House Rules: Any specific rules or regulations regarding the use of the property, such as noise restrictions, pet policies, guest policies, and smoking rules.
- Repairs and Maintenance: Outline the responsibilities for repairs and maintenance.
- Termination Clause: Conditions under which either party can terminate the agreement, including notice periods and any penalties for early termination.
- Renewal Terms: If applicable, include terms for lease renewal, including any changes in rent or other conditions.
- Insurance: Specify whether the occupancy is required to have renter’s insurance, and if so, the minimum coverage amount.
- Legal Remedies: Outline the legal remedies available to both parties in case of a breach of the agreement.