The Ins and Out of Using Co-Ownership to Purchase a New York City Brownstone
Many people have dreams of living in a New York City brownstone but find that it is out of their financial reach. As such, they end up sticking to renting, erroneously believing that they have no other option. However, the solution may be co-ownership, depending on your situation. Some brownstones have two duplexes, 3 units, or can easily be renovated to meet your specifications. Co-buying is how unmarried individuals can come together and purchase a building to enjoy homeownership and build equity in their investment. Over the last couple of years, the share-economy is flourishing. Similarly, co-buying and co-ownership have gained increasing popularity, so much so that it is becoming a cultural norm in places such as New York City, where property prices have increased substantially relative to living wages.
What is Co-Buying or Co-ownership?
Co-buying is when two or more individuals buy a property and agree to share ownership. This partnership can be arranged in infinite ways, and the percentage of ownership does not have to be equal, depending on how the owners take title to the property. One can co-buy a property with another couple, friends, family, or a corporation.
What are the types of title when co-buying a property?
When purchasing a property with another owner with whom you are not married, you have two options for taking and holding the property title.
- Tenancy in Common (TIC)
Tenancy in common is the most popular way for multiple owners to take title to a property. This is mainly because it's a very flexible ownership structure. Notably, the owners do not have to divide the shares in the property equally. Instead, the owners can base the ownership share on the pro-rata amount of how much each owner contributed to the purchase. Additionally, each co-owner can leave their share to their heirs and designate who will inherit their shares upon their death. However, the new owner (beneficiary) will have to go through the state's probate court to change the property's title into their name. However, co-owners should be mindful that this may be a complicated process if there is still a mortgage on the property.
- Joint Tenancy with Right of Survivorship (JTWROS)
On the contrary, in Joint Tenancy with Right of Survivorship (JTWROS), the ownership shares are divided equally between each owner, regardless of each owner's amount invested. This form of ownership is best used where each owner contributes equal amounts (or close to equal). Further, with JTWROS, each owner has the right of survivorship. This means that when one owner dies, the surviving owners automatically inherits the deceased shares in the property. This is done by operation of law and does not require a will to transfer ownership. Unlike Tenancy in Common, this process avoids the long, expensive, and time-consuming probate process. JTWROS is more common with families and married couples. Although, keep in mind, married couples in New York have their own co-ownership title, called Tenancy by the Entirety, where a surviving spouse automatically because of the sole owner of the property when the other spouse dies.
How to Finance a Co-Purchase
To purchase a property using co-ownership, a primary borrower takes out a mortgage with another borrower or multiple co-borrowers. Together, they use their income and assets to qualify for the mortgage. Typically, the mortgage lender makes each co-borrower equally responsible for repaying the mortgage debt and requires them to each hold some sort of ownership interest in the home; however, on the mortgage application, the co-owners can indicate how they intend to hold the title. However, due to the complexities, it is best that each co-owner consult with their lawyer and/or CPA to understand the advantages and drawbacks of the deal. After the ownership structure is finalized, the lender prepares the mortgage loan agreement. The title company will then prepare the title deed to reflect the type of joint ownership structure that the co-owners agreed upon.
Co-Borrowers vs. Co-Signers
A co-borrower is different from a co-signer. Specifically, a co-signer is an individual who guarantees a loan but typically does not live in the property or have any ownership rights. Lenders can, however, hold a co-signer responsible for the repayment of the debt the same way it would as an owner. However, a co-signer is still not a joint owner.
Unique Risks of Co-Ownership
While co-ownership is a great way to invest in real estate and upgrade your living space, as with any investment, it comes with its own unique risks and drawbacks, some of which we will discuss below.
Beware of Partitions
For the most part, things are great between co-owners, that is …until they're not. As a solution to feuds between co-owners, each owner legally has the right of the partition should things go sour. There are two different types of partitions. One type is the actual and physical dividing of the property, which may not be practical depending on the type of property. The second type of partition is where the property is sold by court order, and the proceeds are divided between each co-owner. This can be a huge headache, time-consuming, and expensive. As such, you must think carefully about the people you choose to own property with.
Right to Occupy the Premises
Don't forget that each co-owner has the right to occupy the property at any time. This doesn't matter how much each co-owner owns the property or whether they have a 1% or 90% ownership share. Each co-owner STILL has an equal right to use the property at any given time.
Paying the Property's Bills & Expenses
Similarly, each co-owner must pay for the property's expenses in proportion to their ownership share. This can potentially raise fights amongst co-owners, especially when one owner owns a majority share. Notably, suppose the majority owner feels like the minority owner(s) have been using the property more. In that case, they may feel like the minority owners should be responsible for the property expenses or contribute a higher amount than their proportional share.
Duties Owed to Other Co-Owners
Further, co-owners do not owe each other rent. Co-owners can rent the property to third parties without the consent of the other co-owners. Co-owners are not entitled to compensation for managing the property or otherwise improving the property. However, income derived from renting the property must be proportionately shared with the other co-owners.
Co-owners can make changes for the property without consulting or getting approval from the other owners. This is especially true if the proposed change, renovation, or modification benefits the property.
Co-Owner's right to Mortgage or Relinquish His Share
A co-owner can always mortgage his or her share in the property. This is true even if the co-owners do not get permission or even discuss the transaction with the other co-owners.
Likewise, a co-owner can always sell, give, or donate his or her share in the property to anyone at any time. There is nothing the other co-owners can do if one co-owner decides to sell his property. This right can create a big headache because co-owners end up owning a property with someone they did not originally intend to or, even worse, someone with who they don't want to own property.
The Importance of Ownership Agreements
In general, to avoid most of the preceding issues, the co-owner should enter into an ownership agreement, which is basically a contract governing the co-ownership of the property. In this ownership agreement, the co-owners can agree to waive the right of partition, address who can use the property and land, address each co-owner's financial responsibilities, etc.
Don't Miss Out on Your Chance to Purchase Property Right Now!
While it is true that 2020 has been a challenging year, especially amid the global Coronavirus (COVID-19) pandemic. However, as it pertains to real estate, investors are getting great deals in New York City by taking advantage of the slower real estate market and weaker economy and purchasing investment properties while prices are on the lower end. This is mainly because people are looking at their property and space differently. Now is the perfect time to upgrade living spaces. Another thing to keep in mind is that more people will be working from home for the foreseeable future. Owning living spaces that comfortably allow for home offices and virtual learning for children is ideal. With that being said, during the height of the pandemic, real estate prices in New York City fell approximately 54%. Generally speaking, with low activity, desperate sellers, and an economic slump, the market shifted quickly, and savvy investors took advantage of it.
Overall, townhome and brownstone ownership are great options for families who want to remain in New York City but still require additional space that traditional apartments are lacking. For those who can't afford to do it financially on their own, co-buying is an excellent option to achieve homeownership in New York City.
Schedule a call with me here if you have any interest in obtaining a complimentary valuation for your home or buyer consultation.
Authored by: Stanley Montfort
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