Stratospheric property prices are a fact of life in Sydney and many other places in NSW. Young Australians and others just entering the property market can be forgiven for feeling daunted by the cost of a first home or the initial outlay required to get started in property investment. There may be a workaround, though.
Property co-ownership can offer financial advantages. A couple, a group of friends who would otherwise considering renting together or a budding investment consortium might want to consider co-ownership as a serious option.
The advantages add up. Co-buyers can pool their assets to make a down payment and their credit to get a mortgage. They might share maintenance or repair costs. They may still take advantage of the federal and state governments’ various schemes including First Home Owners Grants, First Home Saver Accounts and exceptions to stamp duty.
On the other hand, co-ownership is definitely not the answer for the uninformed or under prepared. To balance the benefits and the financial risks, a little background may be helpful.
Joint tenants vs. tenants in common
In NSW, these are the technical legal terms for different kinds of co-ownership arrangements (and have nothing to do with renting, name notwithstanding). In the early part of the twentieth century, most married couples were presumed to own property as joint tenants. It matters when a partner dies.
Mum and Dad owned a house for many years; Dad died; Mum inherited automatically. In legal theory, both always owned an undivided share in the whole property and neither could have sold or bequeathed their interest individually. There is no danger that Mum could have found herself inadvertently living with a stranger who inherited Dad’s share.
Most friends looking to share a house or property investors are not thinking about death or inheritance. Few consider holding property for life. In fact, they may be thinking about the benefit of building a credit history by making mortgage payments rather than paying rent, collecting some income or watching the market value of the property rise and then selling and reinvesting the proceeds elsewhere.
For them, owning as tenants in common may be more appropriate. Since the adoption of the Conveyancing Act 1919, that has been the legal presumption where the agreement is silent. The kind of co-ownership must now be specified in the transfer documents.
Each tenant in common owns an individual share in the property, and those shares need not be equal. Absent an agreement to the contrary, each shareholder can sell his or her share, borrow against it or bequeath it independently. Owning property as a tenant in common also has serious tax implications.
With a tenancy in common, therefore, it is very important to negotiate and agree upon the details of the ownership percentage, buy-out rights, approval of additional or new tenants in common, what to do in the event of foreclosure or personal bankruptcy and a host of other issues.
For the legal and financial protection of all involved, these details should be formalized in a co-ownership agreement. Failure to work these things out is naïve and will, with near certainty, end in a lawsuit.
What a co-ownership agreement should cover
A co-ownership agreement sets out the rights and obligations of each person with a share in the property. Consider that, even among the best of friends, disagreements may arise about:
- Whether or when to sell the property;
- Whether to refinance;
- Whether and how a party can be bought out;
- How to split income and costs associated with the property; or
- Mortgage repayments
Everyone involved should have a clear understanding of the finance risk. As co-borrowers, parties are jointly liable for each other’s debts if they are using the co-owned property as security for their mortgage.
More information? To find out more, give us a call on 1300 023 782 or email email@example.com.
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