- The Washington Times - Thursday, June 3, 2004

With the prices skyrocketing in the Washington area, some single residents are finding it practically impossible to achieve the income level and gather the down payment and closing costs to purchase a home.

Rather than wait and continue to pay rent while watching home prices climb, some singles are choosing to team up with a friend, relative or a romantic partner to purchase a home.

Combining incomes to qualify for a higher loan and to share the monthly payments might seem to be a simple solution to the barrier of achieving homeownership, but there are some concerns that should be addressed before making the leap into a partnership of this magnitude.

“The first decision people need to make is if they want to move in together or if they want to buy property together as an investment, which they will rent to other people,” says attorney David Modell of the Law Offices of David P. Modell in Bethesda.

“In either case, it is important to plan ahead and make an agreement in writing about how you want to hold title on the property, the financial arrangements and what will happen to the property if the partnership dissolves,” he says.

Attorney Carol Blumenthal of Blumenthal & Shanley in the District says, “People need to look at buying property together as a business arrangement.

“Just as it’s prudent to visit an attorney before going into business with someone, it’s prudent to visit an attorney before buying property with someone. An attorney can put an agreement in writing and discuss how to approach a purchase.”

Attorneys recognize that when the partnership is romantic, the couple is less likely to make a partnership agreement in writing, even though it would be the prudent thing to do.

“It’s similar to a prenuptial agreement, which, while practical, kind of flies in the face of the fact that you are about to make vows which say you will love and cherish one another forever,” Mr. Modell says. “Emotion often overrides practicality.”

Attorney Bob Slugg of Goodwin, Slugg & Campbell in McLean agrees. “When people do a partnership agreement,” he says, “there’s a whole lot to think about that they don’t want to think about unless they have already been through a disaster.

“It spoils the romance to think about the possibility of the consequences of a breakup,” Mr. Slugg says. “But if you can swing it and not ruin your relationship, then get the big things in writing.”

When unmarried people choose to purchase property together, they must decide how they will hold the title to the property and how they want to hold the loan.

“Partners can choose to hold the title to the property as ‘tenants in common,’ which allows each person to own a certain stated percentage of the property,” Mr. Modell says. “Another option is to own the property as ‘joint tenants with right of survivorship,’ which means that upon the death of one of the owners, the property automatically becomes 100 percent owned by the other partner.”

The legal term referring to “tenants” is not about rental, but rather a person who is entitled to possession of property.

If a property is owned as an investment, a third option is available.

“Buyers can choose to purchase property as part of an LLC (limited-liability corporation), which means they have a member’s agreement, which can specify what happens upon the death of a partner,” Ms. Blumenthal says. “An LLC will usually have accounts which govern the corporation, which also makes it easier to transfer the property.”

Buyers who wish to purchase property with friends need to work with a lender who can advise them on loan programs that will be to their advantage.

“Partners can choose to be co-borrowers or to have only one person on the loan,” Mr. Slugg says. “You can put someone on the title to the property even if they are not the borrower, and you can put someone on the title even if they will not be living in the property.

“For instance, a father who is helping out his kids by co-signing a loan will want his name on the title so that if the kids default on the mortgage, he still has some leverage as an owner of the property,” he says. “From a personal standpoint, it’s better to be co-applicants for a loan because it makes both parties equally personally responsible for the purchase. The person who’s not on the note has more freedom to walk away from the property, even if their name is on the title.”

The only reason most people would choose not to have a partner on the loan is if that partner has credit problems that would cause the loan to be denied.

Mr. Modell says: “Each lender has their own rule about whether or not you can have a sole borrower but two names on the title. Sometimes, you cannot keep the title if you are not on the loan.”

No one can legally discriminate against friends or partners buying a home together, as long as their financing is in place. But private sellers might allow their own prejudices to affect which contract they accept if there are multiple offers.

Occasionally, co-purchasers will try to avoid discrimination problems by putting only one name on a contract.

“I don’t recommend that anyone buying a home with someone else put only one name on the contract,” Mr. Slugg says. “Lenders don’t usually offer a loan to two people when only one name is on the contract, and adding an addendum later with another name can be complicated. If you are planning on purchasing property with another person, you need to contract that way upfront.”

Buying with a partner also brings tax implications that do not exist for married couples who choose to file taxes jointly.

“You can split the tax benefits in accordance with the ownership percentage,” Mr. Slugg says. “But unless you are splitting it right down the middle, it is best to consult a tax attorney or accountant to determine the appropriate way to handle it.”

A far bigger concern than any of the issues at the start of buying property is the problem of what to do with the property if the partnership dissolves.

