Dear Monty: Five steps unmarried people should take before buying a home
By Richard Montgomery
Reader Question: I am considering buying a home with a co-worker. We both have good jobs, and employment has been stable. The idea of deductions for interest and real estate taxes is appealing. The big appeal is that by buying a home together, our monthly housing expense will decrease dramatically because we currently do not live together. Do you have any suggestions outside the typical home buying experience for unrelated people when they buy real estate?
Monty’s Answer: Your reasons for considering such an arrangement are sound. More unrelated people are buying homes together than ever before. One of the reasons is that both home prices and rents continue to escalate. An indication of this is the rising number of questions we receive on DearMonty.com from readers who enter into real estate ownership together without the appropriate due diligence. Here are some suggestions that will help ensure you avoid the kinds of issues that create conflict in the future.
- A pre-launch counseling session. Get together for the sole purpose of sorting out each of your expectations. Both of you come prepared with a list subjects you want to discuss. Do not sugarcoat your feelings. We often think “ We are co workers or friends, and we have gotten along well for years. We are very compatible.” Yes, but you have not lived together. One perfectionist and one not-so-neat individual may wear on each other. Who washes the dishes, and how often? How are food costs shared? Pets? Can we have overnight guests or out-of-town relatives for a month? Create a list of house rules that each party endorses (a signature is best) before you get caught up in the excitement of a home search.
- Establish a partnership agreement. You want to make an effort beforehand to structure the transaction like any other business arrangement, whether two or more participants, co-workers, in a relationship or best friends. Here are a few sample questions: What happens if one of us wants to move out? How will we take title to the house? What if we experience a significant repair, and one of us cannot pay our share? How is value established if one of us wants out, and the other wants to stay? There are many resources about creating a partnership, but an online template is no match for an experienced real estate attorney.
- Obtain a pre-approval letter from a mortgage lender. Go together and ask about any precautions they would be asking for that they would not require for a married couple. According to Fred Rauch, Senior Loan Officer at VIP Mortgage in Scottsdale, AZ, “it is quite easy for unrelated people to buy homes together today, but getting out is not so easy,” so understanding the potential ramifications when your circumstances change is vital. For example, if you take a new job in a distant city, and your partner needs your payment to keep the loan current, either the home must be sold, or they have to find a new partner that can qualify, and then refinance the house. It is essential to know the benefits, the responsibilities, and what to expect under changing circumstances. You also know how much you should borrow.
- Reach agreement on the type of property, the neighborhood, and the price range. Think ahead about your circumstances changing and the exit strategy. Should you be looking for a home that would appeal to a family? If so, features like schools and parks, while not important to you, may widen the market when seeking the next buyer? You may also decide to disregard the resale aspect altogether.
- Find the right real estate agent. Interview multiple real estate agents before you make a choice. A knowledgeable, honest and efficient agent can make all the difference in your outcome. If one or both of you know an agent, include them in the selection process, but submit them to the same scrutiny you would with unfamiliar candidates.
You have both invested hours in preparing. You have discussed the ups and downs of owning a home together. You have received professional help throughout the steps in this exercise. You have agreed about sharing responsibilities, you have a target price range and determined where and how you want to live together. You also have an exit plan. Your chances of staying together as business partners until you agree to part company when your lives change again are better now.
“Richard Montgomery gives no nonsense real estate advice to readers most pressing questions. He is a real estate industry veteran who has championed industry reform for over a quarter century. Send him questions at DearMonty.com.”