Should You Co-Buy a Second Home?

We’re speaking with Craig Venezia, a nationally-recognized expert on home mortgages, and the author of the soon-to-be released, “Buying a Second Home: Income, Getaway, or Retirement.” Today, we’re in the midst of a second-home ownership boom, fueled by such factors as the shrinking American family, older and wealthier households, and new technologies for working from home. One out of every three homes purchased in the United States today is a second home. A 2006 survey by the National Association of Realtors revealed that most second-home owners are married couples - 83% of vacation-home owners, and 75% of investment homeowners. Also, that minorities are playing an increasing role in the second-home market, accounting for 11% of vacation-home purchases, and 17% of investment-home purchases, and that buyers must be enjoying the second-home experiences. 21% of vacation-home buyers go on to buy one or more additional vacation homes, and 34% of investment-home owners go on to buy additional investment properties. Perhaps you’re thinking about taking the plunge, maybe as an alternative to other investments. For example, to rent or resell the property. Or, maybe you’re thinking of buying a cabin by your favorite lake or your favorite ski area. Or, perhaps you’re thinking ahead towards retirement; you may want to find a manageable, well-located home now. Whatever the reason, investment, vacation, or future retirement, the purchase of a second home can still be a burden. One solution is to share ownership of a second home. That can significantly reduce your debt burden. Co-ownership might also, depending on the background of your co-buyer, enhance your collective knowledge of home improvement, financing, property management, and other relevant matters. But, co-ownership of a second home may also have downsides. We talked about it with Craig Venezia.

NOLO: Craig, over the past five years, median home prices have skyrocketed 37% nationally, while household incomes have grown by only 4%. So, someone who is maintaining one household and home may be stretched to purchase a second home. One solution you discuss in your book is to partner financially with someone else interested in owning a second home. Why don’t you start out by listing the pros and cons of shared ownership?

CRAIG VENEZIA: Shared ownership, also called co-ownership, is effectively buying a home with another person, and what that means is that both of you are putting your money in, both of you are appearing on the mortgage documents, both of you have legal ownership of the property. Depending on how you structure the deal, it may be a fifty-fifty split, or it may be some proportionate amount based on who puts in what money, who is doing property upkeep and management, etc. But, overall, the things to think about with co-ownership are that it’s a way to have somebody else share the debt burden of owning a second home. For many people that can mean the difference between whether they even own a second home or not. Now, obviously, there are a couple of other benefits, as well, that you’d want to look at; depending on your co-buyer’s background, you may be able to round out experience where you’re lacking. So, for example, if you are sharing the purchase of a home with someone who is handy with a hammer and you’re not, that person can bring those skills to the table. Maybe you’re pretty good on the financial end and managing the books, you add that to the table, so everybody wins. It also saves a lot of time in the management and upkeep in a second home; you can share the responsibilities, which a lot of people find very advantageous. Now, you’re right, where there are pros, there are also cons, and the cons are something that you really need to look at, and then balance the two, and decide which makes sense for you. So, let’s talk about a few of the cons. Well, sometimes you could have a situation that becomes strained, and broken relationships can even occur. It depends on what expectations are laid out upfront, and that’s the key, doing it upfront. Who is going to take care of what? By not knowing what you’re going to do ahead of time, you can have a lot of miscommunication occur, and that can lead to problems. You’re not going to figure out everything right off the bat; things are going to come up that you’re going to say, “Jeez, we never even knew this existed,” or, “We never knew this problem was going to happen.” That’s okay; the key is to communicate with the co-owner, and make sure there’s a give-and-take. Silent treatment is the worst thing co-owners can do. Another con to think about is you really have to have the foresight to think about all the issues that are involved and, more importantly, nobody likes to do this, but what happens if a disagreement comes up? How are you going to handle it? Or, worse, what happens if somebody wants out of the deal, you know, two, three, or four years down the road? Does the person who’s going to stay in the deal have first right to buy the property? What happens if they can’t? So, these are all issues that you need to discuss and think about, and even pull in some professional such as a real estate attorney, who ultimately would draw up a contract between you and your co-owner. And, yes, I did say draw up a contract, and that’s an important thing. Sure, you’re going to have the legal documents in terms of being listed on the mortgage and listed in the promissory note, but you don’t have a legal document that is required that says who does what, what happens if someone wants out of the deal, what happens if somebody wants to bring another co-owner into the equation. These are the types of things that working with a real estate attorney who has experience in co-ownership agreements, you can work out these scenarios. Truth be told, you could do a contract on a napkin; that’s okay. It really depends on the relationship you have with your co-owner. I think the bottom line of co-ownership is that, for the right individuals, it makes sense; you just need to think about the issues that will come up, and make sure you map it all down, you put it in writing, and you have a contract between the parties. If you take care of it from that perspective, you should minimize the amount of problems that you’ll have down the road.

