Don’t put your names on the deedInstead, 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 agreementSabin 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 changeIf 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 propertySabin 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 questionsBefore 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?