Despite the bleak forecast, the housing market has been seeing a growing trend over the last couple of years — the number of single people who are choosing to buy a home in partnership with a friend. But is splitting a house with your friends a good deal or just a headache? Real estate expert Barbara Corcoran's shares practical advice for those looking to house-hunt with pals:
Pros: You'll get into the market sooner than if you went solo, split all the costs, share utilities, maintenance and chores, plus you get to live with a friend.
Cons: You don't get the federal and state protection typically given to married couples. Also, if there are any credit problems, your friend's financial troubles can become yours, too. Plus, you might also find yourself cleaning up after someone you don't love.
Here are other important points to consider:
1. Have an open conversation before you sign a contract
Talk about what each of you will bring to the table financially and what your day-to-day expectations are. Plus, be sure to discuss credit histories. Get credit reports. Remember that one person's bad credit can make the mortgage rate significantly higher. Also, any outstanding debt or unpaid loans can be later filed as a lien against your property.
2. Hire an attorney
To do it right, you'll need to prepare two technical agreements: the property agreement and the cohabitation agreement. Attorneys know the points to cover.
3. Put everything in writing
This document should outline your original intention and will help avoid confusion in the future (friendship can easily turn to warfare).
4. Make a property agreement
This document establishes who owns the house and whose name is on the deed. Both names should be on the mortgage and the deed. The property agreement also states who pays what towards the down payment and mortgage. In addition, it stipulates how the appreciation will be shared and how capital gains will be divided. Finally, you should buy the house as "Tenants In Common." This form of ownership provides the most protection and the greatest clarity.
5. Draw up a cohabitation agreement
Just like a prenup, this document covers what happens if you break up (like getting an independent appraisal to establish value, giving three-month's notice, and allowing each person the first option on the other partner's interest). It also covers who contributes what to mortgage payments and repair costs and who gets the tax deductions for the property taxes and mortgage interest.
6. Buy term life insurance
Each of you should buy a term life insurance policy and name the other as beneficiary. In the event of death, the whole mortgage will be paid off.