Fifteen years ago, Connie Knapp moved to Chicago and, with $5,000 in her pocket, went looking for a home to buy.
But she kept coming up short of what she needed for a mortgage until a friend from work added $1,000 to the coffer and went in on the deal. The two women bought a two-flat in Evanston, shared the bottom unit and rented out the other one for income.
“It’s an excellent way for single people to get a tax deduction and to begin to put some significant money together,” Knapp said recently.
Like Knapp, many potential homeowners are forming alliances and pooling their money to take advantage of the tax breaks, the investment possibilities and the lifestyle benefits of homeownership.
Those alliances are not without pitfalls, however-be they legal, financial or emotional. We’ll discuss how to avoid them. But first, why are partnerships so particularly attractive today?
For some, it’s also the only way to get in on today’s low interest rates, given the economic environment: high real estate prices, mounting consumer debt, and job security rattled by the recent recession.
Making it affordable
Whether two siblings, two friends (platonic or otherwise) or a parent and child team up, partners are finding that by combining assets, they can buy property they couldn’t otherwise afford.
A prospective buyer who cannot qualify for a mortgage alone, for example, may have a parent co-sign, with the combined income persuading a lender to grant the mortgage.
Or a home buyer may have the income to handle monthly mortgage payments but not enough savings for a down payment. A parent or friend might step in to cover the down payment in exchange for equity in the property.
Mortgage lenders say the relationship between the buyers doesn’t matter to them. “There used to be all sorts of objections from mortgage companies,” says Joan Riordan, a Chicago-based attorney in private practice. “They have vanished.”
“Whether it’s a gay couple or someone not married, we cannot discriminate,” says Lisa Byrne, a lender with Margaretten & Co. in Melrose Park. “It makes no difference to us.”
Owner occupancy
What mortgage lenders do care about is owner occupancy. Most want to see some percentage of the mortgage being paid by those who will be tenants of the property.
In theory, the nature of the relationship between partners buying a home should not matter to the seller, either. “We’re not looking at rentals,” says Connie Abels, president and owner of Abels Realty. “Once somebody buys and gets a mortgage, the seller’s out of it.”
If a married and an unmarried couple both put $5,000 earnest money down on a house, for example, the sellers should consider only the financial ability of each pair, says Ronald Branch, broker and owner of ERA Branch on the South Side.
“Those contracts have no faces,” Branch says. “A good broker explains the contract offer based on its own merit.” However, he added, emotions sometimes come into play.
If the sellers have been living in the same home 30 years and have brought up their children there, they may identify with the married couple and want to sell to them, Branch says.
“Our job is to not allow it to affect their decision,” he says.
Even though the benefits of real estate partnership are plentiful, so are the potential pitfalls, especially for unmarried partners.
When a married couple divorces, there is a legal division of assets, says Anthony Ferguson, a Chicago-based attorney in private practice. “If one person can’t buy the equity out, you can ask that the home be sold and the equity divided.”
When unmarried couples part company, it’s not so clear what will happen to the house, since there’s no legally binding relationship.
Here is a checklist of hazards-and their solutions-for unmarried partners.
Credit history
For starters, your partner can be a liability in trying to qualify for a loan. If your companion has large debts or a poor credit history, it may be difficult to get a mortgage.
In this case, you may want to put only the name of the person with the stronger credit history on the mortgage.
“Usually the mortgage company will let us put it in a land trust and make the other person (the one not on the mortgage) the beneficiary on it,” Riordan says.
(A “land trust” is a device to hold title to real estate while allowing the actual owners of the property to maintain control. The land trust becomes the named title holder, and the owners, who direct the actions of the land trust and control the property, are known as the beneficiaries of the land trust.)
Equal liability
Even if your partner’s name is on the mortgage, it doesn’t obligate him to make the payments, Ferguson says. Your partner-and you, for that matter-could stop contributing to the mortgage payment, the taxes and utilities.
Yet, if one partner stops paying, the lender can pursue either person on the mortgage or both of them, regardless of which person stops paying, loses his job or one day walks out the door. Also, you can both expect your credit rating to plummet if the payments are late.
Mismatched incomes
If your income is much greater than your companion’s, the benefits of the alliance for you may dwindle. Sometimes, however, two sets of liabilities may complement each other: Financial opposites can attract.
“If somebody’s got credit and no money and somebody’s got money and no credit, that’s a partnership made in heaven,” Abels says. “And you don’t have to own 50/50.”
Say you are a mother and son team. The son needs the down payment and the mother could use a tax break. You can structure your partnership to benefit both. “Anything can be structured, so long as it’s not an attempt to commit fraud,” Abels adds.
For Knapp, although she initially put in five times the money her partner did, her partner was better skilled at repairs and her work on the building increased the value of the property.
“To me, it was an even deal,” Knapp says.
Partnership agreements
The best way to protect yourself-and keep relationships strong-is to spell out your understandings in a written contract, real estate professionals say.
Lawyers and brokers urge anyone buying property outside of a marriage to draft a partnership agreement.
A good partnership agreement should spell out: who is responsible for paying what percentage of the mortgage, insurance, taxes and major utilities; contingencies for when one party cannot meet his or her financial obligations; who owns what furniture; under what circumstances the property may be sold; and how the partnership may be dissolved.
Often partners feel their verbal understanding should suffice. If the pair is romantically involved, they may avoid thinking that one day they might not be together. But these are precisely the arrangements that can cause problems, Riordan says.
“Where you have the hassle is a man and a woman, because it usually means some romantic involvement that goes wrong and when they split, it’s holy hell,” she says.
Likewise, relatives or friends-especially a parent aiding a grown child-might be used to doing things informally. “I know that with parenting comes unconditional love for the child, but this is a financial situation,” Branch says. “The parent can have his credit rating ruined.”
A partnership agreement may be a bonus to the relationship. You may feel you can better trust your partner knowing that he cannot just walk away or sell his interest in the home outside of the terms of a contract.
But one more caveat: Even with a partnership agreement, “only a judge can make somebody do something,” Ferguson says. “And you’ve got to file action, you’ve got to win and it all costs money. It’s something I can’t counsel people enough about. You’re basically going into business with someone.”
Table of contents
A partnership agreement might also include:
– A listing of who brings what into the home, from furniture to major appliances. You can’t be too specific, Riordan says.
In the case of one unmarried couple Riordan knows, the man had a computer in which the woman had files. When they split up, the woman had difficulty getting her files back.
– A provision for what happens if one person gets married and the spouse moves in. Under Illinois law, that spouse has a homestead right-the privilege to stay in the building-even if he or she is not listed on the title, or if the original partner moves out.
– A way for the partnership to be dissolved. What do you do, for example, if one member is unable to buy out the other’s interest? Or if one party wants to get out of the arrangement?
“I suggest you have the property appraised and the remaining party can buy you out or otherwise put it on the market,” Riordan says. “Give a time limit on these things. Otherwise the person who wants out would have to file suit to force the sale of the property, and it’s very expensive. It’s ridiculous to have to do that when you can do it on the basis of a contract.”
