February 14, 2017

The Pros and Cons of Co-Buying a Home

Jorge Razon and his friend both wanted to get into the Toronto real estate market, but the thought of living in a cramped condo didn’t appeal to them.

So the two pals decided to something unconventional that is starting to gain popularity lately – they purchased a 1,600 square-foot, four-storey townhouse together.

“We could have gotten something on our own, but it would have been a really small shoebox,” says Razon.

“So we thought hey, you know what? We could get a pretty nice townhouse or a decent-sized place if we pooled our money together.

Related Read: Townhouses – The 20 Most Affordable Neighbourhoods in Toronto

Buying Together Means Business

Co-buying a house with friends or family members is becoming more common, particularly in the Toronto and Vancouver real estate markets, where prices have climbed out of reach for many first-time homebuyers.

But experts caution that this arrangement comes with risks.

“You’ve got to think through the negative what-ifs,” says Kurt Rosentreter, a senior financial advisor at Manulife Securities.

Friends looking to buy a house together should treat it like a business arrangement and create a formal document that outlines what will happen if one partner needs to get out of the arrangement, says Rosentreter.

“You want to document it,” he says. “You want to have legally binding agreements. And the hard part about that is it hurts feelings.”

Heed the Three D’s

There are a number of reasons why one of the parties to the arrangement may want out. Rosentreter calls them the “three Ds” – death, divorce and disability.

Job loss is another big one, he adds.

For example, one of the co-owners could loses his or her job and no longer be able to afford the mortgage payments.

The simple solution would be to sell the property and divide the proceeds based on how much equity each party had in the house.

“But it’s never that easy because usually one person is fine and doesn’t want to sell,” says Rosentreter.

This sort of dispute can be prevented by drafting up a contract with an automatic liquidation clause. Such a clause would set out that if one of the partners wants or needs to sell, the other is forced to sell, as well.

“So if I want out, you have to sell,” says Rosentreter.

Another option is that the person who wants to stay put could buy the other co-owners out at fair market value – provided that he or she can come up with enough cash to do so.

“Sell or buy me out, that’s usually what you see,” says Rosentreter. “But if these people couldn’t afford to buy on their own individually they’re probably not buying you out unless their circumstances have changed materially.”

The contract should also address who is going to pay for any maintenance, repairs and other unexpected costs that are likely to arise.

“You’ve got to think of all the possibly scenarios that can arise that could lead to complications later,” Rosentreter says.

An Effective Way to Gain Equity

But in spite of all the potential hiccups, co-buying a house can be a great way for first-time buyers to break into the market and build up some equity.

Razon and his friend mutually agreed to sell the property after three years and purchase their own, separate homes.

He says he would recommend the arrangement to first-time buyers struggling to break into the market, but with an important caveat – do your research. Don’t go in blind.

“You better know who you’re moving in with, because things you would never think of may end up bugging you,” says Razon.

“But the biggest thing is that both parties have to come in with the same mindset. You have to have a common goal.”

It’s important to determine what each party wants out of the arrange, says Razon. Are they looking to live in the home for a long time, use it to generate revenue as a rental property or wait until it appreciates in value and then sell it for a profit?