What things should I consider when getting a joint-mortgage?

Question

I'm currently renting and I'm wanting to buy a house in the area to live in (because I want more space and I want my money to go into an asset rather than simply losing money I'm paying in rent). Unfortunately almost all of the properties within a reasonable commute of my workplace are beyond what I consider affordable (i.e. properties that cost 7x to 12x my annual salary), and even those that are a 40 minute drive away are still 6x to 8x my salary).

A coworker of mine, who has a lot of spare cash lying around (about 2x my salary burning a hole in his pocket), who pitched an idea that we get a joint-mortgage together, as he is wanting to invest in property due to the large up-trend in property prices in the area over the past 20 years that doesn't seem to be abating - this looks to continue as more people move to my area, and more high-profile companies move here too.

He proposed that we should combine his spare-cash (1.5x my salary) with my own savings (I currently have 1.2x my salary in savings, but I hope to reach 1.5x by next summer) together to form a down-payment on a house in the area (that would cost about 8x-9x my salary), then I would get to live in the house by myself and I would pay the rest of the monthly mortgage payments - he would contribute a portion as well as he wishes - though he would continue to pay his share of the property taxes based on the % of the house he owns. In the end, he would own about 25% of the property, I would own the other 75%. After 10-15 years' time we would sell the house and collect our equivalent share of the profits... or losses, or I might be in a position to pay-off my coworker, buying-back his share of the house based on the house's then-current market value.

It all sounds good, perhaps even too good to be true. I am enthralled that it would allow me to live in a decently-sized house without being too far from work, and neither of us are at risk of long-term unemployment or mortgage-default, so I'd like to ask you on PF if this is a bad idea, what risks there are, and if there's anything I should be aware of.

Update

I'll add that we're also considering a new-build project, where we buy a lot and pay for construction through a mortgage (though we would presumably buy the land outright to simplify and potentially cheapen the mortgage). I'm still doing research on this option and it is looking cheaper than buying a house from someone, at the cost of having to wait for construction (6-9 months) and the paperwork/hassle involved. It looks like 6-7x my salary total cost, compared to 7-8x for a preexisting house of a similar floor-area, build-quality and location.

With a mortgage 7-8x my salary and with 3x-4x my salary as a downpayment (~40-45% downpayment) it still necessitates a 30-year mortgage, so I'm hesitant to sell at 10-15 years in case of being underwater.

We would prefer a "traditional", fixed-rate, no-surprises mortgage. We hope to qualify for a 3.50% to 3.75% interest rate.

Answer 1

The first and most important thing to consider is that this is a BUSINESS TRANSACTION, and needs to be treated as such. Nail down Absolutely All The Details, specifically including what happens if either of you decides it's time to move and wants to sell off your share of the property. Get at least one lawyer involved in drawing up that contract, perhaps two so there's no risk of conflict of interest.

What's your recourse, or his, if the other stops making their share of the payments? Who's responsible for repairs and upkeep? If you make renovations, how does that affect the ownership percentage, and what kind of approval do you need from him first, and how do you get it, and how quickly does he have to respond? If he wants to do something to maintain his investment, such as reroofing, how does he negotiate that with you -- especially if it's something that requires access to the inside of the house? Who is the insurance paid by, or will each of you be insuring it separately? What are the tax implications?

Consider EVERY possible outcome; the fact that you're friends now doesn't matter, and in fact arguments over money are one of the classic things that kill friendships.

I'd be careful making this deal with a relative (though in fact I did loan my brother a sizable chunk of change to help him bridge between his old house and new house, and that's registered as a mortgage to formalize it). I'd insist on formalizing who owns what even with a spouse, since marriages don't always last. With someone who's just a co-worker and casual friend, it's business and only business, and needs to be both evaluated and contracted as such to protect both of you. If you can't make an agreement that you'd be reasonably comfortable signing with a stranger, think long and hard about whether you want to sign it at all.

I'll also point out that nobody is completely safe from long-term unemployment. The odds may be low, but people do get blindsided. The wave of foreclosures during and after the recent depression is direct evidence of that.

Answer 2

Your lack of numbers makes the question a difficult read. What I'm hearing is "I want a house requiring a mortgage 8X my income."

This alone is enough to suggest it's a bad deal. On a personal note, when my wife and I bought our house, it was 2.5X our income. 20% down, so the mortgage was exactly 2X income. And my wife was convinced we were in over our heads.

The use of a partner who will take a portion of the profit is interesting, but doesn't change the fact that you are proposing to live in a house that costs far too much for you. If you are determined to buy such a house, I'd suggest you do it with the plan to rent out a room or two to roommates. If you are living in an area where the cost of buying is so high, the demand for rentals is likely high as well. Absent a plan to bring ion more income, I see no good coming from this. Heed the warnings posted in the other two answers as well.

Answer 3

this seems like a bad idea.

Example:

You want to sell. He doesn't. But he doesn't have enough money to buy you out. What will you do?

You might want to sell because you need money, you have to move, you want to get married, you want to start a new business, etc.

You two are not equals (you need a place to live), so this is unlikely to work.

Answer 4

It may clarify your thinking if you look at this as two transactions:

1. You and your friend forming a partnership to invest in a property,
2. You leasing the property from the partnership.

I am an Australian so I cannot comment on US tax laws but this is how the Australian Tax Office would view the transaction.

