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What is Co-Buying?
As home prices have continued to climb and make it harder for first time buyers to get in on the action, the younger generation is more eager to get in on the advantages of homeownership with their friends, instead of waiting until they are married like what was traditionally more common.
Younger generations are taking advantage of a growing trend called “Co-Buying”, which technically has a broad definition of just buying a house with another person, but lately has been used more specifically to describe the process of buying a house with friends instead of a partner.
As we discuss the topic, the terms interest and share will be used interchangeably, as both of them refer to the percentage of ownership that an owner holds in the property. For example, two owners of a property typically each hold a 50% interest in the home.
What are the Benefits of Co-Owning?
There are plenty of reasons Co-Buying can be a great option. Let’s take a look at some of them now.
1. It Significantly Lowers the Cost of Buying
Over the past few years, prices have continued to increase past what people thought was sustainable, and nobody is suffering more from this than first time buyers. In fact, research from the National Association of Realtors states that the average age of first time buyers is higher than it has ever been before at 36 years old. Personally, I think that is a crazy statistic. If the average age was 25, so many people could have huge equity by the time they are 36, instead of just then getting started reaping the benefits of home ownership. With Co-Buying, even if you are only buying in with one friend, it cuts the monthly payment and initial out of pocket costs by 50%, which can make owning way more realistic for many people.
2. It Opens Up More Opportunities
Suppose, if you will, that you can afford a house- but it isn’t the one you want. Perhaps you can’t afford to be in the well established neighborhood right next to your work, or the nice home with a big yard for your dog. With the help of friends contributing to the cost, it can be much easier to afford a nicer home that has the amenities that you all will need.
3. Save on Expenses
While a mortgage is often the only expense people consider when they are exploring the possibility of buying, there are other expenses that will also need attention. Water, electricity, gas, internet, and insurance are some examples of other expenses that would need covered. In addition to these, things break over time, and in your own house, it is your responsibility to take care of them. Having some roommates to help cover the cost of a broken dishwasher or a leaky roof could be a great convenience.
4. It’s Significantly Safer
Unfortunately, the world we live in isn’t always sunshine and roses, and some people would rather help themselves to your possessions rather than work for their own. What might come as a surprise to people is that most burglaries occur between 10:00am and 3:00 pm. Why? Because this is when most homeowners are not present. The odds of an intruder breaking into your home are drastically lower if they see a car in the driveway, and the more the merrier. If you are at work and your friend is home, this is a great way to strongly discourage a not-so-friendly visitor from stopping by.
5. Pay For What You Need
Most homes have three bedrooms, and the extra space could be nice, but do young first time buyers really need to be spending all of their money on a big house when it will just be them living there? The more efficient method might just be sharing the house with two other friends, and getting a huge discount by letting them stay in the space that you won’t be needing anyway!
6. You’ll Never Be Bored!
Possibly the best advantage on this list, you’ll get to spend a whole lot more time with the people you are closest to. Living alone might be more peaceful, but it can get boring or lonely fast.
Cons of Co-Buying
Of course, there are two sides to every coin. Consider these disadvantages just as much as the advantages when determining if this is a good option for you.
1. Less Freedom
It goes without saying that minor inconveniences will occur- your friend might be in the bathroom when you need to go, or they are using the oven when you want to cook. These things are just minor inconveniences though, and to be expected whenever living with literally anyone other than just yourself. What I am referring to is the lack of freedom for more serious concerns. Perhaps you want to change the floors or paint a room but your friend does not. Or you want to hang more pictures and they would rather leave it bare. Of course, these aren’t huge ordeals, and a lot of times friends have very similar interests so perhaps you would agree on most things.
But what if you think it is time to sell the property but your friend doesn’t want to? They could buy your percentage of the property, but they might not be able to. The next best option would be for one of their other friends to purchase your share so they can still have a roommate. If that doesn’t work either, you might be trying to sell a 50% interest in a property, which isn’t always the easiest thing to do.
