Buying A House With A Friend

Last month Mrs. C. told me that her brother mentioned the idea of buying a home with a friend.  Although she strongly advised him against this, I think he may still end up trying to go this route. The house in question is a $6,500 major fixer upper in a rough area.  If my experience buying a $6,000 home in the same area is any indication, it will need tens of thousands of dollars to make it livable and there will be surprises around every corner. Even in an area like Benton Harbor, MI with low property costs, in order to get something decent you will have to spend at least $40,000 and even then there will be repairs and maintenance issues that cost thousands of dollars.

Major problems with buying a house with another person:

1. Even if the amount of money put into the purchase of the home is equal, what about renovations and repairs? What if one person is able/ willing to contribute more money than the second person? What if one person thinks a $10,000 remodel on the kitchen is necessary, while the other thinks new sticky back tiles and a coat of paint will suffice?  What if one person puts in 500 hours of work, while the other half asses 50 hours of work? There will be disagreements on what work needs to be done and in what manner to do it and there inevitably will be differences in dollars AND time put into the home.

2. If both parties are planning on living there, what happens when one of them moves in a girlfriend? Or a girlfriend with kids…or buys a pet? Is the girlfriend expected to work on the home and pay an equal share of the bills?….And of course there are other issues with living with another person, loud music at night, levels of cleanliness, etc.

3. What happens when one party wants to sell and the other wants to stay? Can the person wanting to stay buy out the other person? What if he isn’t able to?  What if they can’t agree on a selling price?

4. If there is a loan on the property, what happens if one person decides he can’t / won’t pay it any more and doesn’t care abut his credit? Person two is stuck with the bill in full. MOST likely if you purchase a home with a friend you will end up losing the friend and a ton of money, and the house.  It’s like the old saying with lending money to a friend, you will lose both.  It just isn’t worth it. If you want to own a house, save up and buy it yourself, then you don’t have to worry about the above issues.

If you want to own a house AND live with a friend, then buy the house and RENT out a room to the friend with a very specific contract. If you think it is still a good idea to even consider buying a home with a friend after reading this, then be really cautious with legal paperwork. A clear partnership agreement looking into all of the above questions and more needs to be reached, signed and notarized before buying the home.  You know the room mate agreement in big bang theory?  You honestly need to go into that level of detail.

This is another issue based on youthful impatience.  I have consulted with over a half dozen people in just as many months about buying a first home. ALL of them insist on going forward with it, despite having no money for a real down payment, and just not being fiscally ready for it.  Unless you get a 20 year mortgage or less with a 20% down payment, with a mortgage you can afford with 1 weeks paycheck, you are not ready to buy. It sounds difficult but this one decision will decide whether you end up “house poor” or not.  This guide for first time home buyers shows the numbers in details and provides a safe framework for knowing when you are ready to buy a house. If you must buy a house without 20% down, then please get a shorter term mortgage and a lower priced home.

In a nutshell, don’t buy a home with someone unless you are married to that person, and even then ensure that you are truly ready to be a homeowner.  Rent is not “just throwing away money.” Renters have the flexibility to move on relatively short notice without a costly sale. Renters don’t have to pay for emergency fixes such as furnaces, water heaters, roof leaks, etc.  While renters are not building any equity they have some key advantages over owners.

 

What do you think about buying a home in a partnership?  Do you think it’s as bad of an idea as I do?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John uses the free tool Personal Capital to track his net worth and posts quarterly updates on his finances. Check out the Action Economics archives section for all past posts.

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