By thinking this way you can allocate the risks correctly,

Partnership

• How is it formed?
• Should it be incorporated or unincorporated?
• How is it terminated?
• Can a partner sell their interest (or part of their interest)? To the other partner only or to third parties?
• Can such a sale be forced, if so, under what circumstances and at what valuation?
• What to do if one of the partners dies or becomes incapacitated (key man insurance may be desirable)?
• How are profits/losses split (both revenue and capital)?
• Will the partnership maintain a "sinking fund" to deal with unexpected expenses or will/can it raise levies as required?
• What repairs and maintenance is the partnership responsible for (as opposed to the tenant)
• It should be clear that property insurance and taxes are the partnership's issue, utilities and contents insurance are the tenant's.
• What happens if a partner defaults on their obligations?
• How will disputes be resolved (a sensible procedure should follow the negotiation -> mediation -> arbitration/litigation path)?

Tenancy

• How long is the tenant guaranteed tenure?
• Will there be options and how are these to be exercised?
• How much is the rent (generally this would need to be "commercial" to avoid allegations of tax fixing)?

Two things should be clear - you will need a good accountant and a good lawyer. I do not agree that there is a conflict of interest in the lawyer acting for both parties - his role should only be for advice and to document what the two of you agree to. If you end up in dispute, then you need two lawyers.

Answer 5

This is more of a long comment but may answer user's situation too.

I have dealt with joint mortgages before in 3 states in the US. Basically in all three states if one party wants to sell, the home goes up for sale. This can be voluntary or it can go up via auction (not a great choice).

In 2 of the 3 states the first person to respond to the court about the property, the other party pays all legal fees. Yes you read this right. In one case I had an ex who was on my mortgage, she had no money invested in the house ($0 down and still in college with no job). [If she wasn't on the mortgage I wouldn't have gotten loan - old days of dumb rules]

When we split her lawyer was using the house as a way to extort other money from me. Knowing the state's laws I already filed a petition for the property but put it on hold with the clerk. Meaning that no one else could file but if someone tried mine would no longer be on hold.

My ex literally spent thousands of dollars on this attorney and they wanted to sell the house and get half the money from the house. So sale price minus loan amount divided between us. This is the law in almost every state if there is no formal contract. I was laughing because she wanted what would be maybe 50-75K for paying no rent, no money down, and me paying for her college.

Finally I broke her attorney down (I didn't lawyer up but had many friends who were lawyers advising). After I told her lawyer she wasn't getting anything - might have said it in not a nice way - her lawyer gave me her break down. To paraphrase she said, "We are going to file now. My assistant is in the court clerk's office. You can tell the court whatever you want. Maybe they will give you a greater percentage since you put the money down and paid for everything but you are taking that chance. But you will pay for your lawyer and you will need one. And you will pay for me the entire time. And this will be a lengthy process. You would be better served to pay my client half now."

Her office was about 2 blocks from court. I laughed at her and simply told her to have her assistant do whatever she wanted. I then left to go to clerk's office to take the hold off. She had beat me to the office (I moved my car out of her garage). By the time I got there she was outside yelling at her assistant, throwing a hissy fit, and papers were flying everywhere.

We "settled" the next day. She got nothing other than the things she had already stolen from me. If I wouldn't have known about this loophole my ex would have gotten or cost me through attorney's fees around 40-50K for basically hiring a lawyer. My ex didn't really have any money so I am pretty sure lawyer was getting a percent.

Moral of the story:

• In any contract like this you always want to be the one bringing in the least amount of money. There are no laws that I know of in any country where the person with the least amount on a contract will come out worse (%-wise). Like I said in the US the best case scenario that I know of for joint property is that the court pays out the stakeholder all of their contributions then it splits things 50/50. This is given no formal contract that the court upholds. Don't even get me started with hiring attorneys because I have seen the courts throw out so many property contracts it isn't even funny. One piece of advice on a contract if you do one. Make it open and about percentages. Party A contributes 50K, Party B 10K, Party A will pay this % of mortgage and maintenance and will get this % when home is sold. I have found the more specific things are the more loopholes for getting out of them.

• There are goofy ass laws everywhere that make no sense. Why would the person first filing get their lawyers paid for??? The court systems in almost all countries can have their comical corners.

• You will never be able to write a contract that covers everything. If the shower handle breaks, who pays for it? There is just too many one-off things with a house.

• You are in essence getting in a relationship with this person. I hear others say it is a business transaction. NO. You are living with this person. There is no way to make it purely business. For you to be happy with this outcome both of you must remain somewhat friends and at the very least civil with each other.

• To add on to the previous point, the biggest risk is this other person's character and state of mind. They are putting in the most money so you don't exactly have a huge money risk. You do have a time and a time-cost risk. Your time or the money you do have in this may be tied up in trying to get your money out or house sold. A jerk could basically say that you get nothing, and make you traverse the court system for a couple years to get a few thousand back.

• And that isn't the worst case scenario. Always know your worst case scenario. Yours is this dude is in love with you. When he figures out 2-3 years later after making you feel uncomfortable the entire time that you are not in love with him, he starts going nuts. So he systematically destroys your house. Your house worth plummets, you want out, you can't sell the house for price of loan, lenders foreclose or look to sue you, you pay "double rent" because you can't live with the guy, and you have to push a scooter to get to work.

• That is just the worst case scenario. Would I do this if I were 25 and had no family? Yea, why not if I trusted the other person and was friends with them? If it were just a co-worker? That is really iffy with me.

Edit: Author said he will not be living with the person. So wording can be changed to say "potentially" in front of living with him in my examples.