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Should you buy property with family and friends?
Record-low interest rates and a fear of missing out on COVID-19 buying opportunities are leading many Australians to consider pooling resources together to buy a house.
Should you buy property with family and friends?
Record-low interest rates and a fear of missing out on COVID-19 buying opportunities are leading many Australians to consider pooling resources together to buy a house.
For the first time in almost a year, house prices have slightly fallen for the month of May, leading investors to consider it a good time to buy property.
But many Australians have opted to share their financial burden of buying a home with another person. Not only does this save costs, but it also reduces stress and time it takes to save for a deposit.
According to the founder and managing director of Reid Family Lawyers, Fiona Reid, there are risks associated with buying a property with a family member or friend that Australians should know about.
“Buying a property with a family member or friend can be a good way to get into the property market. However, Australians must be wary of the risks involved from a family law perspective,” Ms Reid explained.
She highlighted how if a parent tries to help their child, legally both the de facto couple has rights to the property.
“Often, for example, couples are ‘gifted’ funds by a parent to assist them to get into the property market. If the relationship ends, the ‘gift’, more often than not, suddenly morphs into a ‘loan’, which gives rise to added complexities in your family law dispute.”
“If you’re going down this path, make sure everything is clearly documented. If the money is intended to be repaid if the relationship ends, this should be set out in an agreement. There is also the option of registering the ‘loan’ (assuming it is to be repaid) on the title of the property,” Ms Reid noted.
With property prices dropping, many predict we are going to see a wave of Australians rush into the property market after being shut out for so long. There is a window of opportunity that a lot of Australians will capitalise on.
Ms Reid believes that Australians looking to purchase a house or apartment with a family member or friend need to understand the legal and non-legal risks involved.
She has provided four points for investors to consider.
- Be aware of your ownership rights
When buying a property with another person, Australians have two options. They can either be: (1) joint tenants or (2) tenants in common.
“Buying a property as ‘joint tenants’ limits what you can do with your share of the property. This means you can’t simply sell or bequeath your share of the property to someone else. If you buy the property together, you sell the property together. If an owner passes away, that person’s share transfers completely to the other owner,” Ms Reid said.
“So, people should be aware that if one joint tenant wanted to sell and the other one didn’t, you would have to go to court to force a sale of the property.
“On the other hand, tenants in common split ownership of the property. If you only own 50 percent of the property, that 50 percent is yours and you can do what you want with it. This means you can sell away your share at any time. What people need to know is that even if you own a property as a ‘tenant in common’, unless you agree otherwise, you have a right of occupation of the whole property. So, if one owner transferred or sold their share, the other person may end up owning and potentially living in the property with someone they wouldn’t otherwise choose to,” she explained.
“If you buy a property with a friend or family member, it would be prudent to enter into a separate agreement about the mechanisms to be put in place if only one of you wants to sell. This could include buying the other person out, having a say in who purchases the share and so on.”
- Ascertain your liability if your co-owner defaults on the mortgage
“Generally, a mortgage is secured by the whole property, regardless of the relative ownership rights. So, if one of you defaults on the mortgage repayments, you might be at risk of the bank foreclosing on the loan and seeking to sell the property. Take financial advice from a financial advisor/mortgage broker about the options available to you to protect your interests,” Ms Reid said.
- Protect yourself
“If you have bought a property with someone else or been gifted money by a family member or friend to assist with the purchase, make sure your interest in that property is protected from any future spouse or partner by entering into a financial agreement with your future partner before you live together with them. This type of agreement is intended to make provision for you retaining that property separate from any other assets you and your future partner may acquire if your relationship subsequently breaks down,” Ms Reid added.
- Buying together as a couple
“If you and your partner decide to buy a property together, either as joint tenants or tenants in common, think about entering into a financial agreement as to how the property will be dealt with if your relationship breaks down to avoid expensive and lengthy court proceedings down the track,” Ms Reid concluded.
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