Pooling resources can be a win-win
Co-ownership is when two or more parties, be they family members, friends or fellow investors come together, pool their resources for the purpose of jointly purchasing and sharing in the ownership of a property.
There are many benefits of co-ownership:
- The pooling of resources provides a more cost efficient entry into the property market by spreading the entry costs, such as the deposit, stamp duty and legal fees amongst all the co-owners;
- The pooling of resources further provides for the sharing of the ongoing expense of ownership, such as rates, taxes and maintenance outlays.
- The ability to increase your borrowing and repayment capacity;
- Your co-owner is loyal and trustworthy; and
- It can be a rewarding experience co-owing a property with family and or friends.
However if the transaction is not properly structured and documented before purchasing a property, it can end in expensive and time consuming litigation, stress, losses and ruined relationships.
Prior to the co-owners commencing a search for a property or even drafting and structuring an agreement, the very first step will require each potential co-owner to ask and honestly answer if all parties:
- Have the same investment philosophy and objectives; and
- Each party possesses the same appetite for risk.
If all the potential co-owners answer yes to the above questions, the next step is to formulate an agreement that will provide a framework that governs the transaction and life of the investment.
Such an agreement is known as, surprise surprise, a ‘Co-Owners Agreement’.
The Co-Owners Agreement should accurately reflect each party’s rights, obligations and contributions. Importantly the agreement should also provide for a mediation and dispute resolution mechanism in the event that a disagreement arises amongst the co-owners.
The agreement should also provide a formula for one or more of the co-owners to exit the investment, cash out their initial contributions and hopefully, share in the profit. Other considerations might also include the right of one co-owner to live in the purchased property or a prohibition against a co-owner mortgaging or encumbering their interest.
The Co-Owners Agreement should also make it very clear to the parties how the property is to be managed on a daily basis, who is to be responsible for that management and limits of authority on amongst other things, incurring costs on behalf of the collective.
If the aim is to tenant the property, who will deal with tenant and or managing agent. Who has the authority and what is the limit of that authority to make ongoing payments in respect of rates, maintenance or capital expenses. Who will maintain books of accounts and report back to the other co-owners.
By taking the time and effort at the front end of the transaction to properly structure a Co-Owners Agreement, all parties will be certain as to their rights and obligations and disputes can be avoided or at the very least mitigated at the backend.
As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.