Does this scenario sound familiar? After spending countless weekends searching for a home to buy, you come to the realization that your only viable option is a small, boxy condo in a high-rise.
That`s what Todd Frank, a lawyer with the Chicago firm of Gardner, Carton & Douglas, discovered-until he decided to take a different approach.
Instead of settling for a condo he could afford but didn`t really love when he was in the market to buy two years ago, Frank decided to pool his money with another lawyer at his firm to purchase a two-flat in Lake View.
”I`m a real estate lawyer, so I knew the market and what I could get. At that point, I was looking in the $150,000 range. It`s hard to find a vacant lot for that. I think there`s a big advantage in what two people can buy together,” Frank says.
Frank and his house partner, Kathy Hahn, have plenty of privacy and space. They occupy separate two-bedroom, one-bathroom apartments in a converted Victorian. There`s also a back yard and enough room to park three cars.
Though Frank didn`t invent the idea of sharing mortgage expenses with someone he`s not married to, it`s a rare approach.
”You are seeing young people going together to buy, but not like you used to (in the 1950s and 1960s), because there are more housing
alternatives,” says Joe Hagee, president of Mitchell Bros. Realtors in Evanston.
Hagee and other experts add that the strategy is most common with young, first-time buyers, such as Frank and Hahn, or between family members, such as siblings or parents and their adult children.
Risky venture
And Frank`s the first one to admit that buying a home with someone you`re not involved with romantically is a risky proposition. ”A lot of people are wary of the concept,” he says. ”I think you better know the person real well. You`re not living with them, but you are sharing a lot of your assets.” Despite the possible complications, combining your assets with another person can be a money-making venture.
Lawyers Pat Levy and John Tatooles are a case in point. They bought a run-down two-flat in Wrigleyville in the spring of 1988 and sold it in the fall of 1990. Though they declined to reveal how much money they earned on the deal, they invested a lot of time and financial resources in the building. Specifically, they added new electrical wiring, copper pipes, bathroom and kitchen fixtures and dry wall.
”We decided we could get more for our money by pooling our resources,”
Levy says. ”We each made a little money. That was part of our intent.”
For those interested in taking the plunge, experts cite myriad ways to ensure that the venture is a success.
”The first thing to do is find someone who has similar interests and expectations and is in a similar financial situation,” Tatooles advises.
Once you decide how to structure the deal, it`s wise to sign a written contract. ”If I was offering advice to someone else, I`d say, `You should formalize the agreement. You should enter into some kind of co-owner agreement just between the two of you,` ” Frank says.
It`s also important to share equally in the cost of buying the building and maintaining it. ”If you spend twice as much on your unit, when you go to sell it, you are not going to want to give the other person twice as much of the proceeds,” Levy says.
Frank and Hahn, for example, shared the cost of adding a fireplace to the first floor so that both units would be identical, Hahn says. That made it easy for them to split evenly the cost of purchasing the building.
After agreeing to invest in a home, you should decide what costs will be paid separately and what costs will be shared.
Frank and Hahn, for instance, are responsible for whatever they invest in their own units and share common expenses, such as replacing the roof, furnace or water heater.
Another important decision to make at the outset is under what circumstances they will sell the building.
Frank and Hahn have been grappling with the issue of whether to sell since Frank got married April 15.
They`ve ruled out the option of selling the building immediately because they believe the market`s too soft and because Hahn doesn`t want to be uprooted.
Instead, Frank and his wife, DeAnne, may lease their unit and move into a larger home, Frank says.
Till death do you part
But while a marriage may be disruptive, a less pleasant prospect to plan for is the death of one of the partners.
Both Frank and Hahn and Levy and Tatooles opted to purchase their respective homes as tenants in common.
This type of arrangement is a popular way to structure ownership between independent investors because each partner retains control over the equity he accumulates and the partner`s portion of the property goes to his heirs-rather than to the other partner-when he dies, according to Madeleine Grant, a broker at Mitchell Bros.
(Most married couples, on the other hand, opt to become joint tenants, an arrangement under which the spouse who lives the longest automatically receives the deceased owner`s share of the property.)
Frank and Hahn also decided to purchase life insurance policies on each other. The policies ensure that, if one of them dies, the remaining partner will have enough cash to pay off the other`s part of the mortgage and also buy out the heir who inherits the deceased`s equity in the building.
Tied together
But a tenants-in-common strategy isn`t without risks. Unlike condominium owners, tenants in common in a two-flat own a portion of an indivisible whole, making it nearly impossible to sell without the cooperation of the other partner.
”It`s difficult to explain to people that they don`t own their bathroom and they don`t own their unit; the property is completely indivisible,” Grant says.
And she knows from painful experience just how complicated a tenants-in-common arrangement can become.
Two sisters from Florida hired Grant last year to sell 50 percent of an Evanston two-flat that they had inherited from their mother. The sisters`
parents had purchased the building years ago with another couple and had since paid off the mortgage.
But selling the sisters` inherited share of the building proved to be an ordeal, Grant says.
The trouble started when the elderly woman downstairs, who owned the other 50 percent of the building, refused to sell. That left the sisters in a precarious situation.
First, they couldn`t find a bank willing to underwrite the deal because the building was owned partly by someone else and, therefore, couldn`t be put up as collateral against a mortgage.
”It`s like saying, `Hey, I want to buy 100 shares of IBM and I want a bank to finance it,` ” Hagee says.
Bankrolling it
The sisters were lucky. They convinced a buyer to borrow the money from them to purchase their portion of the building. The buyer paid the sisters 20 percent of the sale price, or $14,000, in cash, and will pay back the remainder in three years at 10 percent interest.
”I thought the gods were smiling on me that day (the building was sold)
because I thought I was going to take this one with me to retirement,” Grant says.
The elderly owner wasn`t as lucky.
”What (the buyer) did is lease his apartment to a family with quite a few children. (The other owner) is still living there. However, she`s not real happy with the people who are leasing the apartment upstairs,” Grant says.
Frank sums up the risks and rewards of buying a home with a friend in this way: ”It all depends what you`re looking for. I think it can work, but it`s not for everyone.”
