11 Ways to Co-Own property without tears
11 ways to co-own property without tears
by Duncan Hughes
A family has taken more than 30 years to unravel a property deal that started as a well-intentioned plan to make them richer, happier and closer but concluded in a bitter dispute and thousands of dollars in legal costs, a warning to other families considering property sharing in today's over-heating real estate market.
Marion and Albert Taylor's falling out with their eldest son Kevin was over the terms of a verbal agreement made around the Victorian family's kitchen table about whether proceeds from the sale of the family home was a gift or an incentive for him to purchase a new property. The parents alleged that they had a financial interest in the new property.
Similar domestic dramas are being repeated every week in courts and tribunals around the nation as verbal, poorly-documented and ill-conceived property deals between friends, families and business partners end in expensive legal wrangles, say lawyers and mortgage brokers.
"Human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes and litigation intervene," says Eric Riegler, Victorian Civil and Administrative Tribunal (VCAT) senior member, in his decision to divide Kevin's property between him and his parents based on their original contribution.
"Memories are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said, or could have been said," he adds.
The case underlines a perennial problem of undocumented deals based on a handshake or verbal agreement falling apart because of misunderstandings or changing circumstances.
Exit dramas
"Problems usually emerge when one of the parties wants to sell and there is disagreement on who has paid what and how the proceeds should be divided," warns Christopher Foster-Ramsay, principal of mortgage broker Foster Ramsay Finance.
"It's worth investing in having a specialist lawyer draw up a contract when the deal is agreed that makes clear all parties' rights and responsibilities," Foster-Ramsay says. "Having no strategy increases the risks of shredding friendships and fracturing families."
Threshold issues include splitting costs, an exit plan and, if there is a disagreement, a mediation strategy.
For example, Mark and Gayle Sherwood, Victorian-based siblings who planned to set up a property investment company, eventually ended up in VCAT with their lawyers arguing over cash and contributions, who owned what and how to dissolve the financial relationship.
Home payments, council and water rates, insurance, rental contributions by Gayle's boyfriend and even the purchase of garden pots, a spray gun, garden tools and a chainsaw were used as evidence by their legal teams in deciding ownership.
A percentage share was awarded to each sibling.
"I have seen many business and property joint ventures end up in tears," warns Mario Borg, a property strategist and mortgage broker for Mario Borg Strategic Finance, about co-owing a property with friends or family (excluding de factos and married couples).
"Seldom do they work," he says about a financial relationship that might have to last the term of a mortgage, which is typically about 30 years or nearly four times the length of the average Australian marriage.
Families in court
The NSW Supreme Court recently had to decide whether a woman's financial contributions to her parents-in-law's household in exchange for a promise they would leave the property to her and her husband created a contract. Nearly 50 years after Temjana Smilevska entered into the relationship, the court ruled it did.
A properly structured property share arrangement can help avoid decades of stress and potentially provide a bigger deposit than a single buyer might otherwise be able to afford, which might mean being able to buy a higher quality property with a better address.
Westpac Group's consumer bank chief executive George Frazis says saving a substantial deposit is the biggest barrier to first-home buyers. Property prices in Melbourne and Sydney are increasing at five times the rate of inflation and wages growth.
"Three decades ago an average first-home buyer needed an average deposit of about twice their annual income, but in Sydney or Melbourne they may now need almost five times their pay," says Frazis.
Some lenders offer products designed to split the cost with family and friends while retaining individual control of finances.
But costs, terms, conditions and features vary widely between lenders and seeking expert legal and financial advice is recommended.
Shared loans
Commonwealth Bank of Australia's property share loan obliges borrowers to guarantee each other's loans as security. Each borrower must be an owner of the property – no third-party guarantors – and demonstrate ability to service their portion of the home loan.
Westpac and St.George have a product where family members can use their own home's equity to provide additional security for a portion of another family member's loan amount. But applicants must be within the same family. Eligible family differs between lenders. It typically refers to children.
This can result in a lower deposit, reducing or even avoiding the need to pay for expensive lender's mortgage insurance.
"A well-drafted and thorough contractual agreement outlining responsibilities and obligations is the best way to avoid legal headaches between co-owners," says Anthea Digiaris, a property law specialist with Slater and Gordon.
"It's quite possible one of the owners will want to sell or can't cover the mortgage at some point in the future, or even just wants out of the co-ownership arrangement.
"That's why it's important you consider all of the potential scenarios upfront and actually have mechanisms for one or all of the parties exiting the contract written into it," she says.
How to set it up
1. Keep the number of partners to a minimum, say three or four, to reduce complexity and possible disputes. Choose responsible and appropriate partners. "You don't want first-time buyers losing potential first-time benefits by partnering with those who are ineligible," says Sally Angell, principal of Sally E Angell Lawyers.
2. Partners with equal shares – say 50:50 – should have a "memorandum of transfer" to avoid half of the property automatically passing to the other joint tenant on their death.Or they could hold the property 50:50 as tenants in common.
3. Tenants in common with unequal shares – say 75:25 – should specify in the contract the percentage ownership to make it clear.
4. Create a deed or agreement setting out who pays which bills, says Slater & Gordon.
5. Owners are usually jointly liable for the mortgage, regardless of the size of their share. Make sure liability reflects ownership. This needs to be agreed with the banks, which are often reluctant to limit liability in the event of default.
6. Try to anticipate future problems and agree on a strategy to solve them. This should include a minimum term of the deal, says Angell. Circumstances can change.
7. Seek legal advice about gifting your share to the other owners in a will to prevent disputes with respective families. This can prevent families of the deceased arguing over the will, says Slater & Gordon.
8. Decide on an exit strategy when negotiating the agreement. For example, how will the property be valued at the time of sale? Stamp duty normally has to be paid on the market value of the share being transferred.
9. If there is conflict, courts can order the property to be sold and proceeds divided in ways that owners might not expect.
10. Additional contributions to the property by one party (such as renovations or payments) could entitle them to a greater share. Ensure terms and conditions are set down, understood and agreed when the property is purchased. "It is really important that parties have a clear and comprehensive understanding of the details when they enter the agreement," says Angell.
11. If the aim is to tenant the property, then the agreement should cover who will deal with the tenant and/or managing agent. It should also specify who has the authority (and the limit of that authority) to make ongoing payments in respect of rates, maintenance or capital expenses and in what circumstances. And it needs to set out who will maintain books of accounts and report back to the other co-owners.
