Buying property jointly with a friend or family member may be appealing but buyers need to take steps to safeguard themselves from being left holding the can financially.
There are all sorts of circumstances in which consumers might want to share the ownership of a property, but they need to tread carefully if they don’t want to end up being responsible for the whole purchase price, says Shaun Rademeyer, CEO of BetterBond, SA’s biggest bond originator.
“We don’t see so many young people clubbing together to buy property anymore,” he notes, “probably because they are tending to rent for longer now and only buy their first home in their mid-30s, by which time we find they will mostly do so on their own or with a spouse or partner.
“But we do still see parents joining forces to buy flats or houses for their children to live in while attending university or college, groups of investors pooling their money to purchase buy-to-let properties, and families that are friends getting together to buy a holiday home in a favourite destination. Sometimes members of an extended family will also jointly buy a property such as a smallholding that contains several separate dwellings.
“And many of these buyers do take the trouble to get an attorney to draw up a very detailed co-ownership agreement before coming to us to apply for a home loan.”
However, he says, the major point that many prospective buyers in this situation continue to miss is that no matter how they split up the shares in the property, or what they agree on between themselves with regard to maintenance, occupation or income from the property, their agreement will have no effect when it comes to third parties such as banks or municipalities.
“For example, although the share of the property that is owned by each purchaser can be stipulated in the title deed and registered in the Deeds Office, the bank that grants the home loan will always want both or all of them to sign that they will be ‘jointly and severally’ liable to repay that loan.
“This means that the bank is entitled to recover the debt from all of the debtors in proportion to their shares, or if necessary, to recover the whole amount from any one of them. So if one co-owner should fall on hard times or stop paying for any other reason, the others will be required to make up the difference.
“Alternatively, if they don’t bridge the gap and the loan then falls into arrears, the bank will be entitled to ‘call up’ the debt and demand that all of them – or just one of them – settle the full amount owing or risk having the property repossessed.”
Similarly, says Rademeyer, the local authority is not going to be interested in who owns what percentage of the property if the rates or the water and electricity account falls into arears because one of the owners didn’t pay their share. “It will simply sue all the owners for the debt and in the meanwhile probably cut off the power, which will discomfort those who have paid just as much as the owner who did not.”
So the message, he says, is to be extremely cautious about who you decide to go into joint ownership with – and also to remember that the share you own will be an “undivided” share, which means that you will have responsibilities with regard to the whole property and not just a particular portion that you might occupy.
“We also believe that professionally drafted co-ownership agreements are essential, even if they don’t safeguard you against non-payment by a co-owner. For example, if there is no agreement stipulating the share breakdown, it will be presumed in law that they acquired the property in equal shares and that is what will be registered at the Deeds Office.”
On the other hand, says Rademeyer, buyers should know that if they have a 60% share of a jointly owned property, it does not mean that they own a larger part of the property. It does mean that they will pay 60% of the purchase price and costs of buying and operating the property – and get 60% of any income or profit from the lease or the sale of the property.
“It is also vital that the co-ownership agreement spells out what will happen if the owners decide to go their separate ways. Problems can and do occur if one co-owner wants to sell but the others do not, or if a co-owner dies, for example. So it could be agreed that if someone does want or need to sell, the remaining co-owner or owners will have the first option to buy his or her share - but also that if they choose not to do so, the whole property has to be sold and the proceeds divided according to the original shareholdings.
“In short, deciding to buy a property with someone else should not be an impulsive decision, because the long-term financial consequences can be very serious.”