Housing affordability continues to be unreachable for many people – Australian house prices are already approximately 4-5 times the average annual household earnings. One way of buying a property is through pooling resources with other peoples – not your spouse – and buying a house together.
Tenancy in common is a principle of property law in Australia that allows two or more people to own property together. Unlike joint tenancy, each party can bequeath his or her interest through their will to beneficiaries of their choosing instead of to the other co-owners.
Tenants in common can own land in equal or unequal shares. It’s a more flexible form of property ownership and a co-owner’s rights and obligations can be set out in a co-ownership agreement to ensure the parties are clear about the parameters of the co-purchase.
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Joint tenants together own the entire interest in the property, but as individuals they own nothing. If one party dies, their share is transmitted automatically to the remaining owner.
Joint tenants have rights of survivorship: if one tenant dies then the surviving joint tenant takes the whole property.
Group purchasers should get a co-ownership agreement prepared for them before they buy a property because of all of the issues that might arise between the co-owners from the date of purchase of the co-owned property.Without a co-ownership agreement, it can be very costly to litigate what was intended to occur between the co-owners in the case of one needing to sell out or one party defaulting under their finance.
What are the risks of co-ownership?
- If one party defaults on their mortgage repayments and the other parties do not step in to pay the amount due, this will affect the credit ratings of all co-borrowers, as they have joint and several liability.
- As co-borrowers, parties are jointly liable for each other’s debts if they are using the co-owned property as security for their mortgage.
- Future home loan affordability is affected. Having responsibility for a loan jointly with others may make it harder to get a future loan for another property as affordability is assessed on an individual’s income. If one co-owner wants to buy a second property, the bank will take into account that first loan – but they’ll assess the whole loan as that borrower’s responsibility.
Tim O’Dwyer, real estate watchdog and consumer advocate also warns people to be careful about who you sign a co-ownership agreement with.
- Beware particularly of purchasing a holiday retreat this way, and hoping to amicably work out who will stay there, when and for how long. You just have to ask any brothers, sisters or cousins who may have been collectively left a holiday home in a relative’s will. Ideally a formal legal agreement is needed in that situation to set out how it all will work and what happens when someone wants out.
- In the case of an investment property (residential, commercial, industrial or a site to be developed), you must first know as much as you can personally and financially about your proposed co-owner/s and really trust them. Consider family before friends, and be most wary of strangers asking you to participate in a wealth-creating project.
- There can be strength in numbers where costs, expenses, risks and (hopefully) profits can be shared.
- Before any purchase agreement is signed or exchanged all prospective investors need to take legal and accounting advice on how the property should be owned, in what proportions/shares and whether spouses will be part of the deal. Apart from buying as joint tenants, tenants in common or in combinations of those types of holdings, you might be best advised to have a company (or companies) acquire the property and/or involve family or other trust arrangements.
- No matter how a property is purchased, there needs to be a formal legally-binding document of some sort setting out not only how the investment will be managed and funded by and between the investors but also making provision for disputes, deaths, divorces, dispositions, disposals and “dismemberments”.
- Be aware that the law allows any participant to seek a court order for the sale of a co-owned property. Courts can also be very expensively involved if disagreements can not be resolved within a company-owned property.
- Sound legal advice and cast-iron agreements are important when an adult child and spouse/partner is buying with mum and dad. Arrangements regarding granny flats and major extensions financed by mum and dad can occasionally go bitterly pear-shaped down the track.
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Ultimately, the best thing you can do is seek legal advice so that you are prepared for any eventuality down the track. We offer a FREE, 10-minute phone consultation. Contact us today.