Buying property with friends and relatives – be aware of the pitfalls!

Buying property with friends and relatives – be aware of the pitfalls!

Rising property prices have led to many purchasers pooling resources with friends and relatives to buy real estate. This can be a great wealth building strategy however it also has the potential to be a costly disaster. Below are some key factors to bear in mind when you are taking the leap into property ownership with friends or relatives.

You can be forced to sell!

Section 66G of the Conveyancing Act 1919 allows any co-owner of the property to make an application to the Court to force the sale of the property. If an application is successful then trustees will be appointed to sell the property. This means that you won’t have control of the sale. The trustees, and potentially the legal costs of the Court application, will be paid from the sale proceeds before you have access to any equity.

The Court has a limited discretion to refuse an application under section 66G so the best approach is to avoid getting to this point. Which brings us to our next tip.

Have an exit strategy!

Given our human frailty and inability to predict where life might take us, it is critical to sit down with your co-owners and work out an exit strategy.

What if a co-owner’s circumstances change and they can no longer fund the property? What if a co-owner wants to access their equity in the property to fund further investments? Do you want an option to purchase the other owner’s share and if so, on what terms? Can you force your co-owner to sell to you? What if you live there and one co-owner moves out – will payment arrangements change? What if costly repairs are needed?

Having these discussions early and planning for as many eventualities as possible is a great start to avoiding a dispute in the future.

Work out the boring details!

From the start it is important to be clear as to who is doing what, when and how. Agree on who will be responsible for managing the administrative side of the property, such as paying rates, monitoring the mortgage, managing tenancies and repairs.

You should also establish a system of reporting and agree on the information that will be circulated and at what frequency. Misunderstandings between owners often leads to dispute. Regular and open communication may avoid many headaches.

Finally – document in writing and make it detailed!

Investing in a clear and concise Co-ownership Agreement from the outset is money well spent. Documenting the agreement reached with your co-owners reduces the chances that you will end up in a dispute and, if you do end up in a dispute, the written agreement may just be your saviour.