Buying a House With a Joint Owner

How to pick a financial partner without losing your shirt—or your friend.

Brian Free at the house he bought with a friend.

Brian Free at the house he bought with a friend.

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When Brian Free went to the closing on his Washington, D.C., row house in 2005, he arrived with more than simply a check for the down payment. Although Free, then 28, earned a solid income of around $80,000 a year as a construction project manager, he couldn't afford the roughly $2,500 monthly mortgage payments on his own. Instead, he teamed up with a longtime buddy, Pete Tuttle, as co-owners of the $430,000 property. "Neither of us had a big enough chunk of money to put down for a home in a desirable neighborhood," Free says. "However, aggregating our resources allowed us to find a home that suited our needs."

This tag-team approach is not as unusual as you might think. In 2007, joint buyers—that's friends or relatives—accounted for roughly 1 out of every 50 homes sold in the United States, according to the National Association of Realtors. But while getting a partner may make financial sense, it can inject new challenges into homeownership—just ask anyone who has ever lent cash to a poker buddy. So if you are considering joint ownership, here are some ways to keep your investment secure and your friendship intact.

Pick a business partner, not a roommate. A lender will typically review the credit histories of both parties. If your partner has been late on bills in the past, you may end up with a smaller loan at a higher rate. Both owners are on the hook for the entire debt, so team up with someone you can trust. "You really ought to take a personality test," says Pat Combs, vice president of Coldwell Banker ajs Schmidt in Grand Rapids, Mich.

Get a blueprint. Co-owners should agree on the financial arrangements from the outset. What percentage of the mortgage is each party responsible for? Who's covering the down payment? If the roof springs a leak, who will pay for repairs? Put the details on paper so responsibilities are clear. "It's almost like a prenuptial [agreement]," says Tim Robbins, the director of counseling at the Consumer Credit Counseling Service of Montana.

Lawyer up. Although such transactions are not terribly complicated, it's still a good idea to obtain a lawyer. Ralph Holmen, associate general counsel of the National Association of Realtors, says a real estate lawyer could walk both parties through the transaction for less than $1,000. "If [the deal] goes south," Holmen says, "it's going to cost a lot more."

Plan for the worst. Such transactions are typically arranged in one of two ways. Under a joint tenancy structure, property interests pass from one co-owner to the other in the event of a death. But if the deal is arranged as tenants in common, should a co-owner die, his share of the property can be passed on to his heirs.

Keep records. Sound bookkeeping is key, Free says. Detailed accounts of who spent what for mortgage payments, utility bills, capital improvements, and household maintenance will minimize disagreements and ensure that both parties are prepared for tax season.

So, how have things turned out for Free? "Reasonably well," he says. "[But] it takes two people that are pretty well established, comfortable with each other, and responsible." Free and Tuttle remain friends today. Even better, now that they've got a contract to sell the house for about $460,000, it looks as if they'll walk away from the experience with more than just fond memories.