The decline in mortgage rates over the past few years, along with the long-standing perception that real property is a good investment, has contributed to an increasingly-large pool of potential buyers - those who want to co-own a residence with an unmarried partner. Many of these are committed couples who are looking to cash in on the advantages of home ownership (like tax deductions and the anticipated appreciation in value); others are merely friends or acquaintances who want to share ownership of a vacation property they would otherwise be unable to purchase on their own.
It is certainly possible that unrelated people can co-own property without a formal arrangement between them, without incident. But a savvy couple or group of friends will address the contingencies ahead of time, by entering into a written agreement which sets out their ownership rights and provides for an equitable distribution of the property in the event of any number of circumstances.
Commonly called "co-ownership" or "co-tenancy" agreements, these documents address relevant issues which might otherwise plague such a relationship, since there is no forum for their resolution other than a partition action in a state district court. (In a partition action, a judge will order the property sold, and the judge, not the co-owners, will decide how to split the proceeds.) These issues include:
- How the percentage ownership is to be divided between the parties. If the investment is equal, the split will also likely be equal. But if one party contributes more of the down payment or purchase price than the other, or commits to paying more of the mortgage, then the percentage ownership can be adjusted to match.
- How the maintenance and repair issues will be addressed. For example, if the property is not part of a common interest community, then the owners themselves will need to budget for large-ticket maintenance or repair items; do they want to set up an account and fund it with monthly contributions from all owners, or simply make an "assessment" when a major item needs repair? What if an "assessment" goes unpaid by one party (either intentionally or because of financial difficulty)? The agreement can address those contingencies so that no ambiguity exists.
- How title will be held. Although most married couples choose to own property in "joint tenancy" (which vests title immediately in the surviving spouse without the necessity of passing through a probate estate), most unmarried people, particularly those casual friends who jointly own property, will instead choose the "tenant in common" form of ownership (which passes the deceased's undivided interest in the property to his or her probate estate). What happens upon the death of a tenant-in-common co-owner should be addressed, since it's likely the estate would want to have the property sold.
- How the property will be used. If it's a residence shared by the co-owners, then presumably both would be entitled to full use of it. Vacation ownership is necessarily more complicated, and is usually accomplished through charts which address weeks of usage. In addition, whether rentals of the vacation home to third parties is allowed should be addressed, since some co-owners may anticipate that, having purposely entered into the relationship with friends, they won't be sharing their "second home" with strangers.
- Who has the authority to encumber the property. Careful institutional lenders will insist on all titleholders signing a deed of trust. But it is possible that one co-owner could grant a security interest in the property, either intentionally (through a deed of trust) or unintentionally (through a tax or judgment lien). Although such a lien wouldn't attach to the non-signing owners' interests, it would nevertheless create countless headaches and likely, legal fees, in order to resolve the issue.
- Who can decide to sell, and when. Normally these agreements provide for a "right of first refusal" so that when one party wants out, the other is given the opportunity to buy that interest. The sales prices can be either a function of the market (the appraised value) or a fixed price, if the sell-out is early in the relationship. The proceeds of a sale are normally divided consistent with the percentage ownership of the property, after all expenses from sale are paid.
- How the monthly mortgage payments, and other monthly expenses, will be paid. Some co-owners set up common bank accounts on which checks to cover the joint expenses are written, and then contribute to those accounts each month. Others will each write a separate check to the lender, as well as separate checks for a portion of the utilities, phone, etc. Remember that the failure of a co-owner to pay his or her share of the monthly mortgage, if that failure results in a foreclosure, will negatively impact the credit rating of every person who signed the promissory note (although it would not affect the credit rating of co-owners who had not signed that note, even though they are in title to the property).
No one goes into a co-ownership relationship with the expectation that it will "crash and burn." Nevertheless, even with parties on excellent terms, it is a certainty that eventually one co-owner will die, or the property will be sold. When that happens, it's best to have all contingencies covered so that the expectations of the participants are met and everyone goes away happy . . . which makes for another co-ownership arrangement for the next investment!
Karen J. Radakovich is of counsel with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm.   Her practice areas include Real Estate, Bankruptcy, Finance, and General Law. She can be reached at contact Karen Radakovich.
Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.