So you’ve decided to buy property with a friend… May 31, 2007
This is not legal advice. For legal advice, consult an attorney about your specific situation.
Many people find themselves wanting a house, but not being able to afford it by themselves. Some of these people think, “Wait a sec — my good friend ALSO wants to buy, but can’t afford it by herself EITHER. I bet we could buy a house together….” That “good friend” may even be your romantic partner (but not your spouse — that involves different legal issues). It’s a good idea, at least from a practical, “make it happen” perspective. However, you should invest the resources up front to formally establish the rights and obligations of the parties, or ottherwise you may be courting disaster.
When people jointly own property, they either own as joint tenants or as tenants in common. The defining characteristic of a joint tenancy is a right of survivorship. Thus, if one joint tenant dies, the decedent’s interest in the property immediately passes to the survivor. When the property is owned between tenants in common, each person’s ownership can be sold or will pass to the beneficiary upon death. As a general rule, joint tenancy is appropriate only for life partners who are sharing financial resources and building a life together.
Accordingly, if you buy property with a friend, you will probably own the property as tenants in common. Each tenant in common has an undivided percentage interest in the property. In other words, each tenant owns a percentage of the property but has the legal right to the entire property. The law also assumes that each owner has an equal percentage interest. However, these assumed terms can be overcome by an express agreement of the parties, which is called a Tenants in Common Agreement (or “TIC Agreement”)
As an initial matter, if you and your friend put up different amounts towards the down payment, or if you agree to pay different amounts towards the monthly mortgage payments, you may want to agree that you don’t own equal percentages in the property (although there may be other factors, such as whether one party’s credit allowed the transaction to occur in the first place). Moreover, you may want to formally agree on several other issues, such as the exclusive right to possess and use a portion of the house, or whether each party must contribute a certain amount to maintenance, or whether one party has the right to buy the other party out before the other party sells to a third person. If you do not address these issues up front, you are setting the stage for conflict with your co-owner.
If you do not enter into a TIC Agreement that addresses the issue of percentage ownership, you run the risk of losing some portion of your ownership interest that belonged to you based on a larger financial contribution. Your co-owner could file a partition action, which is a lawsuit that seeks the partition of real property among co-owners. Given that a house cannot be “split” between the co-owners, the partition action usually results in a sale of the property, with the proceeds split between the co-owners based on their respective percentage ownership. Absent a TIC Agreement addressing the issue, the court may decide that you own less than what you believe.
Moreover, conflict is an unfortunate fact of life. You should assume that conflict will develop at some point between you and your co-owner (even your romantic partner — although we like to believe otherwise, love is not always forever). If you have both signed a written agreement that addresses many of the issues that may give rise to conflict, you can turn to that document to guide you towards a resolution. This is particularly helpful where the romantic relationship has disintegrated and their are strong emotional feelings involved. So, if you’re buying property with someone else, you should strongly consider entering into a Tenants in Common Agreement.
Sphere: Related Content- Posted in : General Real Estate, Legal Issues
- Author : craig
I recently closed a transaction where my client was buying a condo in the same building she all ready owned a unit in. The new condo...
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Craig,
As a young adult, learning the ropes of Real Estate I found this article incredibly informative. In this day and age full of litigation, one can never be too careful…even when dealing with friends.
The Intern
As a realtor, I found this a great article as well. One of the clearest and most succinct explanations I have seen.
I have a question regarding Earnest Money…maybe you can help?
I live in Redmond and am purchasing a condo in downtown Seattle. I am putting quite a hefty earnest money down and have heard that earnest money over some specified amount may accrue interest payable to me, the Buyer. Is this true? What’s the amount-if I need to increase my earnest money for eligiblity I’d do it.
Thanks!
Great post. I’ve not heard of the term of “TIC”, is that the same as purchasing the property vested as “tennants in common” or “joint tennants with rights of survivorship” on the deed?
Tom,
The amount is $10,000. See the link below. I suggest you ask the Earnest Money holder what their procedure is for handling these, as your contract may have provisions that are different from the defualt under WAC 308-124E-013
A better idea would be to wait until real estate crashes here, and just buy your own house. 1997-1999 pricing is about 2 years away.
Rhonda — “TIC” is simply shorthand for “tenants in common,” so yes those two terms are synonymous. “Joint tenants (with right of survivorship — this clause is technically not required)” differ in that the interest in the property automatically passes to the surviving owner upon death (outside of probate and regardless of the provisions in any will).
Tom — it depends on who is holding your earnest money. If it’s your agent/broker, then Ardell is correct. (Ardell, you’re gettin’ DOWN — citing the WACs. Will you be taking the LSATs this summer?) If it’s escrow — I don’t know the answer to your question. Ironically, I have a case right now where I am attempting to find this answer (haven’t looked too hard yet). Hey escrow people — any input on the issue? (If so, you’ll be saving me some time…)
Marcus (the Clairvoyant) — I appreciate the certainty, but I’m a big fan of the old adage “the future is unknowable.” Regardless, the point of the post was to simply address the issue of joint ownership, not to encourage buying a home today.
Great explanation. I’ve been exploring putting together some TIC purchases for my investors here.
Sorry Craig
Did a little work on the side in an LSAT teaching business, which required me to attend the classes. Surprised you picked that up. Maybe I mentioned it in the past. I was going to take the LSAT to get my Mensa, but was advised against it. Someone said no one likes an agent who is too smart, and showing Mensa as a credential would be counter-productive. Your thoughts on that (the Mensa; not the LSAT) appreciated.
