Before Co-Buying a Home With Someone, Have an Exit Strategy: The Prenup of Real Estate
Updated: Jul 19, 2020
You are moving in with another person (whether the relationship is romantic or not) and you decide not to rent, but rather to buy a house. Homeownership is, after all, considered a good investment, right?
Before you launch in, however, make sure you and your future roommate agree on a few matters; not just everyday things like who takes the trash out and who goes grocery shopping, but what happens if and when you decide the relationship isn’t working, or one of you has a major life change such as a new job in another state. Who gets to keep the home? Do you both have to leave? Can one of you buy the other out and if so, at what price?
Well before such an issue turns into a crisis, it’s wise to plan for the possibility that you and your roommate will, eventually, want to part ways, and that either one or both of you will then want to keep the home.
The best way to plan is to create a contract that outlines, among other things, your various options. Below is a rundown on what to include in this written agreement.
Including a Statement of Each Owner’s Percentage Share
Start by determining each of your ownership interests, as a percentage. Typically, each owner would want a 50% share, but that’s not your only choice. Maybe, for reasons unique to your situation, one roommate wants to own more or less than 50%. This could be due, for instance, to one of you planning to front more of the down payment, or one of you wanting to limit the value of his or her property ownership in order to qualify for certain benefits.
You also want to be clear about how you own the property legally (take title). Do you want the property to go to your roommate in the event that something happens to you? Or do you intend for someone else to inherit your share? See How Unmarried Couples Can Co-Own or Take Title to a Home for further tips.
In order to fairly divide up your ownership interests, factor in not only what each of you pays toward the property initially, but what each is expected to contribute to it later, in the form of monthly mortgage payments or even services. If one of you is willing to clean, cook, and grocery shop, for instance, such services have a value that can count as a contribution to homeownership. Keep track of each contribution you make to the home—not just the initial one—so that when you leave the investment, you will get back your entire share.
Including a Clause to Allow for Renegotiation of Ownership Terms
Flexibility is important when making any type of agreement, and shared homeownership is no different. That’s why it’s worth adding a clause to your contract stating that you have the option to renegotiate the terms of your ownership.
This gives you many options not just when things go bad, but also when circumstances change for any reason. One of you may get a raise at work and want to make a cash contribution to pay down the mortgage. Or maybe you need money and want to take a lesser share in exchange for cash from your roommate.
Including Language Allowing One Roommate to Purchase the Other’s Share of the House
The simplest exit strategy is what’s called a buyout. In this scenario, each roommate is given the option to purchase the other’s share. The terms of the buyout must be outlined in your contract. Will you want a cash buyout? Or are you willing to let your soon-to-be-exiting roommate pay you over time? How will you decide the current value of the house? And then, will you charge interest, and at what rate?
Valuation can be an especially contentious issue, so be clear about acceptable methods for setting a price. The simplest way to arrive at a sales price is to look at recent sales of comparable houses on the market. This is something a real estate agent or professional appraiser can assist with.
Including a Provision That Requires a Sale if One Roommate Wants to Leave
If both of you think both of you think you may not want to renegotiate terms of ownership, nor consider a buyout, nor deal with rentals, you can include a provision in the contract that requires a sale of the house when one roommate wants to leave. You may never use it, but it could come in handy someday.
Allowing One Roommate to Rent Out a Share of the House as Alternative to Buyout or Sale
Sometimes, one roommate wants to move out but does not have the money to buy his or her share. Or maybe one roommate has a temporary remote work assignment. What then?
This is when it is helpful to have a rental clause in your contract. The roommate who is leaving can rent out his or her portion of the house and continue to have the benefits of homeownership in the form of passive income. Note, it is wise to have a clause stating that the remaining roommate has the right to interview prospective tenants for compatibility and veto anyone he or she is unwilling to live with.
Allocating Responsibilities for Costs When Both of You Want to Sell
Both parties can, of course, eventually decide to sell the home and recover their respective percentages plus any profits. All selling costs should be shared according to ownership percentages. Be sure to consider the logistics of preparing a house for sale.
To prepare for this, your contract should answer questions regarding whether you agree to stage the home prior to sale, when furnishings will be removed from the house, and what other routine items need to be taken care, and at whose expense, before the home can be listed for sale.
This information is provided for general informational purposes only. No information contained in this article should be construed as legal advice and does not establish an attorney-client relationship.
Originally published in Nolo