In the best of times, seeking a new home for yourself or with a spouse can be stressful and lead to frayed nerves and second-guessing. There are complexities and potential pitfalls that can make for challenging moments in the buying process.
For people who are purchasing property as an unmarried couple or domestic partners, the story can be even more contentious if not thought through.
As home prices outpace the rate of inflation in Seattle, couples may want to weigh the benefits of getting a home before thinking of marriage. Why, for example, should a romantically linked Millennial couple making nice salaries be penalized when the prospect of co-owning a home could work?
Great idea! Or is it?
“A lot of issues can happen,” says Maxim Lissak, attorney in Bellevue, Wash., who often deals with this type of homeownership. “What happens when two people in a relationship and living together get into a fight? One person is excluded from the home or chooses no longer to be in the home. What happens then? Who’s going to continue to pay the mortgage? Who has the right to buy the home? If you don’t have a legally signed agreement, you’re in trouble.”
Parties in this type of arrangement must first decide who should have his or her names on title. In most cases, title to real property may be held in severalty (one person) or concurrent ownership (two or more people). In the most common scenario of two unmarried people in a romantic relationship, it’s likely the home would be concurrent ownership (better known as “co-ownership”).
There are two common types of concurrent ownership:
Tenancy in Common (TIC): When two or more individuals have an undivided interest in a single piece of property, they may be listed on the title as “tenants in common,” the typical method for unmarried individuals (including registered domestic partners) to share homeownership. Tenants in common may have equal or unequal interests. An individual wishing to release his/her TIC may be able to sell the interest to anyone (unless there are provisions in the deed, such as mortgage obligations, preventing a clean transfer); also, the heirs – potentially children from a previous marriage – may inherit the interest when the co-owner dies.
Joint Tenancy With Right of Survivorship (JT): In Washington state, this is when two or more individuals are equal owners of the property. The title will list each co-owner with the phrase “as joint tenants,” a less common type of co-ownership. A key feature of JT is when one of the individuals dies, his/her interest is automatically passed to the remaining owner(s) and cannot be granted to anyone else.
A property can also be owned by a partnership, corporation, Limited Liability Company, joint venture or trust. However, for the sake of two or more people seeking to share residential ownership (as opposed to buying investment property), we will limit this blog post to TIC and JT.
Just as spouses have prenuptial agreements drafted before saying their “I dos,” unmarried individuals, friends, relatives or business partners thinking of owning a home together should establish a legal framework to reduce potential ownership disputes later in life. Getting in is a whole lot easier than getting out of an agreement.
“What happens if one of the co-owners passes away?” Lissak asks, regarding a TIC. “The deceased’s family takes care of the personal affairs because they’re next of kin. So, how are they going to commence ownership of the home? Do they have the right to buy out the existing partner? Do they have to acquiesce and remain in the same type of relationship with this surviving co-tenant forever or do they sell under what conditions?”
With so much on the line, it’s important to clarify in advance some basic questions:
What are the ownership percentages?
Who has the right to sell the home?
How are home-ownership expenses divided and paid?
Who should claim the home on their taxes?
What happens if one owner wishes to sell?
Does the selling co-owner have to accept a buyout offer?
How will owners fairly assess the property’s value should a buyout be necessary?
“All these things should be spelled out,” advises Lissak. “And it’s important that each of the parties has his or her own attorney participating in drafting and reviewing the document.”
Clearly articulate these questions (and possibly additional ones specific to your situation) and actions to be taken in each event in a written agreement that is signed by all parties co-purchasing the property. (Yes, three or more people can co-own a home but our blog post focuses more on two-person relationships.) It’s important to note that the TIC or JT agreement is recorded with the county in which the property is located (in our case the King County Recorder’s Office) and treated as part of the title and other home-ownership documents.
In the absence of a clearly drafted agreement, co-owners may end up fighting for their rights through a legal process that can last for years and cost them dearly.
“When tenants in common have an agreement at the termination of their relationship and a dispute arises, the signed agreement may provide for an alternative resolution method such as mediation or arbitration to avoid the costly process of partition,” adds Lissak. In the TIC scenario, partition is a division of real property between co-owners typically ordered by the courts – a process everyone should avoid. (Washington state law covers partition in a whole chapter.)
An attorney in King County may charge $700-$1,500 – depending on the complexity of the TIC or JT agreement – a relatively small price to pay to avoid a potential legal battle.
And, as with any home-buying experience, please consider reviewing our Buyer’s Guide for step-by-step assistance and work with a reputable Realtor® (like me!) when preparing to own a home.