NOLO: Craig, co-ownership seems like it just makes the whole thing a lot more complicated, more of a hassle, and if you’re sharing it with a friend or a relative, it seems like a recipe for disaster. So, how do you know whether someone is right for you for co-ownership?

CRAIG VENEZIA: It’s interesting you should ask that, because I have a chapter entitled, “You don’t have to go it alone: Buying with others.” That chapter focuses on co-ownership, and within that chapter, I have developed the co-buyer compatibility questionnaire, and basically what it is is a half a dozen questions that you should ask your potential co-buyer, and they should ask you, and you should do it alone. Each answer them, and then compare your answers, and it’s going to be very telling whether you are compatible with that person or not. For example, the very first question is, “What is your primary reason for buying a second home?” Well, that sounds like a pretty simple question that everybody shouldn’t even have to ask the second person. But, imagine if you said “for future retirement,” and your potential co-buyer said, “for vacation.” Well, you may have a problem – what happens if, five years from now, when you want to retire into that house, all of a sudden your co-buyer keeps showing up at now your primary residence and saying, “Hey, we’re here to spend our two weeks this summer; move on over.” You got a problem. So, co-buying may not be the best with that person.

NOLO: Another question about co-ownership of a second home… although it’s probably not a common issue, I’m sure many owners are wondering, what happens if their co-owner dies?

CRAIG VENEZIA: It all depends on how you’re holding title on a property. There are two ways to hold title on a property: tenancy in common, and joint-tenants with rights of survivorship. With tenancy in common, what that means is that each of you can sell or transfer your ownership interest in the property without getting the consent from the other. That’s by far the most common way for unrelated co-buyers to take title, and if one co-owner dies, his or her share is transferred to the beneficiaries of the estate. So, in my book, I have an example about this. Let’s suppose that Thelma and Louise are best friends who buy an investment home together for $200,000. Thelma covers 65% of the purchase price, with Louise making up the rest. They agree that Thelma will take 65% ownership interest in the property, and Louise 35% interest. Suddenly, Thelma dies when her car goes over a cliff. According to Thelma’s will, her young beau Brad is her beneficiary. That means Brad gains a 65% ownership interest in the property. If you’re holding title as joint-tenants with rights of survivorship, it usually means your co-buyer is somebody that’s related to you, maybe your spouse, significant other, or even somebody that’s really close to you. With this form of ownership, you and your co-buyer have no choice but to have equal interest in the property, fifty-fifty, right down the middle. Unlike a tenancy in common, upon the death of one of the joint tenants, the remaining owners gain the deceased owners’ interest in the property, and this happens automatically. So, using the same example, under joint-tenant with rights of survivorship, if Thelma and Louise had taken title that way, each would have had a 50% ownership interest in the property, regardless of the amount each had contributed towards the purchase of the property. After Thelma’s death, her half would automatically be transferred to Louise, who now has 100% ownership in the property, while Thelma’s young beau Brad, well, he would just be out of luck.

NOLO: Craig, one last question about co-buying a second home… some co-buyers form a separate business entity, like an LLC, to co-own the second home. Will forming a separate entity to own the second home shield you and the co-buyer from a default on the mortgage?

CRAIG VENEZIA: Probably not. Your bank’s not going to let you off the hook that easily. Many mortgage-lenders will have you and your co-buyer co-sign your second-home loan. And they do that because they want your personal guarantee that you’re going to make good on the money that they’re lending to you. Think about it from their perspective – if somebody comes to you and says, “Can I borrow a few hundred thousand dollars? Oh, and by the way, if I default on this loan, you’re not going to come after me personally, because you can’t,” well, you may have a little problem lending the money. That’s how the banks think, so they’ll usually ask for your personal guarantee on the loan, in spite of the fact that you set up a separate business entity.

NOLO: Thanks very much to Craig Venezia. Following the release of his book, Buying a Second Home: Income, Getaway, or Retirement, we’ll be back with a second interview with Craig Venezia. You can pre-order Craig’s book at amazon.com.