With the lofty prices of many of the nicer homes at Smith Mountain Lake, some of us can’t afford property there, no matter how much we may wish we could. Kenyon Blunt tells us there may be an alternate way to buy that lovely lake front property you’ve been dreaming of.
If you’ve thought about buying a lake home and wondered how you could possibly afford it, then you’ve probably considered going in with family and friends. Co-owning a lake home is when multiple owners buy a percentage of a property and both owners’ names are on the title and deed. Usually they both sign a mortgage as well. This is a growing trend as prices of all types of real estate escalate.
While using this strategy for lake home ownership may seem intuitively easy, it is fraught with potential problems. So before you form any type of partnership, be sure to investigate all the things that could go wrong beforehand and develop a way to handle them.
Now that I’ve given you the proper warning, let me tell you a few more reasons why you might want to consider this strategy for your lake home purchase:
- It allows you to buy when you couldn’t any other way
- The good times you’ll have in your lake home are usually with family and friends
- Your lake home will get used more often which means less wasted money
- The ownership and maintenance costs are divided among the owners
As you can see from the above list, there are many compelling reasons to consider co-ownership. Now let me give you some reasons why you might want to think twice before investing with friends or family. There are many delicate issues to consider which are sometimes hard to negotiate. First of all, make sure that your visions are the same for the property. Are mortgage payments going to be equal or based on usage? What will happen if one owner wants to sell? Who gets to use the home and when? What happens if the friends of your partner do some damage?
Many of the serious issues need to be addressed like death, divorce and the exit strategy (i.e. one partner needs to sell). If you own the property as joint tenants, your lake home will automatically pass to the other partner at death regardless of what a will stipulates. However, if the property is held as tenants in common, each party is considered to own their respective percentage which means you can sell your share without the approval of your partner. Each owner can also leave their respective share to beneficiaries at death. It’s even possible to buy your lake home as a limited liability company which has the advantage of protecting your other assets from something that may go wrong at your lake home. You can see that choosing the right form of ownership is a complicated subject and one that’s best left to an attorney.
You may think that you have a great relationship with a particular family member or friend, but trusting that “general reasonableness will prevail” is not a good strategy for buying a lake home together. The best thing to do if you’re interested in co-ownership is to invest a little extra money with an attorney to draw up a co-ownership agreement that spells out the ground rules for financial obligations and how the lake home will be used.
Specifically, it should include provisions for:
- How will the property be used? Who gets what holidays (you may want to consider a lottery for the prime weekends) and will usage vary proportionately by the amount invested
- What form of legal ownership will it take? See the above discussion for some of the options
- How will maintenance and repairs be handled? Are you going to set aside a specific amount each year for needed repairs or are you going to agree as they come up
- Who will handle the finances? There must be sufficient resources to not only buy the property but to pay the mortgage and bills as they occur
- What will happen when a partner wants to sell? Often there are provisions in co-ownership agreements for a first right of refusal so when one party wants to sell the other is given the first opportunity to buy that interest.
Pooling your nickels with friends and family is a good way to afford a home at the lake. It also carries with it some significant obstacles so you are wise to consider the old adage “Don’t mix business with pleasure.”
About the Author:
Kenyon Blunt is the publisher of “Lake Home Tips.” To learn more, click on www.lakehometips.com.