At Landed we often get asked questions from people interested in buying property with a friend or family member. Usually when people come to us, their primary concern is accessing homeownership in high-cost housing markets. To understand whether co-ownership might be an attractive housing solution for individuals hoping to purchase a property together, it is important to first understand how property ownership works.
We use this term ownership all the time but rarely pause to ask what it means. When it comes to real estate, ownership has a very specific meaning and history. In short, ownership means possessing the rights to property.
In some cases, rights are referred to as sticks. Because ownership is a bundle of rights, property ownership is often referred to as a bundle of sticks - with each right as a stick in the bundle. In some cases, these rights (or sticks) can be separated and reallocated to different people.
With real property, this bundle of rights is also referred to as title. However, note that title can also refer to the formal document, such as a deed that serves as evidence of ownership. When you go to transfer ownership, a deed will be recorded with the local authorities, usually the county recorder's office. This government office records all property ownership history back to the first recorded owner of the property. This historical chain of ownership is called the chain of title.
It is worth noting here that the authorities generally organize property ownership by assigning a unique record for the property. This chain of title is associated with a specific undivided property. Unless, the property is subdivided, the title will be tracked as a single property.
If you're thinking about buying a property with someone else, it is important to ask three questions. First, how am I related to the other buyer(s)? Second, how do I want to share the rights and responsibilities associated with the property? And third, what do I want to happen if I die? These questions will help you determine how you want to take ownership of the property.
How Should I Take Ownership of the Property?
This is an important question that most buyers don't think about until they are well into a home purchase transaction, sometimes days before closing. It's a good idea to become familiar with your options early.
When property is transferred from one owner to another, the names of the people buying real estate are written in a unique way known as a vesting description. This is important because it describes how the rights of the new owners are allocated.
Broadly speaking, the types of vesting can be divided into two categories: sole ownership and co-ownership.
Vesting Descriptions for Sole Ownership
- A Single Man/Woman: A man or woman who has not been legally married. For example, Sally Purchase, a single woman.
- An Unmarried Man/Woman: A man or woman who has been previously married and is now legally divorced. For example, Brad Buyer, an unmarried man.
- A Married Man/Woman as His/Her Sole and Separate Property: A married man or woman who chooses to acquire a property in their name alone. The buyer will need their spouse to disclaim his or her right to the property. For example, Stan Builder, a married man, as his sole and separate property.
Vesting Descriptions for Co-Ownership
- Community Property: A property purchased by a married couple during their marriage which they are buying together. In California, property purchased by a married man or woman is presumed to be community property. The property is owned equally by both buyers and either spouse has the right to dispose of their half of the property, including by transfer upon death. For example, Sally Purchase and Brad Purchase, husband and wife as community property.
- Community Property with Right of Survivorship: Much like community property but upon death of a spouse, the deceased spouse's interest transfers to the surviving spouse. For example, Sally Purchase and Brad Purchase, husband and wife as community property with right of survivorship.
- Joint Tenancy: A property purchased by two or more people, who may not be married, in equal interest, and subject to the right of survivorship. The property is owned equally by each owner and the property is undivided. For example, Sally Buyer and Bruce Purchase, a single woman and an unmarried man.
- Tenancy in Common: A property purchased by two or more individuals as undivided fractional interests. Each person's ownership in the undivided property may be equal or unequal. Each share can be bought or sold independently of the other. For example, Sally Purchase, a single woman, as to an undivided 75% interest and John Buyer, a single man, as to the remaining undivided 25% interest.
Both joint tenancy with rights of survivorship and community property share equal ownership interests in the entire property. This means that each owner is entitled to use the whole property and the interests cannot be split up. Moreover, in both of these cases, when one owner dies, the deceased owner's share of the property passes to the surviving owner rather than being passed to another person via a will. There are, however, some important tax and legal implications to consider when choosing between these two options for married couples. These considerations are best addressed with a real estate attorney.
Note that the above reflects practice in California.
Special Considerations for Tenancy in Common
In high cost housing markets, aspiring homeowners might find a property they want to purchase but come to the realization that they can afford only a fraction of the property. Thus, they might consider buying a home with a friend or family member who also wants to go-in on the purchase and share the costs and benefits of homeownership.
Historically, the buyers might choose to subdivide the property into two or more separate properties. However, in certain markets, subdivision is difficult, time consuming, or extremely expensive. In these markets, a Tenancy in Common (or "TIC") can be used as an alternative to an actual subdivision.
Because the property is technically undivided, buyers who purchase a property as a TIC often also sign a TIC agreement that outlines each owner's exclusive rights to occupy and use a particular space within the co-owned property. The agreement usually includes restrictions on uses of the property, limits on the sale of the property, and responsibilities related to property management and maintenance. The TIC agreement will also usually go into an allocation of expenses. Through this TIC agreement, the buyers are able to access some of the benefits of a subdivision without legally dividing the property.
There are some limitations to TIC purchases, however. First, the mortgage. Typically, a property is purchased with a mortgage and the lender takes the entire property as collateral for the loan. Even though one TIC owner might be paying their mortgage on time, if the other fails to do so, they might find their home foreclosed upon. This type of financing is often called group loan.
To make up for the risks associated with TIC group loans, some lenders have come up with what is known as fractional financing. Fractional financing involves two separate loans, one to each TIC owner. Currently, only a handful of lenders offer fractional TIC loans. These loans are generally more expensive and are limited to loans with rates fixed for 5 or 7 years and then adjustable after that.
There are a lot of decisions that need to be made when buying a home. Understanding how property ownership and vesting works is an important item to consider, especially if you're thinking about buying a home with someone else. If you have questions about your options, it is important to talk to a lawyer who can provide specific advice related to your own circumstances.
Landed and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.