I’m sure you will agree that it is part of the agent’s job to know the WAC involved when the Earnest Money jumps from $10,000 to $50,000. We also need to know the amount the seller can keep, regardless of the Liquidated Damages Clause, as prescribed by a WAC. So sending our clients links to the appropriate WAC is not outside of our “field of expertise”, considering the boilerplate language in our contracts has some WAC references.
Craig,
One issue that comes up VERY often is purchasing in contemplation of marriage. Many couples purchase a property just a month or two, or even the week before, the wedding. Often all of the monies are coming from only one of the two for the downpayment.
I always recommend both legal and tax advices in that case, given a TIC could result in a taxable gift. Also, even if they DO get married and stay married for a long time, whose property it was at time of purchase could make a huge difference in a divorce settlement, regarding separate vs. joint property.
While this particular post primarily involves both individuals being needed to qualify for the house, there are significant issues when buying jointly in anticipation of marriage, when the income and assets needed only belong to one of the two parties.
I never need to or even want to know HOW the parties are doing it. But I always need to know that they sought the proper legal and tax advices before doing it. I never want to be in the room with the lawyer and tax accountant and my client(s) during that one. That’s like sitting around during the writing of a pre-nup…TMI!!!
Yes, Craig…there are times when I raise the red flags, and then back out of the room. When I write it, I need to know that the person signing it has considered the consequences of their actions. If they say “I already went over it with my advisors”…end of conversation.
Ardell — not sure whether you’re joking or not re: the Mensa/LSAT discussion, so I’ll leave that alone. As a general matter, yes I think agents should be aware of the relevant WACs and can provide them to a client (via link or otherwise). Probably want to exercise extreme caution, though, in explaining or interpreting the WACs.
As for buying property together prior to marriage — you’re right, that is a big deal and the buyers should discuss the matter with an attorney before doing so so that they are fully informed. An accountant’s input would have minimal value, though, as the real issue is the percentage ownership of the property and the implications of using one party’s funds for purchasing the property in both parties’ names.
Finally, as for raising red flags and insuring that your client seeks appropriate guidance, but not providing such guidance yourself — I think that is exactly what is required under the law. More evidence of the quality of representation that you offer…
Regarding your second paragraph, it seemed to me at the time that if one party (not married) was putting down $300,000 and the TIC said ownership 50/50, that might be a taxable gift from one to the other of $140,000? I had that concern, and so added Accountant to Legal advises for that reason. Was that incorrect?
This is not legal advice — consult an attorney.
Presumably the TIC Agreement would NOT say 50/50 ownership given that one party put down all the cash. That’s the point of the Agreement, to establish a percentage ownership consistent with the actual amounts paid by the parties. Nonetheless, if the parties want 50/50 ownership despite the fact that one party put up all the cash, then I think you’re right, there may be gift tax implications. In fact, the gift tax may be implicated without a TIC Agmt because the law assumes 50/50 ownership. Either way, this issue is beyond my level of expertise, and you’re right, an accountant would be helpful (although a tax lawyer might be the best resource).
As an aside, the gift tax is not what people think. Everyone has a lifetime right to gift $300k+ (not sure of exact number) tax free. Gifts in a lifetime that exceed that amount incur a tax libility on the part of the giftor. Any gift in excess of $12k (I believe that’s the current number) count against the lifetime exclusion and must be reported on a gift tax return.
LOL…a week before the wedding and NOT 50/50? Better to do what I did. I bought the house in my name only BEFORE the wedding…twice. And I’ve only been married once
I think that’s a little more passive aggressive than explaining to your future spouse why it’s going to be an 80/20 TIC.
I own a property with another individual as JTWROS. I own 80% the other person owns 20% and this was recorded with the purchase. The individual that owns 20% wants to move his share into a trust. What is the impact on me and does he have the right to do this without my consent?
AMR — sorry, I can’t give legal advice via a blog. Not only am I not familiar with the details of your transaction, but moreover I have no idea whether you are in WA, the only place I am licensed to practice law. You need to contact an attorney in your area. Sorry I can’t be of more assistance.
AMR,
Here’s a section from Wikipedia about breaking a Joint Tenants With Right of Survivorship. They should never be entered into lightly and are much rarer than tenants in common. I’m glad you brought this up as my Mom and sister bought a house JTWROS and may need to change that due to a change in circumstances.
From Wikipedia:
“Breaking a JTWROS - The co-tenant in property owned by a JTWROS can break the JTWROS as to their interest in the property at any time by conveying their interest in the property to another person. Under the old common law, this required an actual exchange with a straw man - another person who would buy the property from the co-tenant for some nominal consideration, then sell it back to the co-tenant at the same low price.
Many states now permit a joint tenant to break the JTWROS without a straw man, simply by executing a document to that effect - even if that owner does not inform the other owners. In either case, the JTWROS will, again, revert to a tenancy in common as to that owner’s interest in the property.
There is a big problem that is possible with the simple document execution method. In the straw man approach, there are witnesses to the transfer. With the document, there may not be witnesses. With either method, as soon as the break occurs, it works both ways. Because there may not be witnesses, the party with the document could take advantage of that fact and hide the document when the other party dies.
It is important to note, however, that if there are three or more owners, and only one of the owners breaks the JTWROS, the other owners remain in the JTWROS as to each other.”
Of course the internet is no substitute for a local attorney, but hope that sheds some light on the situation, and helps you formulate the questions to ask an attorney.