Everybody’s Buying a House with Friends—How Complicated Is It Really?
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With home prices and mortgage rates remaining absurdly high, purchasing a home isn’t in the cards for many aspiring buyers. In Bankrate’s 2024 Down Payment Survey, more than half of the respondents reported they couldn’t afford a down payment. So pooling money with a friend—or a few friends—to purchase a home is becoming a popular option. In 2023, 14 percent of buyers purchased a home with a friend, according to Zillow research. Some people are teaming up to buy a house to live in together, while others are buying houses with friends purely as an investment, to rent out and generate extra income, or to flip for a healthy profit. While co-buying has its perks—namely being able to afford a home that you couldn’t buy on your own—it’s a fairly complicated process that doesn’t always end well. Here are the five steps you need to take for a smooth transaction.
Choose Your Friends Wisely
Your college roommate (or tennis partner, coworker, drinking buddy…fill in the blank) may be a perfectly nice person, but it’s important to do some due diligence before entering into a financial partnership with a friend. Jody Fay, a real estate attorney in New York and Connecticut with the Kelsey Company, suggests contacting a local title company to run a judgment and liens search, a litigation search, and a bankruptcy search on your prospective partner. This may cost you a few hundred dollars, but you never know what kind of skeletons someone may have in their closet. It’s also a good idea to run a credit check, although the other party needs to agree to this (and if they don’t, consider it a red flag). If you’re applying for a mortgage, you don’t need to be as vigilant about these searches since lenders will be digging into both of your financial histories.
Also, make sure you and your friend are on the same page about the home. “For example, if the plan is to renovate a home for resale, are both parties on board with the cost and timeline needed to make the necessary changes? What if there are unanticipated expenses beyond the initial budget? What if the house doesn’t sell in the expected time or with the desired profit margin? It’s important for anyone going into a real estate investment to flesh out all of the ‘what if’s’ to hopefully avoid conflict and maintain a friendship,” Caroline McCay, a senior wealth strategist at CIBC Private Wealth, says.
Define Your Goals
If you plan to use the home strictly as an investment property and rent it out, Fay recommends creating an LLC for this residence. An LLC protects you and your co-owner from liability if a tenant gets injured on your property. The downside to LLCs is they are associated with higher interest rates—but the peace of mind is worth the extra money, and an LLC also comes in handy in the event your friend stops paying their share of the mortgage. With an LLC in place, you won’t be on the hook if your co-owner defaults on their portion.
Apply for a Mortgage
Mortgage lenders are willing to lend to friends buying homes together. “You apply for a joint mortgage, but each person still fills out their own separate application,” Michael DeSantis, executive board member of The National Association of Mortgage Brokers, says. Here’s how it works: The mortgage broker gathers each person’s financial details (income, credit, assets, etc.) and inputs this information into the loan system. Then the lender looks at the group as a whole to determine if you qualify. If everything checks out, you get approved for the loan together.
Tenants in Common vs Joint Tenancy
This is done surprisingly late in the game—usually in the contract phase or at closing—but it’s arguably the most important decision you make when buying a home with a friend. The difference boils down to what happens to your share of the property upon your death. In a tenants in common agreement (TIC), your share would be passed down to your beneficiaries. In a joint tenancy, your co-owner automatically inherits your portion of the house. “Unless you are buying a home with a family member, you would probably not want to do joint tenancy,” Fay says.
Work Out the Details
Who gets the house on Thanksgiving? Who pays the electric bill? These are the kinds of questions that should be addressed in a legal document that both parties sign at the closing called a side operating agreement. “There’s a whole host of additional considerations beyond just the financial ones including how often each person (or family unit) will get to use the property and dates for usage; how and who will maintain the property; how should ongoing expenses be divided; and what will happen if one owner wants out?” McCay says. If your friend decides they want to sell their share of the home, and you can’t afford to buy your friend out, they can sell their share to anyone they want, which means you may end up sharing a home with a stranger—so this is especially important to address in an official agreement. Creating a legal document that details the nuts and bolts of the partnership will prevent potential hassles and falling-outs between friends. After all, homes are bought and sold, but, ideally, friendships last forever.
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