What's a Co-ownership Agreement and why does it matter?
Friends and family who co-own a home should get things in writing. Codifying the terms of co-ownership is key, but it's not just about a document.
Creating a co-ownership agreement is an essential step to co-buying a home. It provides a framework for successful co-ownership and helps you protect your home, relationship(s), and financial investment. But it’s often misunderstood.
In this post, we explore what a co-ownership agreement is and the purpose it serves. We base these insights on experience dealing with hundreds of CoBuy groups of all shapes and sizes.
What is a co-ownership agreement?
In a nutshell
A co-ownership agreement is a written agreement that defines the terms, structure, and management of joint homeownership between two or more parties. It outlines the financial and functional aspects of the arrangement. Many people think of it purely as a legal document, but it plays a larger role.
Who needs one?
Anyone co-investing in a home with friends, family, or a partner should create a co-ownership agreement.
In many ways, co-ownership is like a business partnership. Many co-ownership arrangements are not technically business partnerships, but they share characteristics. In each case, two or more parties:
- Contribute money, time, and energy
- Co-operate to advance shared interests
- Share risks
- Share rewards
Business partnerships generally create a partnership agreement to address the risks and maximize the odds of success. A co-ownership agreement is similar in design and purpose.
The format of a co-ownership agreement depends on circumstances and preferences. It should be constructed as a legally enforceable contract and usually consists of descriptive, prescriptive, and remedial elements.
- Participant names
- Property description
- Ownership structure and individual interests
- Individual contributions (financial & non-financial)
- Roles, rights, and responsibilities
- Expense and payment management
- Maintenance and repair management
- Disagreement resolution
- Contingency plans
- Exit strategy
Some co-buyers prefer to get more granular than others.
Why do you need a co-ownership agreement?
Planning, structure, and management are key ingredients to successful co-ownership. You can address all three by investing energy into the process of creating a co-ownership agreement.
Protect against risk events
Co-owners are generally considered separate legal entities. Unlike a married couple who owns a home together, co-owners do not benefit from an established legal framework. Property and tax laws that protect married couples in case of death, illness, or disagreement often do not apply.
Limit financial exposure
In co-ownership, co-buyers co-invest in a home (asset). Most co-buyers finance their purchase with a joint mortgage (liability), making them joint and severally liable. Each co-borrower is personally responsible for the repayment of debt in full. Practically, this means that if one party can't or won't meet their financial obligation to repay the mortgage for any reason, the other(s) are on the hook.
Simplify the exit
All co-ownership arrangements eventually end through a sale, transfer, or death. Without a plan for different scenarios, unwinding co-ownership can be costly.
Common pitfalls and challenges
Prioritizing the document over the process
Creating a co-ownership agreement is a process of dynamic decision-making between co-buyers. The objective is to get on the same page. Co-buyers can accomplish this by placing relatively less emphasis on the co-ownership agreement as a document and focusing on the process of building consensus around key issues. The document is an output of this process.
Deferring the creation of a co-ownership agreement
The approach to a co-ownership agreement should be proactive. The remedial benefit that it provides is a function of the thought and energy invested. It's not a fill-in-the-blank job. Fundamentally, the objective is not to design a contract so you can take your grandma or your partner to court -- it's to avoid disagreement and safeguard against risk. It's easier to create a co-ownership agreement with a clear head early in the co-buying process.
Assuming you don't need a co-ownership agreement
Friends, family, and loved ones are not immune to risks. The strength of a relationship between co-buyers is not a substitute for a co-ownership agreement: it's a great reason to create a co-ownership agreement! Relationships are worth protecting.
1. Start early
Start thinking about the co-ownership agreement before co-buying a home — the earlier, the better. This approach helps to tease out hairy issues and makes for a smoother purchase process. If there are any sticking points or potential deal breakers, you want to discover these as early as possible.
2. Think big picture
Remember that the co-ownership agreement is just one part of the big picture. The decisions you make about individual contributions, who is listed on the mortgage, and how you structure ownership are all related. Co-buying and co-ownership involve many moving parts. A strong agreement can set the stage for smooth sailing, but it's just a template for how things should operate.
3. Keep your agreement up-to-date
A co-ownership agreement is a living document. Over time, life changes. We make career moves. Our family situations change through birth, death, coupling, divorce, or illness. These events can impact our day-to-day and our financials. A document created last year may not reflect the reality for you and your co-owner(s) on the ground today. Treat your co-ownership agreement as dynamic and schedule periodic reviews: it will benefit everyone involved.
4. Consult an attorney
It's smart to engage a qualified real estate attorney. You'll want to work with someone who has expertise in co-buying and co-ownership in the state in which you're planning to buy a home. You can control costs and ensure you get the most from this engagement by getting prepared ahead of time and working with a vetted attorney.