Buying with Friends: What You Should Know

• September 3rd

by Lark Turner

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This article is part of UrbanTurf's Archive Series where we re-publish a popular post from the past. 

While many young residents in DC may want to buy a home as they see themselves here for the long haul, scrounging up the down payment to get into the house they want is easier said than done.

So what happens when a couple friends decide to buy a house together? It’s certainly been done before, even to the point of turning a rowhouse into cohousing for two families. With the right person, the advantages are clear: You’ll save money by pooling your resources, splitting the mortgage and dealing with unexpected repairs, and you may save time by splitting the household tasks. But before you sign the paperwork, there a few precautions to take to make sure the friendship, and your large financial stake in a piece of real estate, are protected.

To figure out what steps/precautions to take, UrbanTurf spoke with Andrew Kline, a principal at Veritas Law, who frequently helps friends go in on real estate purchases and start businesses together.

Rule number one, Kline said, is to treat the investment professionally.

“It’s a business arrangement and should be treated as one,” he said. “The parties should approach it that way and think about what they need from a business standpoint. Their best chance to remain friends is to make sure that all the issues are dealt with on the front end, and not left for interpretation later.”

The big questions that friends need to answer before buying together are these, Kline said:

• Who’s putting in what money?

Before diving in, you should know exactly how much your friends are willing and able to finance the home and how they’ll do so.

• How are decisions made?

Kline says friends will need to answer this question: “If there are decisions that need to be made concerning the venture, then how will those decisions be made? And if it’s set up such that there might be a deadlock, how will the deadlock be resolved?”

• Who gets what profits?

People will probably be putting up different sums of money, so the division of equity may vary. Buyers may also have an arrangement that includes a provision for “sweat equity,” so if one person in the group or partnership agrees to take on certain tasks separate from putting in money, that person receives a certain amount of equity in return.

• If more money is needed, who pays?

You will likely need to put money into your home. Will you split everything? How will the money be divided?

Friends will also need to determine how the asset will be divided if one person leaves the arrangement or dies unexpectedly. To deal with these issues, Kline recommends friends put together an LLC to make the purchase and manage the property. Within the structure of an LLC, the co-owners can sign an operating agreement that governs how they make decisions and how the property will be managed between them. A bonus: It’s also an easy way to rent out the property if anyone needs to move out.

This article originally published at http://dc.urbanturf.production.logicbrush.com/articles/blog/the_pitfalls_of_buying_with_friends/9655.