For some would-be homeowners, teaming up with others could be the best way to crack the real estate market. Geri Forsaith, licensed conveyancer and founder of Sydney Property Conveyancing, explains the legal issues you need to be aware of.
Despite the recent drop in interest rates and housing prices, many would-be homebuyers still find it difficult to break into the property market. But by pooling resources with friends, family or even compatible acquaintances, it’s possible to get a toehold in the property market sooner rather than later.
While buying a property with friends might seem fun at the start, but when circumstances change and one partner wants out, things can turn messy. Here are two of the most common risks:
1. Future home loan affordability is affected. Having responsibility for a loan jointly with others may make it harder to get a future loan for another property as affordability is assessed on an individual’s income. If one co-owner wants to buy a second property, the bank will take into account that first loan – but they’ll assess the whole loan as that borrower’s responsibility.
2. One owner wants to sell up. Problems can also arise if one co-owner wants to sell when the others don’t and you may end up in court which can be expensive and stressful. The party opposing the sale bears the onus of dissuading the court from ordering a sale. If a co-owner doesn’t wish to sell, the court will look at whether the land is easily physically divisible and also at the costs of subdivision. The court will also look at hardship on the minority if the greater benefit to the majority were to prevail.
Minimising the risks
It’s essential that you obtain advice from your conveyancer/solicitor before purchasing with another buyer, as everyone’s situation is different.
When setting up the legal side of things, it’s best to approach the process with the worst-case scenarios in mind. Even though it might seem a little depressing, you have to decide what will happen to the property if you break up with your partner for instance, or have a falling out with the other owner.
Step 1. Your legal will
Make sure you get a will drawn up by your solicitor to show who will inherit your assets. If you already have a will, ensure that it’s updated with the new property details.
Thought should also be given to whether or not the co-owners give each other a Power of Attorney if one of the co- owners becomes incapacitated.
Step 2. The Co-ownership Agreement
In order to avoid disputes between co- owners, it’s a good idea to draw up a Co-ownership Agreement to cover every conceivable issue. Costly disputes can be avoided if these issues are considered and solutions are agreed upon before the property is purchased.
The agreement doesn’t have to be complex, but it will require you to have rules and agreements worked out in advance – this is crucial. For example, co-owners may agree that if one wishes to sell, the other co-owners have first right of refusal to buy their share.
Things to be considered should include: • a sinking fund should be set up to
cover repairs and for periods when the
property is vacant
• the agreed time to hold the property
• a plan to pay for unforeseen
• how various insurance issues will be
• taxation/depreciation and capital gains
tax issues clarified
• on the sale to another co-owner, how
will the sale price be determined
• who determines the rent and the tenant • contribution of deposit and/or cost of
• which of the co-owners will live in the
property and on what basis
• how sale proceeds will be distributed and why a sale would take place and
how to resolve disputes
A Co-ownership Agreement should be arranged before purchasing and deciding which ownership structure to take (Step 3).
Step 3. Co-ownership structure
This is where you’ll need to decide whether you’ll set up the property under a Joint Tenants or Tenants in Common co- ownership structure. The differences are a vital consideration.
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