Whether it’s a group of friends investing in a multi-unit building or a couple that sees no need to tie the knot before buying a home together, agents and buyers have plenty of reason to understand the distinctions between different types of joint ownership structures.
While purchasing a property is usually an exciting occasion, James Erwin of Erwin Law noted that it’s important to be prepared for the eventual dissolution of the union that is investing in a property together. And that sometimes means bringing up worst-case scenarios rather than making assumptions about what will happen in the future.
And as such, some awkward conversations can result. Erwin said he recently had a situation in which a newly divorced client was buying a property with his now-fiancée. “I said, ‘I hate to be the wet blanket here, but you’re my client and she’s not,’” Erwin recalled. “It’s always better to be clear and upfront, even if it can be uncomfortable for some buyers.”
Forming a limited liability corporation or a joint venture can function like the equivalent of a real estate prenuptial agreement, according to Erwin. In the case of the client and fiancée, they decided to create an LLC, structured such that she would have an ownership share, but in the event of a sale, Erwin’s client would be the first to recover any proceeds from that sale.
For buyers of investment properties, Erwin said this approach makes it easier to sort out who gets what — and even who can bail out of the partnership and under what circumstances — if one party wants to dissolve the ties.
“Let’s say I bought this two-flat with my buddy but my aging parent in Arizona needs me present and needs me financially, so I need to sell. But my buddy doesn’t want to sell. This can become the equivalent of a real estate divorce,” Erwin said. “Agents should tell their buyers that it’s a good idea to form a joint venture or an LLC agreement, so you have a plan for what happens and you have the rules of the game spelled out.”
Even if partnerships never sour, it’s a fact of life that everyone dies eventually. This is where it’s especially helpful to have a firm grasp of the difference between tenancy in common and joint tenancy. Joint tenancy is the most common vehicle used when a home is owned by a married couple: Each spouse has an equal share and interest over the home, and both have what’s referred to as “the right of survivorship,” meaning that when one of the co-owners dies, the surviving co-owner takes over that share. Tenancy in common is where two people own a property without the right of survivorship. This means they are co-owners of the property, and when one of the members dies, the rights of ownership transfer to the deceased person’s heirs. While usually split down the middle, tenancy in common agreements can also be structured where two parties do not have equal shares.
Understanding these distinctions, Erwin said, is key to helping clients — especially those who would like to buy investment properties — avoid mistakes that can derail their goals suddenly and unexpectedly.