Buying real estate with someone other than a spouse can be a costly mistake. If you are married and split up, you have rights that are addressed in the divorce process. However, if you are not married and no longer see eye to eye, you are going to need to resolve the issues on your own or hire an attorney. You may need to go to court in order to get the house sold and recoup your money.
A cohabitation agreement can help make that break-up easier. It can also improve the relationship by outlining the terms of how you will pay for expenses and delegate responsibilities. Here are 10 considerations to think about before you purchase the real estate:
• Down Payment – Decide how much each of you will contribute to the down payment and who gets it back if the property is later sold.
• Title Decisions – Determine whether you will both be on the deed and pay attention to how the deed is written. You can hold title as joint tenants with survivorship rights or as tenants in common. If you have survivorship rights and one of you dies, the survivor owns the real estate completely. If you own the real estate as tenants in common, your share will go to your heirs if you die.
• Liabilities – You need to think about whose name will be on the mortgage and who will make the monthly mortgage payments.
• Ongoing Expenses – Consider whether each party will pay a percentage of all of the normal expenses associated with owning and living in the home. These expenses typically include real estate taxes, betterment assessments, sewer and water charges, insurance premiums, electricity, utilities, heating costs, and all necessary maintenance, repairs and upkeep. If you want to make improvements to the home, decide on how that will be done and who will pay for it.
• Exit Strategy – Define how the agreement can be terminated. Often the agreement ends when one party dies or moves out, or if both parties agree in writing to end the cohabitation. If you decide to call it quits, address how one party can buy out the other, or confirm that you will list the property for sale.
• Buy-Out Price – Consider how you will determine the price if one party will purchase the real estate and discuss options in the event you cannot agree on a price. For instance, you can each choose a qualified, licensed appraiser to determine the fair market value. In the event you still cannot agree to a price, the appraisers can then together choose a third party qualified licensed appraiser to perform the valuation and come up with a purchase price.
• Dividing Profits – Decide how you will distribute the equity in the real estate if it is sold. You can split the profits equally, or the person who contributed more to the down payment can get a larger return on the investment. Don’t forget to consider who made the monthly mortgage payments, paid expenses, kept the house neat, and mowed the lawn.
• Allocating Losses – Determine how the mortgage will be paid off if you decide to sell and the sale price does not cover the outstanding mortgage.
• Disbanding the Dream Home – In the event of a break-up, discuss how the vintage furniture and artwork will be divided and who gets to keep the high-end, egg-shaped grill.
• Wedding Bells – If you will be getting married, consider converting your cohabitation agreement into a prenuptial agreement before you say “I do.” Getting married will bring certain rights and you will want to make sure they are clarified in writing.