Buying a Property Together: Is It The Right Thing To Do?Posted: December 9, 2011 @ 4:26 am PM by admin
I have been asked over the years by people if it is possible to buy property with another person. Usually this question comes from a first home buyer who doesn’t qualify for a loan on their own.Although it is sometimes an advantage to do this, there can also be a number of pitfalls involved. The most common occurrence for joint ownership is between siblings, friends or family members. If you are considering buying a home with someone else here are some of the things you need to consider.
Susan and Sally decide to buy a home together because they can’t afford to on their own. They put their savings together, combine their incomes and apply for the First Home Owner Grant.
They move into their new home and have a ball for the first few years. One day, Sally becomes engaged to Steve and they want to buy a home together.
Steve has saved a small deposit, but needs a little bit more. His income also falls a little short for serviceability so he explains that in order to buy the home they like she needs to contribute some funds, and her income is required.
Her equity is tied up in the house already owned by her and Susan and as she is jointly and severally responsible for this loan (in other words, if Susan can’t meet her payment this month, Sally has to make it for her), her income doesn’t stretch over two loans. She will also be responsible for the entire debt with her Steve.
This would limit their borrowing options, however Bank of Melbourne have a “common debt reducer” policy whereby, provide Susan can service her half of the loan, Sally only needs to service the other half.
This may overcome the issue of serviceability, but raising a deposit is the other problem. They may be forced to sell the home, which means Susan will need to buy another home on her own. This may not be possible due to her income and she is not happy about having to pay stamp duty again.
Alternatively, they may need to increase their borrowings in order to raise a deposit, but once again, Susan is not happy about being responsible for a loan which assists Sally and Steve, but for which she receives no benefit.
Needless to say, Steve was pretty upset when he realised he was not eligible for the First Home Owner Grant because Sally had already received it. He was counting on this money, and now is that little bit further away from buying his home with Sally.
Friends buying a home together usually do so for the same reason as siblings. That is to say, they can’t afford to buy on their own so they join forces.
Unfortunately, the same circumstances may, and usually do arise as the case with Susan and Sally, but not being related to each other can make things worse and may even end up in court. Needless to say, it is a good way to ruin a good friendship.
The decision to buy a house together should be thought through thoroughly and legal advice sought.
Families, for example two or three married couples (and their children) may think it is a good idea to buy a holiday house together. On the surface it sounds like agreat idea. They can split the costs and suddenly theyhave a coastal escape!
However, what happens when there is an argument over who gets to use the house over Christmas or Easter? Each party may wish to invite friends with them down to the house and may have to settle on heading down every third Christmas, Easter of school holidays.
This may cause friction and one or more parties may decide they don’t want the house anymore and wishto sell their share to the remaining parties. If the other parties can’t afford to buy the other share out, the house may need to be sold. No one is happy if this happens.
Even if all parties can compromise on the use of the house, what happens if one party has a change in financial circumstances and can no longer pay their share of the mortgage repayments? Until they can, the other parties will need to make up the difference. What if one party decided to buy into a business or wants to upgrade their home and want their money back? Once again, this will apply pressure to the remaining parties.
Syndicates may be formed between, friends, family or business associates to buy an investment property. This may be a larger purchase of either residential or commercial property and as such the structure of such a purchase is critical.
A unit trust is usually the best way to do this. A trustee company is established and then units are sold to each unit holder (investor). For example, if the trust wishes to buy a property for $1,000,000, it may establish 20 units of $50,000 each. If for example, there are five investors, each may buy four units with the equivalent value of $200,000 each.
Depending on the position of the investors, some may wish to buy more units, so you may have a case where one investor has ten units (valued at $500,000), one buys four units at $200,000 and the other three buy two units for $100,000 each. They would then have to split the income and costs of the property in the same proportion.
Units can be sold independently, within or outside of the syndicate. For example, one investor may need to sell two of his units and other members of the syndicate may be happy to buy these from him. Alternatively, one member may wish to sell his units to a family member without affecting the remaining syndicate members.
Adopting a unit trust avoids any issues within the syndicate and if a member has different requirements in the future units can be bought and sold easily.
This whole process is best achieved if each unit holder pays cash for each unit, by sourcing their own funds. This can come from cash holdings, borrowings or even superannuation. This way the investment property is unencumbered and there are no joint borrowings within the unit holders. This prevents the problems that may arise in the previous scenarios.
The trust and structure should be established with the advice of each member’s accountant and solicitor.
As you can see, buying a property together can be fraughtwith issues and problems and should be considered carefully and after legal and financial advice has been taken. There can be benefits in buying property together, but I feel it needs to be structured in a way that will not affect any parties if circumstances (financial or personal) change for another party. By structuring the purchase correctly (as with the example of the unit trust), and changes do not affect other parties.
Property Investor and their contributing authors have made every effort to ensure that the information is free from error, neither Property Investor nor its contributing authors make any representation or warranty as to the completeness or accuracy. Readers must decide if this information is suitable for their personal situation or seek advice.