Should We Buy a House Together?

concept of section of property after divorce.More and more couples, both mixed and same sex, are electing to live together without getting married, and often this includes purchasing a home together. Many couples decide they can afford a second home or vacation property if they purchase it with another couple. This is a major decision with potential serious consequences if and when they decide to split.

Set the Ground Rules For a Split Before the Purchase
Couples who have just decided to live together usually don’t want to even think about how they will want to deal with a split when it comes. Facing the issue at the outset, however, may save a lot of trouble down the road. Consider, too, that a failure to agree on the ground rules that will govern a split might well indicate that the relationship may not last very long…

The Easiest Rule: Split Means Sale
A prepurchase agreement that the house must be sold if either partner aborts the relationship avoids some thorny issues that can arise when one partner stays with the house. The only issue in this case is how the proceeds are to be divided. Equal shares may not be equitable, depending on the respective contributions of each partner.

One approach is to divide the net proceeds by each partner’s contribution to the equity in the house when it is sold. There are many ways to calculate the contributions. Just be sure the partners agree on the general formula at the outset.

What If One Partner Wants To Stay?

Valuing the Property: When one of the partners remains in the house, the terms of settlement are more complex. There is no sale price, so the partners must agree on an appraisal procedure and on who will pay for it. If they wait until the end, this is invariably a problem.

Paying Off the Departing Partner: Another problem arises if the partner remaining in the house doesn’t have the money to pay off the partner who is leaving. The more equity they have in the house, the more cash the resident partner needs to raise. A home equity loan is not possible unless both partners become responsible, which is the last thing the departing partner wants.

Taking the Departing Partner Off the Hook: Much the largest problem, however, is the departing partner’s continuing responsibility for the mortgage. Many departing partners believe that they are off the hook because the partner remaining in the house has agreed to assume full responsibility for the mortgage. They (and evidently their lawyers) overlook the fact that the lender was not a partner to their agreement. Departing partners who remain liable for their mortgages often are unable to get new mortgages on their own.

Lenders have no incentive to remove one partner from the note. Some can be induced to do it if the partner remaining with the house has a perfect payment record and can document that they have been solely responsible for the payments for some considerable period perhaps a year. But if the lender refuses, the only way to get the departing partner off the note is for the remaining partner to refinance in her own name.

One option is to grant the remaining partner a reasonable and stated amount of time to make the settlement payment, and to get the departing partner removed from the note. Otherwise, the house must be sold and the mortgage paid off.

Implications of a Declining Market: If the house is worth less than the mortgage balance, the options are grim. The house can’t be sold unless the partners pay the deficiency. If neither partner wants to remain in the house and the amount required is small enough to be manageable, that may be the best option. The alternative is foreclosure, which will destroy the credit of both partners.

If one partner wants to stay in the house and continue to make the payments, the partner that leaves avoids foreclosure but will remain liable indefinitely. It may take years before the partner that remains is able to refinance in her own name.

Like any partnership, whether personal or business, think about how you’re getting OUT before you get IN!