Property Co-Ownership: The Benefits, The Pitfalls And The Importance of a Legal Agreement

With the average age of first-time buyers having risen to around 35 and retirement savings continuing to dwindle in a weakening economy, it’s no surprise that people are increasingly considering joint investments in order to get a foot on the property ladder or accommodate extended family.

Advantages and disadvantages

Buying property together therefore enables young people to enter the market sooner and to get a head start when they’re ready to settle down, thereby simultaneously bringing down the average age of first-time buyers and stimulating the market.

And, over and above shrinking retirement savings, the scarcity of affordable retirement accommodation and the fact that these days most retirees are still active and independent, makes joint property ownership a great way to maintain independence yet share financial and maintenance responsibilities.

On the other side of the coin, however, the downside is the fact that you can’t make any decisions without the consent of other owners which cause delays or arguments and hold up planned renovations, upkeep and maintenance.

Financing criteria

Lending institutions have no problem with granting joint bonds and the criteria is the same as for single applicants with no additional documentation required.

The pooling together of buyers’ income improves affordability but each buyer must have a clear credit record, demonstrating that they have managed previous debt responsibly and they must also jointly have sufficient net surplus income after expenses to afford the repayment of the monthly bond instalment.

Joint legal ownership automatically affords each owner with equal shares in the property (co-ownership in undivided shares) and they are jointly and severally liable for the debt.

It is, however, possible to enter into an agreement whereby each party acquires the property in different shares allocations and this information must be recorded in the title deeds of the property.

Legal agreement and conflict resolution

Although purchasing property jointly has many advantages, there will almost certainly come a day when the property will be sold, and perhaps not always under the best circumstances, so it’s essential to ensure there is a legal agreement in place between the buyers before purchasing.

Whatever the reasons, the dissolution of any partnership is likely to be at least somewhat emotionally charged and this will be significantly exacerbated if there isn’t an agreement in place regarding jointly owned property and it cannot be drawn up retrospectively.

Certain situations, especially, such as death, divorce and financial misfortune are difficult enough to deal with without the additional stress of trying to resolve partnership issues and the best way for this to happen as amicably as possible is to have an agreement in place.

It’s very important to make sure that the agreement is in writing and that it is done before buying a property.

Important factors to consider in any partnership agreement

1. Clarify your contributions: Partner contributions can include physical property such as furniture, physical labour and time spent on renovation, cash investments etc.

As far as possible, ascribe values to each contribution and also detail which costs will be borne by which partner.

Regardless of whether or not there is a personal relationship between the co-owners, it’s an investment and should be treated as such so keep a record of all payments, even to the point of having financial statements. And if there is an income stream, establish how this will be divided.

2. Draw up a roster if the property is to be used on a time-share basis: In the case of a jointly-owned holiday property, arguments can easily arise when it comes to who uses the place at what time of year. For instance, if Christmas is a popular time, then perhaps the plan would be to alternate years.

And what happens if an owner wants to allow a friend or another family member to use the property?

3. Who makes the decisions?: Indecisiveness when decisions need to be made can slow processes down and it can also cause rifts in partnerships so it’s best to decide upfront exactly how decisions will be made and how the situation will be resolved if no consensus can be reached.

And, difficult as it may be when everything is still rosy, it’s important to consider what would happen if there is a breach of trust or a conflict of interest and what risks will you face should such a situation arise.

4. Conflict resolution: Disputes are an inevitable part of life, but they do need to be addressed because, if left unresolved, they can lead to serious consequences, especially when there are financial partnerships at stake.

The best way to protect such relationships is to ensure the partnership agreement includes a section on resolving disputes which could be done through voting, appointing a mediator or consensus.

5. Divvy up the assets: In the case of a business partnership, this means determining how you’ll distribute your capital gains and/or profits and how you’ll deal with losses and additional cash flow requirements.

In a personal scenario, this could refer to how your share of assets is distributed to your family upon your death. Will you use a will or opt for a trust to minimise estate duty? Or would the other owners prefer the deceased owner’s share to revert to them?

There is no limit to the number of people who can jointly own a property, but remember that the more people there are involved, the less profit you get in the event a sale, the more admin there will be in the ownership process and the more complex it can be when it comes to making decisions about matters relating to the property.

And, as advantageous as co-ownership can be, it’s a very big decision so be sure you know and trust the people you are getting into partnership with and be sure you have a clear understanding of what you are getting into ahead of time.