Puzzle Finance Blog

To co-own or go it alone?

Buying a property with friends or relatives might make financial sense, but it must be negotiated carefully.

In the US, bank loans secured by mortgages on individual shares of co-owned property are one of the most rapidly expanding areas in the mortgage-lending industry.

In Australia, after a flurry of interest during the property boom, shared property ownership between friends or family members is very much the exception.

Robert Larocca of the Real Estate Institute of Victoria says: ''We've never been able to quantify the amount of shared property ownership.''

Shared property buying has gone off the radar with the improvement in housing affordability, stability in property values and lower interest rates.

A senior sales consultant with Hocking Stuart in Carlton, Michael Amarant, says: ''In 2007-09, you would see friends and family members saddling up together to combat [the lack of] housing affordability. It is a symptom of the market when people feel desperate and property values are rising fast.

''When these things happen, people feel they can undertake the risk and get out some time in the future when their circumstances change.

''But when the market is down, you have to factor in the in and out costs of buying and selling, the main cost being stamp duty.''

Yet for some Victorian families, joining forces with other individuals or families has been a way to get on the property ladder.

Ben Richards and his wife bought a half-share in a house in Coburg with a single friend of long standing for $312,500 each about six years ago.

''We could have done the mortgage but it was a way of halving the mortgage when we were having a family,'' Mr Richards says.

The house lent itself to a division, with the co-owner taking the rooms upstairs and the Richards family living in three rooms downstairs, with a shared middle section.

The one agreement they had was that there be no television in the neutral area.

''We have all lived in shared [rental] houses and one of the important factors was that no one had labels on food in the fridge. Everyone cooked and ate together,'' Mr Richards says. When they had their third child, they installed glass doors to section off upstairs.

Although there was no formal agreement between the parties, the understanding was that the arrangement would remain in place for five years to ensure there were no financial losses from getting out too soon.

The family recently bought out their friend amicably and now have a house that's appropriate for three children.

''It is not an arrangement that would suit everyone,'' Mr Richards says. ''You have to have a commitment to making the house work and be flexible.

''There would be a dust-up once every six months about something minor; everyone would get it out of their system and the house would recalibrate.''

It helped that their co-owner was often away for work and that they had a country property they could go to at weekends.

There were no issues about money or repairs.

Negotiating the buyout was the most potentially difficult aspect - ''keeping the whole thing together as it came to an end''.

The price of the co-owner's share was determined by two real estate valuations and a sworn valuation.

Buying property with an unrelated person was ''a life-cycle thing'' that enabled the Richards to get the family home they wanted and gave them a real appreciation of their own space. So sold are they on the experience, they have joined with their co-owner and two others to buy a house in Rosebud.

For Griff Clemens and his partner, Philippa Hawker, buying a holiday house with friends enabled them to eschew a mortgage. They bought their share of a Phillip Island beach shack for $45,500 in 1999 and apart from drawing up dates and times for shared usage, had no formal agreement.

''We achieved something we couldn't have done by ourselves,'' Mr Clemens says. ''We could have borrowed the money but we didn't want to.

''It is a dance of flexibility and you have to be getting something from it.

''The hardest thing would be if people live through their house and their identity is locked up in the decor. You can't do that.''

The other drawback is that you have to leave the house spotless every time you leave.

The only debacle has been flooding when their three-year-old left a tap on.

''That was as bad as a holiday-house disaster gets. It is easier when you are both coming from the same place with young children. The others recognise, 'There but for the grace of God …'''

Mr Clemens says it would be difficult if one owner saw it as an investment property and the other as a beach house. ''Looking back on the potential pitfalls, we were lucky it has worked as well as it has.''

A spokesman for the Law Institute of Victoria, Rob Bradley, says of shared property ownership: ''You are a little bit in the lap of the gods. You should be cautious and the economics of it will decide for you.

''It is a compounding of all the problems you get in a shared rented house but with all the property ownership issues, such as repairs, sale and realisation, thrown in.''

Mr Bradley has seen shared property ownership in the housing market only in sales involving siblings. The legal ownership framework for shared property is tenancy in common, which means co-owners share liability and can also specify the size of the shares and who will inherit each share.

Mr Bradley recommends having ground rules in place. ''If either party wishes to sell, you'd say, 'This is the process. You can accept my offer or the property can go to auction in 90 days.'

''Where there is a dispute, VCAT [the Victorian Civil and Administrative Tribunal] is a good system to undo it [the property ownership] because it is cheap and quick. VCAT can make an order for a property to be sold where there is an unresolved conflict.''

Mr Bradley says the risks inherent in financing properties with non-family members make shared property ownership uncommon in Australia. If overseas experience is anything to go by, it could become much more common as housing affordability decreases.

Posted by Helen Verlander - The Age on 29th September, 2012 | Comments | Trackbacks

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