Avoid the pitfalls of buying property with family
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Five top tips to avoid the downsides of buying property with your family.
With property prices nationwide still making ownership unattainable to many, families are looking into alternative methods to get onto the proverbial ladder.
One such method that is on the rise, particularly for young professionals, is co-owning with their parents. Children being helped out by the ‘bank of mum and dad’ is far from a new concept, but in this modern world has had a new lease of life for families searching for a smarter way to purchase property.
When surveyed, 37 per cent of Australians said that they would consider co-owning with a family member or friend, if it would make purchasing property more affordable.*
However, going into property with family carries its own set of risks. Despite a close bond, there are many pitfalls to purchasing with siblings or parents, ones that can be avoided by taking careful steps to ensure you have a formal co-ownership agreement in place to protect all parties.
Founder and CEO of Kohab, the world’s first digital platform, community and marketplace for co-ownership, and expert in the space David Dawson says, “Buying property alongside family is a great way for younger Australians to purchase property in an environment where they might not be able to do it alone.”
Here, David offers his 5 tips to families wanting to purchase property together:
Decide who can afford what
As with families, no co-ownership agreement looks the same. You may decide that it will be a 50-50 split between the two parties or 70-30 or three parties on title at 40-30-30. Parents may require their children to pay rent on the portion of the property owned by the parents, in order for them to service their part of the loan. What is key is making sure that this is all documented in a legal manner and understood by all, should there be any unforeseen hiccups further down the track.
Document your roles and expectations
Whilst in a dream world we would all have the same views on everything, that’s not always the case. I can’t stress enough how important it is to be clear and agree on your roles and expectations of co-ownership to avoid any disappointment down the line and to ensure that all parties have a smooth and beneficial experience of co-ownership.
Have an exit strategy in place
How parties exit a co-ownership purchase is one of the main questions I encounter from families. Make sure that exit options are clearly defined. It could be that the parties agree on first right of refusal to purchase the exiting parties share, or another co-owner is introduced by the leaving party or the property is simply sold on the open market and the sales proceeds split according to the per centage of ownership. This will ensure that leaving doesn’t impact negatively on the parties who want to stay. Co-ownership isn’t necessarily a forever arrangement, people’s circumstances change.
Be Mortgage aware
It's critical to obtain the right mortgage. Look for a mortgage that allows multiple parties to borrow against the one title. There are loans in the market place where serviceability can be split according to your individual percentage of ownership. For example, if a $800,000 property is purchased between two co-owners at 50-50 each, the co-borrowers should look for a lender that assesses their serviceability based on their income of their portion of the loan only. This means that if both parties combined have a $600K loan on a $800K asset, they need to be able to service $300K each and not $600K each.
Make sure you have a co-ownership agreement
As you can see, there’s many ways that this process can become a negative experience, but that really doesn’t need to be the case providing you have a co-ownership agreement in place, outlining all of these scenarios. Co-owning with family may seem like a no-brainer, but it’s always important to have legal agreements in place to protect you all.
David continues, “With 70 per cent of people surveyed by Kohab* saying that they wouldn’t be able to afford property in their chosen area, co-ownership allows families to overcome this hurdle and purchase property in their preferred location. In this day and age, co-ownership will undoubtedly be the way forward for many people, so taking these actions will ensure the experience is positive and beneficial to all parties involved.”
* Independent research was commissioned and analysed by Kohab. The data is based on the analysis of over 1,000 Australians over the age of 18 in February 2018.
This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.