- The Washington Times - Wednesday, August 4, 2004

Q I’m thinking of purchasing a second home with a good friend, since buying one on my own is just too expensive. What should I do to protect myself?

A: Purchasing a home with someone else — whether it’s a relative or a friend — can help finance your dream, but it also can create problems. You have to do your homework and work out an agreement that spells out the rights and obligations of each party. Issues range from the gritty details of how often the roof needs to be replaced to the larger question of what happens if your friend wants to sell.

“In theory, it’s a good idea,” said Sheryl Garrett, founder of the Garrett Planning Network of financial planners based in Kansas City, Mo. But she warned: “The quickest way to lose a friend is going into a business relationship without spelling out the terms of the business relationship.”

Miss Garrett and other professionals urge prospective co-owners to set up a limited liability company, which will address ownership interest and financial obligations.

But that won’t fully protect you. If your partner stops paying the mortgage, you will be liable. So it’s critical that you know your partner’s financial history well. More important, you need to protect yourself by having enough cash in the bank to cover the full mortgage for at least six months if your friend can’t.

Mortgage companies don’t care which one doesn’t pay, said Bob Walters, chief economist at Quicken Loans in Livonia, Mich. Both partners’ credit standing could get hurt if one falls behind.

When you buy a house together, “basically, you have thrown your lot together,” Mr. Walters said.

Here are some of the issues that need to be addressed when you form a limited liability company, according to financial and legal professionals:

• Will mortgage payments be 50/50 or on another basis? Friends could work out a deal where one puts down 75 percent of the down payment, and makes smaller monthly mortgage payments than the other. Of course, in a couple of years, the equity in the house could become even, so be sure to keep careful records.

• The buyers need to determine whether they want the house to be rented out, and under what conditions. Otherwise, one owner could stumble on a stranger when showing up at the house for a weekend.

• The document should spell out that if one party wants to sell, the other gets first right of refusal. It also should indicate how the sale price will be determined.

• Liability should be spelled out. It’s possible to make your partner liable for damages if she or he exposes the property to a dangerous situation or condition — for example, if your friend leaves a rake on the sidewalk, and a passer-by slips and falls, and ends up suing. That way, if your friend doesn’t have enough money, the injured party won’t be able to come after you, according to Diedre Wachbrit, a lawyer based in Thousand Oaks, Calif., who specializes in asset protection and estate planning.

However, the injured party still could go after the equity in the property, she said.

• Both partners need to agree on the annual cost of maintenance of the home, and set a cap on it. “You don’t want an overzealous partner demanding to build a third level to the house,” said Miss Wachbrit.

The document also should outline the schedule for major repair work, such as how often a new roof should be installed. If the partner falls behind on payments, then the document should stipulate that his or her equity share in the house be reduced by that amount.

Of course, there are lots of nonfinancial issues to be worked out, such as how many guests should be invited for the weekend or who gets to mow the lawn or clean the garage. That requires flexibility.


Sign up for Daily Newsletters

Manage Newsletters

Copyright © 2020 The Washington Times, LLC. Click here for reprint permission.

Please read our comment policy before commenting.


Click to Read More and View Comments

Click to Hide