Co-buying a home? Focus on the big picture.
People ask us a lot of questions about co-buying a home. We hear one question in particular from friends, family members, and unmarried couples: “how does co-buying work?” It’s a valid question. Teaming up to buy a home is a big decision. There’s a lot of money involved, and it’s not your typical home purchase. We like to look at the big picture and then break it down.
Folks often focus on the purchase. But the transaction is just the start. Buying a home is not the end goal: the real objective is successful co-ownership. Success involves some combination of financial and social return on investment with minimal stress.
In this post, we break down the joint home purchase into three parts:
- Co-buying a home (transaction)
- Co-owning a home (partnership)
- Exiting (sale or transfer)
Thinking about the big picture — and the full co-ownership lifecycle — helps you exercise better decision making from the start. This approach will save you time, money, and stress. It also makes it more likely that you enjoy yourself.
Co-buying is a complicated version of a complex transaction.
Buying a home is difficult. It takes four and a half months on average and involves twelve or more parties. Unlike coffee or oranges, homes are not commodities: each one is different. Consequently, buying and selling homes isn’t a straightforward affair. And buying a place is expensive! The majority of buyers take out a mortgage to fund their purchase. The lenders who originate mortgages are regulated, but the mortgage industry isn’t famous for being transparent or focusing on customer well-being. For context, a recent survey found that one in four homebuyers reported signing documents that they didn’t fully understand. All these factors combine to make buying a home a complicated and often stressful experience. For 40% of buyers, the process represents the “most stressful event in modern life.”
Co-buyers face additional hurdles. Today’s home buying process caters to traditional buyers’ needs — married couples and individuals. Without a framework or specialized guidance, it’s tough for co-buyers to build consensus, manage logistics, and secure joint financing. Even the best real estate agents and loan officers are poorly-equipped to address co-buying and co-ownership. They lack the relevant experience and the incentives to meet these needs, and it’s just not their job.
Co-ownership is similar to a business partnership.
The period of co-ownership is the main event. It starts when you close on the property and can be a short-term, medium-term, or long-term arrangement. Co-ownership has many of the characteristics of a business partnership. As co-buyers, you’re jointly contributing financial capital and assuming liabilities to invest in a real asset. That asset also provides shelter as a service. On closing, you become co-owners. It’s almost as if the purchase process was a warm-up. Did you stretch?
Like a business partnership, your co-ownership arrangement needs planning, structuring, and management to thrive. It’s sensible to go through these exercises early by starting with an open and transparent dialogue between the parties involved to discuss roles, rights, and responsibilities. Aim to develop a plan for handling finances, payments, and day-to-day management. One aspect of planning that people overlook is risk management. How will you handle unexpected scenarios–including unpleasant scenarios? Ignoring risks does not eliminate them. By considering and jointly deciding how you would manage different risk scenarios, you protect your investment, relationships, and home.
Getting everything in writing and engaging an experienced attorney is also a good idea. This exercise has multiple benefits. First, it helps ensure everyone is on the same page about important aspects of your co-ownership arrangement. If there are any issues where you and your co-buyer(s) don’t see eye to eye, you want to identify them early. This way, you can either reconcile your differences or decide that co-buying together doesn’t make sense. Second, it protects everyone involved. In the absence of a written agreement, a dispute between co-owners can end up in litigation. Everybody loses in this scenario. Lawyering up is expensive: to get the ball rolling can cost $50,000. Ahead of resolving a dispute, which can take many months, you can’t sell the property. Friends, lovers, and close family members are not immune. Finally, getting things in writing creates peace of mind. It frees up mental capacity for risky pursuits that are fun, like skydiving.
Exit: think about your strategy ahead of time.
Eventually, your co-ownership arrangement will conclude through death, sale, or transfer. The sample space of possibilities is larger for co-buyers versus traditional buyers: a married couple that divorces benefits from an established legal framework. Things can get messy, but there are well-developed processes for handling the splitting of assets in this case. Co-owners don’t have the benefit of an established legal framework to protect their interests.
We recently conducted a survey at CoBuy in which we polled U.S.-based adults who intend to co-buy a home within two years. As part of this survey, we asked respondents to indicate which aspects of co-buying and co-ownership most interested them. “Exiting co-ownership” came in dead last, with only 40% of those surveyed showing an interest in the topic.
The ideal exit scenario involves a friendly sale or transfer of ownership interest by one or all co-owners. But death, sickness, job loss, job transfer, change in life circumstances, disagreement, or one co-owner simply wanting out can throw a spanner in the works. Thinking about how to handle these possibilities early in the game is crucial. We sincerely hope that 60% of co-buyers who aren’t thinking about an exit strategy already have a well-defined plan to cover all their bases. Our experience suggests this is unlikely.
The key to co-buying is thinking big picture.
We understand the tendency to emphasize the purchase. Who doesn’t want to get the keys to their new dream home? At the same time, you don’t want to drive the wrong car off the lot. And in this case, it’s not just a car! And you’re not the only one involved.
Co-buying, co-ownership, and exiting are connected. These three stages of the co-buying process are distinct but not separate. When you approach the process from a big picture frame of mind, you and your co-buyer(s) will be better off.
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