Buying a Home with Friends Can be a Legally Complicated Transaction
What you should know about working with clients who choose this unusual avenue to homeownership.
A small but growing share of home buyers is forging an alternative path to homeownership that is ripe for potential legal consequences: purchasing a property with friends. With affordability near an all-time low, it’s easy to see why some consumers, unattached to family or a partner, would consider such an arrangement prudent. However, these transactions likely will introduce legal issues you wouldn’t typically have to address with clients who are married or buying with family members.
You may not be seeing the trend of friends purchasing homes together in your neck of the woods just yet. There’s a likelihood, though, that you will soon. Only 2% of buyers in 2018 described themselves as “other,” meaning they could be in an unmarried romantic relationship or an alternative family relationship, says Jessica Lautz, vice president of demographics and behavioral insights at the National Association of REALTORS®. “Marriage rates in the United States have dropped while, at the same time, home prices have increased, so buyers are finding unique ways to enter homeownership,” Lautz says. One result of this trend, she adds, is the share of unmarried couples purchasing homes with roommates is increasing.
While the process of buying a home with friends is similar to purchasing with a partner or alone, there are specific aspects of this type of sale on which you, as the real estate professional, should be able to offer guidance. “The most important thing is for the friends to be on the same page on legal issues and to have everything in writing,” says NAR Senior Counsel and Director of Legal Affairs Chloe Hecht. The major issues that could have legal implications include:
- How will the down payment be split?
- In whose name will the mortgage be?
- How will the title be held?
- Will the ownership stake be equally split?
- How will decisions be made about repairs and improvements?
- How can one of the owners exit the partnership?
- What happens if one of the owners passes away?
“It’s also important to understand how your state’s laws could impact the partnership,” says Hecht, who recommends consulting with a real estate attorney to ensure the buyers have a comprehensive agreement about the joint purchase.
The piece of the puzzle that may cause the biggest legal concerns is the plan for transferring ownership in the event one friend wants to exit the partnership. ”The parties may want to consider allowing the person who is staying a right of first refusal to purchase the other person’s interest in the property they jointly own,” Hecht says. “Related issues to consider are how the parties will determine a fair market value for the house and what happens if the person staying can’t afford to purchase the other’s interest in the house.”
Beyond legalities, the decision-making process also may be trickier between friends than partners or family members, says Stacey Schalk, associate broker at Berkshire Hathaway HomeServices in Northglenn, Colo.
Couples, for example, usually have a firmer understanding of what they want in a home, while friends may need more time to come to an agreement, she adds.
In cases of friends purchasing together, Schalk recommends sitting down with the buyers to firmly establish what’s important to them in a home, including which spaces they’re willing to share, such as the kitchen, family room, and outdoor area. Friends may also need help figuring out how to equitably cover utility bills, maintenance costs, and expenses for common home goods. Shalk says that while it’s exciting to consider living with your best friends, practitioners need to look beyond their clients’ initial enthusiasm about such an arrangement to figure out what the friends really require in their spaces.
Some real estate professionals have been on the consumer side of a transaction with friends and struggled with the process. Daniele Kurzweil, a sales associate with Compass in New York, says she was a silent partner when she bought a single-family home that was converted into a two-family home with two of her friends in 2011. Kurzweil says she was confident she was making a solid investment but left specific decisions, such as the location and finishes of the home, up to her friends. Kurzweil contributed to the process by helping her friends understand the types of renovations they should undertake versus a major project. “I trusted that my friends would make the right decisions. Had I tried to get involved, it would have been a distraction, and nothing would have gotten done,” Kurzweil says, describing the transaction as having “too many cooks in the kitchen.”
Kurzweil and her friends didn’t draw up legal documents describing their ownership stake in the property, though they have since formed an LLC and are figuring out how to clear legal hurdles as they go. Kurzweil says she wouldn’t advocate a property purchase with a friend before asking yourself a few questions:
- Would you trust your friends to do the right thing, with or without a legal document? (Spoiler: You should always have a legal document in place when purchasing with friends.)
- If, for some reason, you were unable to make a decision regarding a problem with the property, would you trust your friends’ judgment?
“If your answer to either of these questions is no, then making it legal with a contract won’t change things,” Kurzweil says.
None of this is to say that buying a home with friends is necessarily a bad idea. But the possible legal and personal ramifications cannot be understated, says Jake Lizarraga, a writer for REITS.org, a website dedicated to helping people understand real estate investment. ”For those who don’t qualify for a mortgage on their own, it’s a great idea,” he says. “For those who wish to keep a friendship, not so great.”
Lizarraga likens buying a home with friends to going into business with friends: The individuals must agree on a vision moving forward for the arrangement to work. However, it’s likely with friends that, eventually, they’ll have different visions—which can sour the relationship quickly. Then again, it’s always possible that a home purchase with friends can lead to a lifelong partnership.