Buying a home in Encinitas as an investment or residence with friends may sound like the perfect idea. You don’t have enough for a down payment, but combined with one of your friends, together you have enough. However, a deal such as this can go bad and ruin your friendship. Here are 4 guidelines to go buy, so that you and your friend(s) are fully prepared.
1: Examine & Discuss
If you and your friend(s) are serious about buying a home together, this is not the time to keep secretes. Here are a few key points that need to be discussed:
- Review All Finances: Everyone’s credit score, monthly income, down-payment portions, extra savings accounts, retirement funds, and all other finances should be put on the table. If for some reason some major structural repair needs to be made on the home a year or two after you buy the house in Encinitas, that is not the time to learn that your friend doesn’t have extra money for large repairs.
- Discuss Responsibility: Are your friends dependable and follow through on their promises? It’s important to discuss everyone’s living situation before buying a home because this may be their first time living on their own with responsibilities such as paying utilities.
- Imagine It’s a Business: Buying a house together is essentially a business deal. In the end it’s not just a place to live, but a major investment. Make certain your friends understand that they essentially will become co-owners to a major investment.
2: Get a Mortgage
There are two ways mortgage experts say to apply for a loan with a home purchase – The first being that every owner should be listed on the loan paperwork to avoid future disagreements about repayment. If one person’s income is not enough to cover the mortgage payment alone, you may have to supply all names.
Others consider that the way to qualify for the best loan possible, only the person with the best credit and highest income should apply. If one of your friends or yourself have a significantly higher credit score, having other people sign on could result in higher rates.
3: Prepare Legal Paperwork
Make sure you hire a lawyer to write up a contract. Don’t think that because your friendship is so perfect that nothing ever could go wrong. Problems can arise from someone wanting out of the place because they want to start a family, someone losing their job, or if the absolute worst happens, who would inherit your share should something happens? You could consider a deal where all parties own a share of the property. Here are some things that the contract should include in the details:
- Payments & Ownership: Who contributed money to the down payment, who pays for what portion on the mortgage, real estate taxes, and home repairs/maintenance?
- Receipt of tax deduction: Only one owner can claim a tax deduction on the home. Make sure you know who is going to claim the deduction and what the co-owner(s) receive as compensation.
- Decision Making: Make out a plan for resolving disputes about home maintenance, utilities, and the like.
- Daily Life: Similar to sharing a rental, be sure to set out guidelines about noise, parties, guests and overnight guests, cleanliness, and pets. Rules to respect each other’s privacy and other mutual agreements.
4: Plan Out for the End
Expect your co-ownership of the house to last only a few years because when someone wants to get married, move to another city because of a job opportunity, or something of that nature, there should be contingencies to protect the investment. Are you going to sell the house? One person buys out the other?
If you are very stressed out and are fearful that the hard questions are going put your friendship at risk, then maybe buying a home together with your friends isn’t the right decision. But if you can follow the guidelines above, owning a house in Encinitas without yourself carrying the entire burden of all the costs can result in it being a worthwhile decision.
Sources: Gilan Gertz, “Buying a Home with Friends” http://www.realtor.com/home-finance/homebuyer-information/buying-a-home-with-friends.aspx
Anne Miller, “4 Keys to Buying a Home with Friends” http://www.realtor.com/advice/4-keys-to-buying-a-home-with-friends/