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New Yorkers are resourceful (they are, after all, New Yorkers), and coming up with strategies to meet the city’s challenges is almost part of the deal when you decide to live here. That, of course, includes navigating New York City’s real estate market, infamous for its jaw-dropping prices.
Perhaps, looking at your smallish apartment, rising rent, and significant (but not super-sized) reserves for a down payment, you’ve had a lightning bolt moment: You’ll pool your money with similarly positioned friends and buy a two- or three-family to live in together. Eureka! You’re a genius! Life is good!
You might be, and it is, but while going in on a building with friends (for example, two young families purchasing a townhouse together) could be a way to maximize your buying power and make your real estate dreams a reality, it’s not an arrangement you should enter into without a considerable degree of thought.
Yes, you can do it
First, it absolutely can be and has been done. Attorney Adam Stone of The Stone Law Firm, says he works on a co-buying deal about once a year, and recently helped two married couples buy a brownstone in Harlem. Craig L. Price, partner at Belkin Burden Wenig & Goldman, has helped a young family buy with a single person (the former of which, he notes, was prepared for what living in a building with small kids could bring). And Citi Habitats agent Michael Eisenberg has personally purchased multiple properties (as investments and vacation homes in Queens, Miami, and Utah) with a friend.
However, everyone we spoke to about entering into a co-buying partnership advised serious prep and discussions before signing on the dotted lines.
Friends may not make good real estate partners
You heard it here first: “Being good friends with someone and living with them is a completely different proposition, as anyone who has ever had a ‘best friend’ become their roommate only to end up barely speaking when the lease ends, can attest,” says Corcoran's Marie Bromberg. “You don't really know how well you will cohabitate with someone until you live with them, and although the units are separate, there's also a lot more at stake than a lease.”
It may be preferable to enter into this kind of partnership with people you’re not close with personally, Price suggests. “People with similar goals can be good neighbors,” he says.
Regardless, you need to have a thorough discussion about expectations, and get them in writing. (Yes, you should hire a lawyer to help you clearly document your agreement.)
“Getting anything in writing is a good idea, because people misremember things, and people also interpret things differently,” Eisenberg says. To that end, it’s good to be as detailed as possible as you document what you agree upon.
Sitting down to discuss and make decisions about how things will be handled with a lawyer is not only prudent and practical, it also can help all parties become aware of the many factors involved and of potential issues. “In concept, you may like the idea, but when the rubber hits the road and you realize all the issues you have to deal with, you may not,” Price says.
“Just having the discussion can be invaluable,” says Stone, adding that some people may ultimately decide they’re not up for such a potentially complicated agreement. “If that’s what happens, at least you figured out you don’t have the stomach for it sooner rather than later.”
Finances and financing are key in a co-buying situation, and all parties should be as transparent as possible: about expectations, assets, debts, etc. Not sure about your co-borrower’s financial picture? You should be. “Ask for some proof, even though it might be awkward,” says Eisenberg, who also recommends agreeing on a certain amount of money that will be set aside to maintain the building.
People can purchased a property together as a group of individuals, with all parties named on the mortgage, creating what’s known as a Tenants in Common agreement. Another route is to open an LLC and purchase the building through that entity—although your lender will still want to know the financial health of the individuals behind the LLC.
Not everyone needs to contribute equally, or own the same share of the building or LLC, whichever the case may be—but should one person default on their agreed payment, the other co-owners are responsible for making up the difference.
It’s in everybody’s interest to imagine, and prepare for potential issues, scenarios, etc. “Then if you can’t agree on something, you can say, ‘This is what we all agreed,’” Stone says. Inevitably, some points will be particular to you and your building, but examples of the many, many, things to consider and discuss include:
Who lives where? (The garden apartment, the upper duplex, etc.) Are any spaces shared?
How will decisions be made? Do “votes” on issues need to be unanimous? Do parties with a greater financial stake get more voting power?
How will the common areas and exterior be maintained?
Who is responsible for snow removal, prepping for trash removal, etc.?
The roof is leaking, impacting the upper tenant more than the lower, who is not in a hurry to spend $50,000 to repair it. What now? (Stone suggests getting an engineer’s report to assess the condition of the roof or other major elements so you know what repairs may be on the horizon.)
Will there be renovations? How will those be handled, scheduled, etc.?
Are there lifestyle differences that need to be addressed, i.e., a single person who likes to entertain and a family with a young child that needs to sleep?
Perhaps one of the biggest issues to consider is what happens if one person wants or needs to get out, due to a job transfer, financial issues, or other life events. Can they rent out their apartment? Does the other owner need to approve the new tenant?
If you’ve bought under an LLC, the person leaving may be able to sell their share of it, but typically, the tenant staying has the right of first refusal. But if they don’t want, or can’t buy out the person exiting, they’re potentially entering into a legal and financial agreement with someone they did not choose to do business with in the first place. (In some instances, this forces a sale of the entire building.)
If your purchase was done under the names of individuals and there is a loan still outstanding on the building, it’s much more complicated to extricate a person or people from the contract, but you need to plan and prepare for it. Stone points out that for married couples, there are guidelines in place to navigate such fractures, but with friends, “You don’t have the mechanism in place, so you’re creating it yourself.”
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