Many investors and homebuyers are keen to enter the market with property prices on the rise. With interest rates low, there is a window of opportunity that a lot of Australians will want to capitalise on. If you have found a home to buy with a friend or a parent keen to give your children a boost to enter the property market – go in eyes wide open!
The good
Sharing the financial burden of buying a home with a friend can reduce stress, save costs, and decrease the time it takes to save for a deposit. Triple Zero Property Managing Director, Danny Buxton and Tom Wood from FC Lawyers believe there are benefits in pooling funds to purchase a property. However, there are associated risks with buying a property with a friend or family member that Australians should know about.
The risks
“Buying a property with a friend or family member can be a good way to get into the property market. However, purchasers must be wary of the risks involved from a family law perspective,” Mr Wood explained.
Mr Wood highlighted how if a parent in a de facto relationship tries to help their child, legally both members of the de facto couple have rights to the property.
“Often, for example, couples are ‘gifted’ funds by a parent to assist them to get into the property market. If the relationship ends, the ‘gift’, more often than not, suddenly morphs into a ‘loan’, which gives rise to added complexities in your family law dispute.”
“If you’re going down this path, make sure everything is clearly documented. If the money is intended to be repaid in the event the relationship ends, this should be set out in a proper agreement. There is also the option of registering the ‘loan’ (assuming it is to be repaid) on the title of the property,” Mr Wood said.
What you need to consider:
Mr Buxton believes that Australians looking to purchase a house or apartment with a family member or friend need to understand the legal and non-legal risks involved. You should seek independent legal and financial advice before signing any contract.
1. Be aware of your ownership rights
When buying a property with another person, Australians have two options. They can either be joint tenants or tenants in common.
When buying a property as ‘joint tenant’, it limits what you can do with your share of the property. This means you can’t simply sell or bequeath your share of the property to someone else. If you buy the property together, you sell the property together. If an owner passes away, that person’s share transfers entirely to the other owner. People should be aware that if one joint tenant wanted to sell and the other one didn’t, then you would have to go to Court to try to force a sale of the property.
On the other hand, ‘tenants in common‘ split ownership of the property. If you only own 50 per cent of the property, that 50 per cent is yours and you can do what you want with it. This means you can sell away your share at any time.
Even if you own a property as a ‘tenant in common’, unless you agree otherwise, you have a right of occupation of the whole property. Of course, in practice, there is a very limited market for part-shares of a property.
Technically, if one owner transferred or sold their share, the other person may end up owning and potentially living in the property with someone they wouldn’t otherwise choose to.
If you buy a property with a friend or family member, it would be prudent to enter into a separate agreement about the mechanisms to be put in place if only one of you wants to sell. This could include buying the other person out, having a say in who purchases the share etc.
2. Fully understand your liability if your co-owner defaults on the mortgage
Generally, a mortgage is secured by the whole property, regardless of the relative ownership rights. So, if one of you defaults on the mortgage repayments, you might be at risk of the bank foreclosing on the loan and seeking to sell the property.
There are also lending complications when purchasing a property with co-owners with the financial institution often still assessing the financial capability of one of the owners only around servicing, yet at the same time (if an investment) only taking into account 50% of the rent. Always seek advice from a financier/mortgage broker about the options available to you to protect your interests before entering into any contract.
3. Protect yourself
If you have purchased a property with someone else or been gifted money by a family member or friend to assist with the purchase, ensure your interest in that property is protected. This includes entering into a financial agreement with your future partner before you live together. This type of agreement is intended to make provision for you retaining that property separate from any other assets you and your prospective partner may acquire if your relationship subsequently breaks down.
4. Buying together as a couple
If you and your partner decide to buy a property together, either as joint tenants or tenants in common, think about entering into a financial agreement as to how the property will be dealt with if your relationship breaks down to avoid expensive and lengthy court proceedings down the track.
Always seek professional advice before signing a contract…
Consider your long-term strategy of co-owning a property as well as your exit plan. It may not be as simple as you think!
In this short video, Danny Buxton (Director of Triple Zero Property) interviews Kevin Scambler an Accountant from Atom Accounting and Taxation about his experience with clients who had bought a unit for their university age children.
Buying property is a huge financial decision and it is essential to get each step right. If you want good advice, we can help gather your expert team. If you have further questions about buying with family and friends, the team at Triple Zero Property are here to help.
Call 1300 897 000 or email [email protected]
Disclaimer: The content of this document is not to be considered specific advice. Your situation is specific and individual; as such, you should always consult a registered and qualified professional within a particular area of advice needed.
