Pitfalls of buying with a friend
Published 28/03/2013 | 04:00
MOST of us can always count on our friends, whether it's for companionship, moral support or sharing jokes.
But while they might be willing to lend you a tenner every now and again, would you consider sharing the biggest financial commitment of your life with them?
A small number of first-time buyers, faced with demands for large deposits from lenders and sick of renting, are choosing to buy their first property with friends.
However, property experts say only a few will ever consider this option and it only makes sense if both friends are willing to commit for at least five years.
Carol Tallon, a buyers' agent and author of the 'Irish Property Buyers' Handbook 2013', says: "In my opinion, it's not a good idea unless the parties agree to hold the property for a minimum set period, and work it as a strategic investment whereby they can choose to live in it or rent it out for a set price."
However, friends who are set on buying together can rest assured that many potential issues that might arise can be avoided by drawing up a strong written agreement.
Such agreements should, of course, be legally binding, says Paula Duffy, a family law solicitor.
"It's a contract between them and we would recommend it, because the big thing that arises is if one of them wants to get out and get their money out of the property, and very often, when I've acted for friends, they have an agreement that they wouldn't sell the property for five years."
Such agreements would set out what happens if one friend decides they want to sell but the other one still wants to stay in the property, or even if one friend dies.
"If you're buying with friends, you need to think about what happens when one wants out and the other doesn't, and what happens when one dies. You mightn't want your mortgage protection policy to go to the other person, for instance."
Such agreements may also offer some legal clarity in a situation where one friend loses their job and can't afford his or her share of the mortgage repayments.
Buying a property together can put a long-standing friendship under pressure if things don't work out.
"If there is a row over property, of course there's going to be tension, if one wants out and the other doesn't. If it has financial implications, then it's going to put a strain on the friendship," says Ms Duffy.
"With an agreement, everyone knows where they stand."
But besides a written agreement, there is the important matter of how you structure your joint ownership of a property.
"The first thing I would be saying is to buy as tenants-in-common and not joint tenants," says Ms Duffy.
"If a husband and wife would buy a property, they would buy it as joint tenants. But there's two ways of owning a property – one is joint tenants and the other is as tenants-in-common."
Structuring property ownership as tenants-in-common helps to protect debt, resolve credit-rating issues, or, in the event of either party dying, ensures that their share in the property goes to their next of kin – not the co-owner.
As well as buying as tenants-in-common, the friends should specify the ownership split according to their contribution of the purchase price.
"For example, if I have two friends coming in and one of them has an inheritance or had saved money, and he was paying the deposit but they were paying the mortgage jointly, in that situation, it is very important to set out what each is contributing to the purchase."
Ms Duffy also recommends setting up two separate accounts for paying back the mortgage so that there is a clear history of who is paying what at all times, in case there is a dispute later on.
"With couples, one might say, 'well, I'll pay for the holiday and you pay the mortgage'. But in situations where friends are not covered by family law legislation, you need to show that, 'actually, I paid 50pc of the mortgage and there's my evidence'."
A well-designed agreement can help avoid lots of potential problems, but the other unforeseen difficulty will be in persuading banks to give you and your friend a mortgage in the first place.
"I can only speculate and say that the banks most likely would consider this riskier than lending to an involved couple who were intending to co-habit," says Ms Tallon.
Ms Duffy says banks would be particularly wary of a situation arising where a friend wants out, particularly in this weak property market.
"The problem is, at the moment, banks won't let people take on the mortgage on their own."
For this reason, Ms Duffy suggests that friends who want to buy together would also have the financial capability to buy on their own, too.
Of course, for many friends, this would miss the main perceived advantage of buying together: to get on the property ladder because they can't afford to do so separately.