“Anybody at the start of a relationship is friendly, and they don’t want to look at the dark side,” Ms. Blumenthal says. “The reality is that many relationships don’t last and the people involved don’t part on amicable terms. When that happens, the property can be a burden.

“If the partners are mad at each other, they can use it as a weapon, and even if they are amicable, the partner that wants to stay in the home may not be financially able to buy out the other partner,” she says.

A variety of financially disastrous scenarios are possible when property-owning partners split.

“If partners are splitting up and one decides to move out, they can determine the equity in the home, and the person leaving can choose to buy the other one out,” Ms. Blumenthal says.

“If they decide the equity is $20,000, one partner pays the other $10,000 and leaves. But when that partner chooses to buy another property, a lender will likely turn down that person because they still owe the mortgage on the other house,” she says. “Even if the partner claims that their ex-partner is covering the mortgage, a lender will still see it as an obligation owed by both. It’s necessary to refinance the home when the partners split up, and if one partner cannot qualify on their own, then the house must be sold.”

Sometimes people avoid the problem of refinancing by simply allowing one partner to move out while the other continues to make the payments on the loan, but this solution can have negative consequences, too.

Ms. Blumenthal offers an example, pointing to the importance of not losing track of a partner after a split.

“A couple of friends buy a home together, and then one partner leaves and disappears for 10 years,” Ms. Blumenthal says. “Meanwhile, the other partner pays for the mortgage and the upkeep of the house. Now the home needs to be renovated, and the owner needs to borrow money to pay for the renovation, but the lender will not approve the home-equity loan without the signature of the other co-owner, even though that owner has had nothing to do with the property for 10 years.

“You cannot allow a person with whom you own property to fall out of your life completely,” she says. “That’s the worst thing you can do.”

Another problem Ms. Blumenthal points out is the possibility of a former partner running into credit problems.

“If someone still has their name on the title of the house and they run up a lot of credit card debt, it’s possible that the property may become subject to liens by creditors,” Ms. Blumenthal says.

“The liens would have to be paid before the house could be refinanced or sold even though they have nothing to do with the person living in the house and paying the mortgage and taxes,” she says.

Property disputes that end in the court system usually result in little satisfaction for any of the parties involved.

“If you end up in court, everybody loses,” Ms. Blumenthal says.

Mr. Slugg points out that disputes over property sometimes escalate over items within the home, including fixtures, furniture and window treatments.

“If you cannot just split everything 50-50 or have one buy the other out, people often end up in court with a suit for partition,” Mr. Slugg says. “In this case, a judge will appoint a trustee for the sale, who will then hire a Realtor to sell the property. The judge will determine what percentage of the profits goes to each partner after the settlement.

“But this is really not the way to go if it can be helped, because then you have the attorney’s fees and the trustee’s fees in addition to a Realtor’s commission, plus all the normal costs associated with the sale of the property,” he says. “These are all the reasons why it is a good idea to put in writing who put in what money all along and who gets what if the property is sold.”

Ms. Blumenthal notes the importance of keeping all records pertaining to the property.

“When you are dealing with real property, you need to keep records forever,” she says. “When you decide to sell the home, you need to know what you purchased it for and what you spent on it over time.

“If partners break up after a long time one, may want to claim more than 50 percent of the interest in the property if they can prove they paid for more of the improvements than the other partner,” she says.

Another concern of partners is what happens to the portion of a property owned by one partner if that partner dies.

“A settlement attorney can resolve this issue at the time of settlement with forms that can be signed at the closing,” Mr. Slugg says. “If the partners own the property as joint tenants with right of survivorship, there is no issue and the property automatically goes to the surviving partner. If the property is held as tenants in common, then it could be a mess.

“The heirs will probate the will and may then own a share of the property, or, if there is no will, the state will figure out who the property should go to, which could even be against the wishes of the partner who has died,” he says.

In addition to a will or to holding property with a right of survivorship, some potential problems can be solved by having a written partnership agreement in place before property is purchased.

“A partnership agreement should cover how valuations of the property will be handled, along with voluntary buyouts, forced buyouts and the death of a partner,” Mr. Modell says. “You need a lawyer to write this agreement to make it as legally binding as possible.”

A partnership agreement can help prevent some problems, but it may not solve all of them.

“A contract is a good idea because it commits us on paper to what we want to do when our heads our cool,” Ms. Blumenthal says. “Having a written agreement is a good thing, but it’s not a panacea. At the end of the day, it can still be broken and the partners will still need to go to court.

“I’m not saying you should never [buy property together] because that would be saying that people should never trust each other,” she says. “Marriage is a trust, and so is a partnership. You should just be as prudent in your partnership as you would be in a business partnership.”

All three attorneys strongly recommend seeking proper advice for your particular situation from a lawyer, tax adviser or both.

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