Not long ago, as we were doing introductions at the beginning of our Homebuyer Express class, one of the participants stated that he was scheduled to close on his new house in two weeks, but was still shopping around.
As the story goes, he and his girlfriend were going to buy the house together and he, in the interest of peace and harmony, let her pick out the house. But now, before closing, she was no longer girlfriend. He could still afford the home, but it wasn’t the home he wanted. So he was still looking around and trying to decide if the extra costs of backing out were worth it for him.
As more and more unmarried people are buying homes together, it brings some “interesting” potential issues to the surface. Even if the individuals buying together aren’t a couple, but rather siblings, business partners, or just friends, the situations can provide for some more challenging “now what” moments.
While I truly hope everything works out for the best, let’s look at some of the scenarios that I’ve run across right here in friendly old Sioux Falls.
Things fall apart in the relationship and you decide it’s time to move on. You are even willing to let them keep the house. You are on the title and the mortgage, but you have moved out and are living somewhere else. So that removes you from liability, right?
After you and your buddy buy a house together, tragically you pass away. Your ownership interest is a part of your estate and you intend for that value to pass on to your beneficiaries, like your family. So how does that happen with the value in your home? After all, you just want your family taken care of.
You are the sole owner of the home but have had a couple of friends living with you and paying rent. It’s all quite informal as you’ve never worried about anything like a lease. But now you are ready to move on and want to sell. On closing day, you find out one of your friends has yet to move out, let alone even find another place to live. But the new owners aren’t expecting a house guest. With nowhere to go, your friend isn’t ready to leave – physically or mentally. End of the friendship, but end of the house guest?
So now what?
First, let’s deal with the first two scenarios since they involve co-ownership. When you purchase a property with another individual, you need to decide whether you want to take ownership as Joint Tenants or Tenants in Common.
As Joint Tenants, you are joined at the hip. Any ownership interest you have at the time of your passing is automatically divided equally among the other Joint Tenants. So if you were looking to pass on your assets to someone other than your co-owner, you instead may want to look at being Tenants in Common. As a Tenant in Common, you can now decide where your ownership interest will go. You can sell or even put a mortgage against the property, but only against the portion that you own.
While the default for couples is usually Joint Tenancy, we will sometimes see couples elect to buy a home together as Tenants in Common if this is a second marriage. This way, they can protect their portion of the value that they will leave to their children in their estate.
Neither is right or wrong, it’s just what you want to happen with your stuff when you are gone.
Should the relationship between owners fall apart, as in Scenario #1, there are ways to deal with it. You can file a Quitclaim Deed at the county Register of Deeds. This gives constructive notice that you are severing ties with the property. That, however, does not relieve you from your responsibilities in connection with the mortgage. If you are on the mortgage, there are really only two ways to get off the mortgage. First, both of you can sell the house to someone else, paying off the existing mortgage. Second, whoever is staying can refinance into a new mortgage, removing the other’s name and responsibility. But the person keeping the house will have to be able to qualify for a new mortgage with only their own income and credit score.
What unfortunately happens in these situations brings us to ‘sort of’ option number three. Even if you file a Quitclaim Deed and move out, you share responsibility for that mortgage until that mortgage is no more. This means that if they quit paying and get foreclosed on (because they often can’t afford it on their income alone), you have a foreclosure on your credit report as well. While a previously filed Quitclaim Deed may reduce the impact of the foreclosure, it’s still going to hurt.
And now the third scenario of the unwanted house guest. Even though they aren’t on any formal lease, you have implied an agreement by letting them live there and collecting rent. Because of those actions, that individual now has certain rights protecting them from illegal eviction. To make their removal enforceable, you will need to provide proper notice (usually 30 days) in writing informing them of the end of the lease. If you don’t, the new owners must also honor their rights as a tenant until they have been provided proper notice. If they planned to move their kids into that bedroom, the tenant is going to be a deal breaker.
So what to do about it?
Before entering into any co-ownership, you really need to decide what your plans and priorities are. Are you committed to the relationship, whatever type of that relationship is? Do you want the freedom to move on regardless of what the other person wants? What do you see in your future? The purchase of a home can be almost as binding as having kids together, so it’s a big deal. Before signing any purchase contract, have a conversation with both your Realtor and lender about the situation. The Realtor should be able to help you process through, and the lender will be ordering the title work that lays out how ownership is taken.
If you would like more general education on home ownership, the Center for Financial Resources offers free Homebuyer Express classes. You can find out more about the classes and scheduled classes on our website, or call us at 605-330-2700.
I love being a home owner. I believe that, for most people, it’s a great investment. But like any investment, it needs to be done the right way.
written by Breck Miller
images courtesy freedigitalphotos.net