Buying property with friends or family can make home ownership more achievable, but it also creates important legal and financial obligations. Before buying, consider whether to own the property as joint tenants or tenants in common, how each person will contribute to costs, what happens if someone wants to sell or can no longer make payments, and how each owner’s interest will be dealt with if they die or want to sell. A co-ownership agreement can document each owner’s rights and responsibilities and establish a process for managing changes or disputes.
What should you consider when buying property with friends or family in Australia?
Our Commercial team discuss this important topic.
Summary
For many Australians, buying your next home is feeling increasingly out of reach.
With property prices rising and borrowing capacity limited, more people are looking at ways they can buy their next home. The idea of a family compound just might be on the cards.
Buying with friends, or family, can make property ownership more achievable. It means being able to get into the property market sooner and share the costs with someone else.
But buying with someone is a significant financial and legal commitment.
Before signing on the dotted line, it is worth thinking about not just how you will buy the property, but how you will own it and what happens if things change down the track.
Quick takeaways
- Buying property with friends or family can make property ownership more achievable but creates a long-term legal and financial relationship between co-owners.
- Joint tenants own the property together without defined individual shares. When one joint tenant dies, the other automatically becomes the sole owner of the property.
- Tenants in common each own an individual share of the property, which can be equal or unequal. This share can be sold to a third party , but whether someone unconnected to the other owners will want to buy this interest is another question.
- A co-ownership agreement can set out how the property will be managed and what happens if one owner wants to sell, stops contributing or otherwise wants to leave the arrangement.
Joint tenants or tenants in common?
One of the first decisions to make is whether the property should be owned as joint tenants or tenants in common. This decision can affect your rights, interests and share of the property.
Joint tenants
As joint tenants, owners do not have separate specified shares in the property. Each joint tenant has an interest in the whole of the property, regardless of how much you both may have contributed.
The key feature of joint tenancy is the right of survivorship. If one joint tenant dies, their interest passes to the surviving joint tenant or joint tenants. This is typically the arrangement when someone buys a home with their partner.
Being in a joint tenancy makes it very hard (ie. it requires a court order) to sell your share if you wanted to exit the arrangement later on.
Tenants in common
Tenants in common is where owners own an individual share in the property. Those shares can be equal or unequal. For example, two people could own a property as tenants in common in equal 50% shares, or one person could own 60% and the other 40%.
This can provide greater flexibility where the parties are contributing different amounts towards the purchase or have different intentions about their ownership of the property.
A tenants in common share in a property can be sold to a third party. However in practice it is unlikely that someone unconnected to the other owners will want to buy that interest as they will be required to jointly own the property with someone else.
Importantly, there is no right of survivorship between tenants in common. If a tenant in common dies, their individual share generally forms part of their estate and can be dealt with under their Will.
Why might tenants in common be appropriate when buying with others?
There is no single ownership structure that is right for everyone.
However, tenants in common can be useful where people are purchasing property together and they want to own a defined share of the property and have control over what happens to that share.
For example, imagine two friends purchase a $1 million property.
One contributes $300,000 towards the purchase and the other contributes $200,000. They may decide that their ownership interests should reflect their respective contributions, rather than simply owning the property equally.
Tenants in common can offer more flexibility in separate ownership interests.
However, the ownership recorded on the title is only one part of the arrangement. You need to also consider how the property will actually be managed during your ownership.
What happens when circumstances change?
When you buy a property with a friend or family member, it is easy to focus on the purchase itself. The more difficult questions often arise several years later.
- What happens if someone wants to sell?
- What happens if someone can no longer afford the mortgage?
- What happens if someone wants to move out?
- What happens if the relationship between you breaks down?
These are not necessarily signs that the arrangement is destined to fail. They are simply circumstances that can arise during a long-term property investment.
A well-considered co-ownership arrangement should anticipate these possibilities.
A Co-Ownership Agreement Can Help
Choosing an ownership structure does not, by itself, answer all of the practical questions that can arise between co-owners.
This is where a co-ownership agreement can be useful.
Depending on the circumstances, an agreement can address matters such as:
- each owner’s ownership percentage;
- contributions;
- mortgage repayments;
- rates, insurance and other outgoings;
- repairs and maintenance;
- renovations and improvements;
- whether the property can be rented;
- what happens if an owner wants to sell;
- whether another owner has the first opportunity to purchase the interest of the person who wants to sell;
- what happens if an owner stops making payments;
- what happens if an owner dies or becomes unable to contribute;
- how disagreements will be resolved; and
- when and how the property may ultimately be sold.
The agreement should reflect your specific arrangement.
What should you consider before buying with someone else?
If you are considering purchasing property with friends or family, you should consider:
- Your ownership structure: whether joint tenants or tenants in common better reflects your circumstances and intentions.
- Your respective contributions: including the deposit, mortgage repayments and ongoing expenses.
- Your long-term plans: including whether everyone intends to live in the property, rent it out or treat it as an investment.
- Your exit strategy: what happens if one person wants to sell or can no longer participate.
- Your estate planning: particularly where the property is held as tenants in common.
- A co-ownership agreement: setting out everyone’s rights and responsibilities before the purchase proceeds.
Need Advice?
Buying property with friends or family can be an exciting opportunity, but it is important to consider the legal and practical implications before committing to the purchase.
Our commercial lawyers here at HHG Legal Group can assist with advising on the appropriate ownership structure and preparing co-ownership agreements that set out the rights and responsibilities of each owner.
So, if you are considering your next family compound, consider obtaining legal advice before signing the Contract to help ensure the arrangements reflect your understanding.