Joining forces with a sibling or friend to rustle up the cash to get into the property market seems like a good idea, in principle.
But while the benefits of co-ownership can indeed be substantial, many people enter into the deal without fully understanding the complexity of the situation, which can end up ruining relationships.
Miriam Sandkuhler, author of the book Property Prosperity – Seven Steps to Investing Like an Expert, likens the experience to signing a prenuptial agreement.
“Everyone’s friends until money’s involved and then it changes everything,” she says.
“When emotion comes into it no one thinks rationally and things just spiral out of control.”
Ms Sandkuhler says co-ownership can provide a great opportunity to dip your toe in the property market as long as both parties are on the same page.
“As a means of getting your foot in the market it’s a good idea. However, you have to set ground rules before actually going through with it.”
A recent survey conducted by ME bank revealed ‘co-buying’ is proving popular among younger first home buyers.
According to the survey, 14 per cent of buyers have purchased jointly with parents and 12 per cent with other family members.
About four per cent bought a place with friends.
Luke Easton, general manager of lending products at ME bank, says the trend is growing.
“From our point of view it’s something that we’re increasingly seeing as being a tactic that people are using to get into the property market.”
How to avoid heartache
Mortgage broker Geoff Schippers says problems can be avoided with an upfront discussion and by putting parameters in writing before any purchase is made stipulating each individual’s objectives.
The length of the investment should be first item on the agenda.
“If that’s not discussed and agreed on you may get a situation where one person outgrows the other or their circumstances change more quickly.”
Mr Schippers says conflict usually arises when one party wants to exit the agreement and the other doesn’t.
It’s a view shared by Michael Sloan, managing director of The Successful Investor.
He says the plan can come unstuck when one of the siblings gets married and wants to a buy a house in their own right, or their financial circumstances change.
“You’ve got to have an agreed exit plan. That plan is, in five years time, either one can go to the other and say I want to sell and the other one has to agree.”
The difference between Joint Tenants and Tenants in Common
Typically for married couples, joint tenancy refers to people who are regarded as jointly owning a property together.
The land held as joint tenants is subject to law and if one of the tenants dies the property goes to the other person.
With tenants in common the landscape gets a bit tricky.
It is particularly significant in the case of co-ownership, where people that own different shares need to ensure their portion is taken care of.
“They need to remember for a start that they should have a will to determine what happens to their share if they die,” explains conveyancer Leonie Jarrett.
Problems down the track
Many people who have entered into a co-ownership arrangement are unaware of the hidden impacts that can crop up.
A pair of siblings could take out a $400,000 loan to purchase a house, each of them technically owing $200,000.
However, banks and lenders look at the situation differently, recording the loan as $400,000 for each individual to protect themselves.
This can put some people at a disadvantage when they decide to buy another property and go to apply for a loan and they are unaware the bank is taking the full amount into account.
“Some banks will treat each party as owing all the money,” Mr Sloan explains.
“So the total loan is $400,000 and it’s between John and Mary and John goes into the bank to get a loan in his own name because he’s met this lady.
“The banks says to John well you owe $400,000, we’re going to assess you on the full amount because if you’re sister doesn’t pay her half you have to pay it.
“This can be a real stumbling block. That’s when John turns around and says to Mary I want to buy a house with my wife and I can’t because of this loan we have together … I want to sell. And she doesn’t.”
Is it a wise decision?
As long as it’s handled correctly, co-ownership can be a win-win situation for all involved.
The key is to ensure a clear agreement is put in writing to avoid any issues down the track.
“Whilst people might invest together, ten years down the track life circumstances might change or a partner comes on board and they want to get married or exit out,” Ms Sandkuhler says.
“So an agreement needs to be put in place to point to what will happen when one party wants to exit even when the other doesn’t.
“Get clear on your goals and objectives and what the other person is trying to achieve. If those things don’t match then don’t do it.”
Mr Easton says internal feedback at ME bank suggests more people are considering buying with family and friends.
He recommends people get proper legal advice and agree on their objectives.
“There are some good benefits to joint ownership. It can allow you to borrow more and buy a property that you couldn’t in your own right. It may also enable you to buy a property in an area that you might not be able to afford.”