The best way to avoid an incident like this is to go into it with a plan, and lay everything out on the table. As far as the floors example or personal decorations on the walls, those are things you can and should discuss as you tour properties. As far as selling, have a plan to live in the home for a set number of years, and after those years have passed, you both consider the possibility of selling. Make sure that everyone knows, if they decide they want or need to sell, they need to give other owners a several months notice. This can help you save up to purchase their share of the home, or give you time to find another roommate.
2. Relying On Others To Carry Their Weight
Make sure that anyone you consider this with is very responsible, because if become unable to make their share of the payments, it can be really frustrating to carry their slack. Depending on the amount, it could be a serious issue if they cannot pay it and you can’t help them either. It could cause you both to fall behind on payments and risk damage to your credit score and even foreclosure. You might also want to consider if they are really messy, because you might not want someone to constantly clean up after. A bad roommate can be a nightmare, and owning is more of a commitment than renting, so you need to be positive that not only can you live in harmony, but that they are also responsible and capable of being a good co-owner.
3. The Interest Rate is Determined By The Borrower With the Worst Credit
This could be a negligible disadvantage, but whoever has the worst credit will be determining the interest rate for all buyers involved. When that interest is split between 2 or 3 friends though, it probably will be more of just an inconvenience than a serious issue.
4. The Possibility of Disputes
This really isn’t specific to friends who co-own, because any two people will likely have a disagreement at one point or another. Whether it is parent and child, husband and wife, or friend and friend. They are never pleasant though, and it is a good idea to understand how you solve disputes prior to moving in together. If you and your pal break out into an all-out brawl when you can’t determine what’s for lunch, it might be a good idea to hold off on making the biggest purchase of your life with them.
The Technicality of Co-Buying
When you are planning out the purchase of property with your peers, it is important to discuss which form of ownership will be used. The two options are Joint Tenancy and Tenancy in Common. It might not be the most enjoyable conversation, but settling things now will help avoid any disputes in the future.
Each form of ownership is a form of undivided co-ownership, meaning that while everyone will own a percentage of the home, they can’t section it off from each other. So, if two owners each owned 50% of the property, instead of splitting the house right down the middle, they would each own 50% of the entire house, so 50% of every room, 50% of every stair, 50% of every light fixture, etc.
In both forms of ownership, if one of the owners decides they want to sell, they are also able to sell their interest in the property. The other owners can buy them out and own a larger percentage of the property, which is just about always going to be the option with the least amount of friction, but the seller is also able to sell their interest to a third party buyer as well.
In North Carolina, Joint Tenancy historically meant that each tenant owned an equal share of the property. Recently, that has been changed so that, if specified, the owners can have different percentages of ownership. The biggest difference in the two is that with Joint Tenancy, if one of the owners passes away, their share is directly transferred to the remaining owners. Because of this, it will skip probate, and is a rather simple process if that unfortunate event were to occur. This form of ownership can only occur if every member gives expressed consent, so that heirs are protected from being accidentally disinherited.
Tenancy in Common
Tenancy in Common has always allowed unequal shares of ownership. This might come in handy if, for example, an agreement is reached where one of the owners has a smaller interest in the property in exchange for a lower portion of the monthly payment. With this form of ownership, if one of the members passes away, their percentage of ownership will transfer to the heirs. This can be a good way to ensure you will leave a legacy through a will if the worst happens, but it could complicate things if there is no will in place and the property has to go through probate.
Ultimately, the best way to make sure everyones best interests are met is to gather everyone who will be involved in the purchase and discuss the best plan of action with a local real estate attorney.
Think Co-Buying Might Be A Good Idea For You?
If you like the idea of getting in on the benefits of home ownership while living with your best friends, the first thing you should do is run it by them and see if they are on board. If everyone agrees, you should speak with a Real Estate Professional.
I would be happy to help you if you are considering co-buying. I’ll help you through every step in the process, from getting pre-approved with your friends to scheduling showings on properties that you will love. Give me a shout! You can reach me anytime on my cell, via call or text, at (828) 855-6514.
Thank you for reading, have a blessed day!