Interesting changes are occurring in real estate as the social media generation moves into home-buying. These new, often non-traditional homebuyers need to learn how to protect themselves when making a life-altering investment. This column will identify some areas of concern.
According to a recent National Association of Realtors, or NAR, 2019 Profile of Home Buyers and Sellers report, 37 % of homebuyers are under 38 years old. In this report, unmarried couples made up 9% of homebuyers and uncategorized others made up 2%.
Multi-generational homes were also purchased by 12% of homebuyers for some of the following reasons: 1. Caretaking of aging relatives; 2. Cost savings; 3. Adult children or relatives; 4. For aging parents or the return of adult children; or 5. A larger home that multiple incomes can afford.
Additionally, a recent CNBC segment highlighted an increase in homebuyers pooling their resources and forming “partnerships” to maximize home-buying powers. However, be aware that homeownership between partners is treated differently than with married couples. Understanding these differences is important to protect the biggest financial asset many homeowners will have in their lifetime.
First, consider a co-habitation agreement to spell out how expenses are shared. While the obvious expense is the mortgage, other considerations include furniture, utilities, repairs, major remodeling and everyday maintenance upkeep. This agreement should define ownership of other assets to avoid confusion of what belongs to whom, as well as issues such as the rights, duties, obligations and responsibilities common in a homeownership.
One thought on how to take care of unforeseen repairs and maintenance issues is to plan for them. Setting aside 1% of the house value per year — on a monthly basis of course — would help to create a readily accessible slush fund when an emergency arises. This helps to ensure a sudden expense does not stress the partnership if one party can’t pay the full amount when needed.
Unfortunately, disposing of property can be more complicated than its acquisition. Planning for the worst in the beginning is the best way to preserve the maximum value of the assets in the end. So, the agreement also should be detailed and specific about what happens if the partnership dissolves — amicably or not. The eventual tax consequences can be complicated.
If the partnership dissolves, be aware that the agreement won’t cover a partner’s release from the mortgage obligation — only the lender can modify that obligation because all of the partner(s)’ names are on the original loan documents and responsible for payment. From the lender’s perspective there are two issues: 1. the remaining partner(s) must still be able to qualify to make the mortgage payments and 2. the partner(s) who leaves are still obligated to pay if the mortgage payments are not made.
If the lender is not notified of the parties separating — which is more common than you think — the person(s) who left may have a problem obtaining another loan because records will show they are still obligated on the first loan, even though they have not made payments since separating. This is type of scenario is best discussed with the lender when making the initial loan application, so the partnership agreement can reflect the process.
Another option is to form a limited liability company — which can be formed for any lawful purpose. An LLC also can provide asset protection and transfer of ownership — in life and death — while letting partners retain control.
However, to dissolve the LLC, a court must determine the company is unable to continue with the purpose for which it was formed. Unfortunately, a property title change might bring tax consequences. Selling the property might also become a reportable tax event.
Second, follow through and coordinate the intent of the agreement with all partners' written wishes in their wills to minimize outsider challenges. While it is difficult to imagine the worst-case scenario, the death of one partner can cut off the asset from the living one. Without proper documentation, the remaining partner could have a difficult time proving ownership rights and be left to fight relatives for home and assets.
Third, consider obtaining a term or decreasing-term life insurance policy to benefit your partner and/or family. In many relationships, one partner earns more than the other. This disparity can create a financial hardship if the higher earner dies. A life insurance policy can provide an extra measure of security and give the remaining partner some breathing room. For a disgruntled family member cut off from an asset, an insurance policy might be just enough to soothe feelings and prevent an unnecessary challenge.
For non-married partners, these legal touches can give you some of the benefits of married counterparts. With your home being one of your biggest assets it deserves extra precautions to protect it.