Buying a property with someone else is a great way to share the fun, stress, and cost of the venture. Often people buy a house with their significant other, to make a home or invest together. Others buy property with friends, relatives or business partners. Joining forces with someone else can increase your borrowing power, and pooling savings can bring a deposit within reach.
However, there are pitfalls to buying a property with someone else. It is better to think about these issues up front and take steps to ensure that everyone is protected. This article takes a look at the top 3 things that people need to consider before becoming purchasing a property with someone else.
1. Asset Structuring – Joint Tenants or Tenants in Common?
One of the fundamental questions that you need to consider as a co-owner is how the property will be held.
During a purchase, buyers are asked if they want the certificate of title to be held as “joint tenants” or “tenants in common”. It is important not to rush this choice. It has a significant effect, and everyone involved needs to be comfortable with the decision.
a) Joint Tenants
The most common form of ownership is joint tenancy.
This means that both people own the property, and neither can sell their “share” to a third party.
If either person dies, the property will automatically belong solely to the surviving owner. In that case, it is not possible for one of the owners to leave their share to someone else in their Will.
Joint tenancy is common for couples who own a family home together, but it is not the right choice for every partnership. Some couples, for instance, may wish for their share of a home to benefit their children rather than their spouse, particularly if they have children from a previous relationship.
b) Tenants in Common
In contrast, if a property is held as tenants in common, the owners each possess a distinct share in the property.
If either person dies, their share can be bequeathed through a Will to someone other than the co-owner. This share can also be mortgaged or sold (with or without the consent of the other co-owner/s).
One of the advantages of co-owning property as tenants-in-common is that the shares can be held unequally. For example, imagine that 3 siblings decide to buy a property
- they can hold the property equally (i.e. each having 33%); or
- if one sibling contributed more than the others this additional contribution can be reflected in an unequal holding (i.e. if one sibling puts up 50% of the deposit, it may be fair for them to own 50% of the property, while the other siblings who contributed nothing up-front (but who will contribute to the mortgage and ongoing costs) each hold 25%).
c) Mix of Joint Tenants and Tenants in Common
It is also possible to have a mix of joint tenants and tenants-in-common.
For instance, if a couple decide to pool their resources with a friend to buy a property, the couple can be joint tenants while the friend is listed as a tenant-in-common.
This means that if one of the couple dies, their partner will receive their share of the property, while the ownership of the friend remains unchanged.
2. Potential Issues of Buying with Someone Else
Unfortunately, the best laid plans do not always work out. Relationships break down, people die, are sued, and go through bankruptcies. Any of these circumstances can complicate the co-ownership of a property.
a) Death
Broadly speaking, joint tenancy is the best arrangement for couples who want their partner to own the whole property if either of them die. The right of survivorship applies but requires an application to the Registrar of Titles to ensure that the surviving owner is recorded solely on the certificate of title.
b) Separation
On the other hand, a joint tenancy can be a burden if a relationship breaks down. Neither person can make decisions about the property without the other, so it forces the separated parties to work together to take actions such as selling or renting the home.
After separation, it is necessary to deal with the property, whether this involves selling or refinancing it into one person’s name, or even just applying to sever the joint tenancy.
c) Bankruptcy
People at risk of bankruptcy or being sued sometimes think that holding property in joint tenancy will protect the asset. This is not correct.
A court can order a joint tenancy to be severed, the ownership apportioned equally between the owners, and the share of the property owned by the debtor sold.
3. Benefits of a Co-Ownership Agreement
Whether a property is owned as joint tenants or tenants-in-common, it can be very useful to have the additional protection of a co-ownership agreement. This agreement is essentially a contract used by people who buy property together.
A co-ownership agreement sets out each owner’s rights and obligations and should also include provision for what will happen if an owner wishes to sell or mortgage the property. A well-drafted co-ownership agreement can help avoid disputes in the first place or help guide the parties to resolve any dispute that does occur.
This information is for general purposes only, and we recommend you obtain professional advice relevant to your specific circumstances.
If you or someone you know wants more information or needs help or advice regarding purchasing a property, please contact us on (03) 9592 3356 or email office@citypacific.com.au or fill in the web contact form here:
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