Co-Ownership of Real Property by Single People
These days, with housing costs out of control and marriage later in life, it is not uncommon for an unmarried couple to buy a home together. Indeed, even people who aren’t a “couple” — friends, family, etc. — may find home ownership within reach if they pool their resources and share the house with each other.
But owning real property with someone else — when they aren’t your spouse — is a big deal. You should understand the relevant law, how it will apply to you, and how you can best protect yourselves from a lousy outcome.
As you will learn, you should enter into a formal agreement (a tenants in common agreement or joint tenants agreement) with your co-owner(s).
Tenants in Common vs. Joint Tenants
Unmarried people can own property together in one of two ways: As tenants in common, or as joint tenants. They are basically the same, with two important differences.
First, when one tenant in common dies, their ownership is an asset of their estate. It will pass according to their will (or if no will, then by the law of intestate succession). In contrast, when one joint tenant dies, their ownership automatically and instantly passes to the surviving joint tenant. There is no need for probate. In this fashion, joint tenancy can be considered an estate planning tool.
Second, joint tenants must own the property in equal percentages. In contrast, tenants in common can own unequal percentages of the property. So unless each of you own the same percentage of the house, you cannot be joint tenants.
It goes without saying that you should have a pretty close relationship with your co-owner. But if that is all you have, you are courting real trouble.
How to Manage and End Co-Ownership
When married people want to end the relationship, the divorce process provides a framework for resolving all of their co-ownership, including the home. In very sharp contrast, there is just one blunt legal tool for severing co-ownership by unmarried people: a lawsuit, and specifically a partition action.
A partition lawsuit is a disaster.
Here’s another “it goes without saying”: You don’t want to end up in court. Litigation is bad. However, if you don’t do anything to manage your relationship up front, you may find you have no other choice at the end.
If co-owners agree on how to separate, there is no problem. However, once a relationship in general sours, it is unlikely that the co-owners will agree on anything. And a dispute over one’s home is not uncommon — to say the least. People get emotionally invested in their home.
So absent agreement, one owner must sue the other owner in a partition law suit. In a partition action, the court will do two things: (1) determine each party’s ownership percentage (if not agreed as 50/50, there will probably be a dispute); and (2) sell the house at a sheriff’s auction, and distribute the proceeds to the owners.
If that sounds easy, it isn’t. It is a long and drawn out process that will easily consume tens of thousands of dollars in legal fees — on each side! And the end result is a distressed sale, i.e. a sale that will not get full and fair market value for the home. So quite literally, a suit for partition is an old fashioned game of “chicken.” Eventually one of you will blink, but it is stressful, expensive, and ends up getting less money for the home. In other words, a lousy outcome.
A Tenants in Common Agreement is essential.
To avoid partition litigation, the co-owners can enter into a written legal agreement. A Tenants in Common Agreement (or Joint Tenants Agreement) will set forth the rights and obligations of the owners in regards to the property. It will provide a framework for resolving disputes if one owner doesn’t live up to those obligations. And it will provide a process for resolving co-ownership, whether by buyout or market sale.
Costs of Maintenance and Repair
The Tenants in Common Agreement will spell out exactly who is responsible for what costs of ownership. Mortgage, taxes, insurance, maintenance… it adds up! In almost all instances, the owners will be required to pay in amounts equal to their ownership percentages — but ultimately it’s up to you.
The Agreement should also spell out what happens if one party doesn’t pay those costs. Most commonly, one owner has the right to advance those costs, and will then have a claim against the other owner for that amount.
Buyout or Market Sale
More importantly, the Tenants in Common Agreement will set forth a process for ending the co-ownership. Ideally, one owner is able to buy out the other owner. But there is a reason you purchased the home together!
So the Agreement will also spell out how the property will be sold to a third party. This will include a term that will set the sale price, plus ensure regular price drops until the place sells. Because that is the only acceptable resolution.
You’re not partners, right?
Finally, the law actually provides a lot of obligations and protections for business partners. If you are buying the house with someone else, there is a risk that the law will consider you both business partners. This will complicate exponentially your efforts at separating forever. Accordingly, a good Tenants in Common Agreement will include the legalese necessary to avoid this pitfall.
We can help.
We focus our practices on residential real estate. Give any of us a call to see how we can assist you with managing your relationship with your co-owners of real estate — and head off a potentially big problem down the road.
