Co-Buying A Home Can: Pros and Cons

You don’t have to be married to live out the American dream of owning a home.

Co-buying is a way for unmarried individuals to get out of the cycle of renting and begin building equity in a home through shared ownership.

It’s been gaining popularity over the last few years with co-buyers purchasing 16.3% of single-family homes in 2017, up from 13.7% in 2015.

“People have been buying and owning homes together since money and finance came into existence,” said Matt Holmes, who founded the company CoBuy in 2015. “But I think the trend is clearly moving toward shared ownership as cultural norms shift and property prices increase relative to real wages.”

To sum up the modern economy: Wages are stagnant. Rent is extremely expensive. Mortgage rates are relatively cheap. Couples are getting married later in life. The share-economy is booming.

Co-buying seems like a logical progression.

What is Co-Buying?

Co-buying is when two or more people purchase a property and agree to share ownership. This can be a partnership between a couple, relatives, close friends or even a company.

To share ownership, you’ll need to decide how you will take and hold title to the home. There are two options for co-buyers:

1. Tenancy in Common (TIC)

The most popular title deed for co-buying is “tenancy in common” because of the flexibility in ownership. Shares of the property don’t have to be divided equally. The ratio of ownership can be in proportion to how much money each individual invests. Each co-owner can designate who they would like to inherit their shares in the event of a death.

2. Joint Tenancy with Right of Survivorship (JTWROS)

Ownership is divided equally between owners regardless of the amount invested. Right of survivorship means that in the event of a death, the surviving owner(s) automatically assumes the remaining shares even if a will says otherwise. This process avoids probate, which is the long expensive legal process of validating a will and distributing the property of the deceased. JTWROS is more common with married couples.

Pros and Cons of Co-Buying a Home

Pros

• Splitting down payment and mortgage payments makes owning a home more affordable
• You’ll be able to start building equity in a home earlier in life
• Saves money on utilities and other household maintenance expenses
• The asset is divided in a predetermined way in the event of a split

Cons

• The buyer with the lowest credit score determines the interest rate
• If one co-buyer can’t make his/her share of payments the burden falls on the other co-buyer(s)
• Under tenancy in common, one co-owner doesn’t need the approval of the other co-owner to sell or rent his/her portion of the property 

Occupant vs. Non-occupant Co-Buying

A co-buyer isn’t required to live in the house to be a part owner. Non-occupant co-buyers are individuals that buy into a property as an investment or to help a close relative or friend.

A potential home buyer might have a steady income to pay a monthly mortgage, but perhaps doesn’t have enough savings for a down payment. Co-ownership is one way a relative or close friend can essentially lend the money until the occupant home buyer can afford to buy him/her out.

Non-occupant co-buyers may also be two or more individuals that purchase a property as an investment. They split the cost and the earnings from either renting it out or fixing it up and reselling the property. 

Tips for How to Make Co-Buying Successful

Whether you plan to be occupant co-buyers, non-occupant co-buyers or some combination of the two, it is essential to have a written agreement detailing the obligations and responsibilities of each owner.

These agreements should be prepared by a real estate attorney and include the following information:

• The type of title to the home that you want
• How the shares will be distributed
• Who is responsible for what percentage of the down payment and mortgage payments
• How you will handle a situation in which one co-owner can no longer afford payments
• How the shares will be passed on in the event of a death
• What to do if someone wants to leave the co-ownership arrangement

Co-Buying Trend Explained

First comes love, then comes marriage. Owning a home used to come somewhere after the baby carriage.

Nowadays, some couples choose not to marry at all. The marriage rate fell from 72% in 1960 to just 50% in 2016. Those that do tie the knot are doing so seven years later in life. The average age has shot up to 29.5 years-old for men and 27.4 years old for women. In comparison, the average was 22.8 and 20.3 in 1960.

Regardless of marital status, 82% of Millennials say buying a home is a priority, but nearly two-thirds cite lack of funds as a barrier to buy.

That’s largely due to the fact that wages haven’t increased since 2000 for Americans age 25-34. The average income was $42,868 in 2016, a decrease from 2000 when the average wage was $43,373. Rent has increased over 67% over that same period of time.

Mortgage rates are relatively cheap in 2018, averaging about 4.3%. The average mortgage cost 8.64% in interest back in 2000.

When it comes to living expenses, you would much rather buy than rent and splitting the cost of a mortgage makes owning a home much more affordable. Co-buying makes sense for unmarried couples that want to become first-time home buyers and  begin building equity early. They don’t have  the same legal protections as married couples, so co-buying makes dividing assets much easier in the aftermath of a split.

Sources

Atom Data Solutions (2017 August) Housing News Report. Retrieved from https://www.realtytrac.com/dashboard/NewsReportPdf/133/HNRR/115838168

Parker and Stepler (2017 September 14) As U.S. Marriage Rate Hovers at 50%, Education Gap in Marital Status Widens. Retrieved from http://www.pewresearch.org/fact-tank/2017/09/14/as-u-s-marriage-rate-hovers-at-50-education-gap-in-marital-status-widens/

MacKenzie, M (2018 March 26) This Is the Average Age of Marriage Right Now. Retrieved from https://www.womenshealthmag.com/relationships/a19567270/average-age-of-marriage/

Renter, E (2018) 2018 Home Buyer Report. Retrieved from https://www.nerdwallet.com/blog/2018-home-buyer-report/

Freddie Mac (2017 September 14) Mortgage Rates Hold at 2017 Low. Retrieved from http://www.freddiemac.com/pmms/

Value Penguin (2018 March) Average U.S. Mortgage Rates 2018. Retrieved from https://www.valuepenguin.com/mortgages/average-mortgage-rates