The challenges of DIY second home co-ownership

Published Date: January 6, 2023

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Shared ownership of real estate is nothing new, though it’s not always planned or formal. In some cases, co-ownership is an outcome of a joint inheritance where the beneficiaries agree to share the property as a family vacation home. Other times, it’s intentional — friends or family members might pool their resources to purchase a second home as a more affordable alternative to buying a whole vacation home. In either case, “DIY” co-ownership can be challenging. Families change, friendships wane, people move and priorities shift, adding complications and stress to co-ownership arrangements, especially when personal relationships are at stake. Disagreements over expenses, usage or even decor can lead to more serious rifts over time.If you’re interested in co-ownership but worried about the potential pitfalls, you need to plan ahead. The Escape Home spoke with Williamstown, Massachusetts, real estate attorney Jonathan Sabin about the do’s and don'ts of property co-ownership, and he offered these recommendations.

Don’t put your names on the deed

Instead, says Sabin, co-buyers should create a vacation home LLC. The buyers are the owners of the LLC, while the LLC is the legal owner of the property. Each buyer owns a portion of the LLC, based on their financial contribution. The benefit of an LLC is that it acts as a separate legal entity. The only asset of the LLC is the property, so you don’t risk losing your personal assets in the case of an owner default, dispute, or even a liability claim related to an injury on the property. 

Do create a comprehensive operating agreement

Sabin describes the LLC operating agreement as “a prenup for real estate.” It should cover any issues you could possibly anticipate when buying real estate with other people. The operating agreement should include all the rules and guidelines for ownership, such as:
  • Who pays for maintenance and repairs (be specific — do you go with the lowest bid or the least expensive replacement appliance? If there’s discretion, how much?)
  • Consequences for non-payment of agreed-upon fees
  • The redistribution of ownership if a co-owner dies, or if a member wants to sell or gift their ownership
  • Usage rights and limitations
  • Anything else that’s important to you and your co-owners 

Don’t assume things won’t change

If you go into co-ownership intentionally, you’ll probably be selective about your co-buyers. Even if everyone has good relationships and is financially stable when you buy the property, however, that may not always be the case, cautions Sabin. People lose their jobs, get divorced or face other unexpected challenges, and they may no longer want to commit to a co-ownership agreement. If you opted for an informal arrangement “because you’re all friends,” you might find yourself in a difficult financial or legal situation later on. Sabin’s point of view? “It’s a really really bad idea not to have an LLC.”  

Do form an LLC for a family property

Sabin said it’s not uncommon to see “unintentional” co-ownership among family members who’ve inherited a share of property from a relative who passed away. If the new co-owners don’t take any action, they are typically in an ownership structure called a tenancy in common. That means they all have equal access to the property regardless of their amount of ownership. Co-owners could show up at the same time or potentially stay at the shared property as long as they want, and they may disagree about financial responsibilities. Resolving issues in a tenancy in common can involve costly legal fees.The best solution? Form an LLC. It may initially seem unnecessary to have such a formal arrangement among family members, but family disputes over property are all too common. Creating an LLC with a clear operating agreement can alleviate many of the gray areas that cause those disagreements. 

Do ask these key questions

Before you consider co-ownership, these are some of the top questions to discuss with your potential co-buyers and an attorney:
  • Will you have the right to sell in the future? Are there any restrictions around selling or potential buyers?
  • What happens if someone dies? Who will inherit, and what’s the process?
  • What if a co-owner can’t pay their expenses?
  • Will you allow rentals? If so, who will oversee rental management?
  • How will you manage access to the home?

Professionally managed co-ownership

LLC co-ownership can help you avoid many of the legal, financial and emotional pitfalls associated with other types of shared ownership. But the process of forming and managing a property LLC on your own can still be challenging. When it comes to second home ownership in particular, finding a group of people to commit to a real estate purchase can be quite an undertaking. Think of how hard it is to get a group of friends to agree on a restaurant or movie, much less a home purchase! That’s where Pacaso can help. We find and bring together qualified buyers, handle all the sales and LLC formation details, act as the corporate guarantor of the loan, and provide ongoing management. You get to do the fun stuff, like browse amazing listings, choose a home you love, then start enjoying time in your new luxury second home. We make co-ownership simple — learn how it works

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Amie Fisher

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