Even with interest rates at their lowest levels in fifty years, getting onto the property ladder in today’s economic climate isn’t always as easy as it sounds. Saving the deposit for the property you want can be difficult all by yourself. But by pooling your resources with friends or family members, you could find a way to get into the property market sooner rather than later. Here’s a few important things to take into consideration. It’s best to get legal advice They may be friends and family, but purchasing a property together is a business arrangement so the first thing you should do is seek legal advice from a professional solicitor and draw up a formal agreement in writing. Always consider the worst case scenario when setting up the legal side of things and include a dispute resolution process so you have a method of working out any disagreements. You may think this is unnecessary when dealing with people you know and trust, but a formal agreement will make sure you all have clear and consistent expectations regarding your arrangement. You also need to take into consideration what may happen down the track. You and your family or friends may all be on the same page now when it comes to your investment, but what happens when time goes by and your spouse or children inherit your assets? Avoiding disputes now and into the future is an important consideration. In addition to a dispute resolution process, the agreement should also cover every other contingency you may encounter throughout the process. You should decide in advance things like: how the price will be determined when it comes time to sell. What will happen if one person wants to buy the others out. Who will take care of managing the property – day to day details like insurance, rates, finding tenants and so on? What will happen if one of you cannot meet their financial obligations for some reason? Only a professional legal advisor can make sure you are meeting all the legal requirements of entering into this kind of partnership. They will also be able to tailor a contract that covers off all the contingencies that might arise during the arrangement. Consider your financial liability If you and your co-owners are borrowing money from a lender to purchase the property, the lender will consider you ‘jointly and severally liable’ for the debt. That means that if one of you cannot pay their share of the mortgage, the others will be held responsible for their share as well as yours. Insurance products can help to minimise the risks and cover your commitments in the event of unemployment, illness, injury or death. Perhaps you can look into insurance products for everyone involved, like life insurance and income protection insurance to make sure that no one is left holding the baby as far as mortgage repayments are concerned. Additionally, you should have a plan in place for how you will cover the cost of unexpected repairs and expenses. Consider setting up a sinking fund that everyone pays into for repairs and renovations. What’s your exit strategy? Buying a property with family or friends may restrict your capability to borrow money to purchase property on your own in future, because the bank takes into consideration the whole of the first loan as your responsibility – just in case your co-owners default. For this reason, it’s best to have an exit strategy in place. Think about how long the arrangement will last before you begin. In an ideal case scenario, will you hold the investment for a minimum of five years, seven years, or ten years? Can the decision to sell be made by one partner or will it take all of them to be in agreement? How will you proceed to a sale if one partner is suddenly unable to pay their share of the mortgage? In your written agreement, include details of how a sale will be managed. How will the sale price be determined, how will a real estate agent be appointed, whose solicitor will you use? How will the sale proceeds be distributed? These details are easy to resolve in advance, but circumstances may make them extremely difficult to negotiate down the track. If you would like to enter the property market by pooling your resources with family members or friends, talk to us today as your mortgage broker. Joint financing can be arranged for the right partners, so teaming up with someone may just be a good idea to get you started on the property ladder. Call us today.
Buying a property with family or friends
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