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For many prospective homebuyers, sole ownership is prohibitively expensive. With inflation and mortgage rates still high, some people may be thinking about less-conventional options for buying a home. While spouses and family members are frequent partners when investing in a house, you may also consider buying a house with a friend. Teaming up to pool your financial resources can increase your buying power and keep homeownership within reach, even if you wouldn’t qualify to buy independently.
Can you buy a house with a friend?
Absolutely — it’s possible to buy a house with a friend, or even with a group of friends. In fact, a 2022 survey by Realtor.com indicated that more than half of Americans would consider buying a primary residence with someone they are not married to, and 31 percent already have. The trend is likely to continue gaining momentum, especially among younger buyers. But before jumping into such a serious commitment, there are several legal and financial implications to think about.
Things to consider
Property type, location and price
Before you begin shopping for a home, make sure you’re in agreement on what type of property you want and which neighborhoods you want to look in. Will the property need multiple primary bedrooms and bathrooms, dedicated parking spaces, pet accommodations? The more you can decide on in advance, the easier your search will be.
You’ll also want to establish a price range that suits your combined budget. Getting preapproved for a mortgage will give you a good idea of how much a lender would be willing to loan you (be sure they understand your co-buying agreement when you apply). Bankrate’s affordability calculator can also help provide a sense of how much house you can afford.
To avoid future problems — especially if one friend eventually wants to sell or gets married, for example — it’s smart to be proactive. Establish what type of ownership stake you plan to have in the property long before you sign on the dotted line.
Joint tenancy, which allows multiple equal stakes in a property, is a common arrangement for married couples and can also work for friends who intend to co-own their home. Tenancy in common is another type of ownership setup where co-owners can divide stakes in the property (25 percent and 75 percent, for example, or one-third each for three people).
Regardless of what ownership arrangement you choose, you will want a written agreement in place, says Ian Brandt, a real estate attorney and partner at Davidoff, Hutcher & Citron LLP in New York City. “There has to be an agreement as to how the property is shared, whether for use or investment,” he says. This document can also dictate what happens “when someone dies or wants to sell,” he adds.
Finally, a frank discussion of finances is in order before you get the process rolling. Consider each person’s income, credit score and debt-to-income (DTI) ratio, and be upfront and honest about everything. It may seem obvious, but be sure that your co-buyer has stable finances — you are making a big investment together, so in a sense, you are investing in each other. Any problems could potentially impact both of your credit scores.
Be sure to have a plan in place in case of surprises: for example, if one of you needs to move away for work or family reasons, becomes impacted by serious illness or loses your income unexpectedly. A lawyer can draw up a cohabitation agreement that stipulates plans for such circumstances, as well as what will happen if one friend wants to buy out the other’s stake or refinance in the future.
How to buy a house with a friend
Once you’re settled on all the details, you’re ready to actually start house-hunting. Here are five steps you’ll need to follow to buy a house with a friend:
- Get preapproved for a mortgage: Preapproval strengthens your position as a buyer. Gather all your paperwork together carefully — you’ll need every document times two, for both of you — and, as you compare lenders, be sure to explain your co-buying arrangement.
- Hire a real estate agent: Consider interviewing several agents in your market to find the right fit for you and your friend. Local agents know their markets well and can be especially helpful for buyers in unique circumstances (like you), so be candid about your joint budget and needs.
- Look at homes: Looking online is useful, but it’s important for co-buyers to visit homes in person, preferably together. Discuss what you like and dislike about each. Consider whether the home will be a good fit for you both now, as well as in the future.
- Make an offer and get an inspection: Once you find a house you both agree on, work with your agent to make an offer on the home. Do not skip a home inspection — this important step in the homebuying process will alert you to any issues with the property or repairs that need to be made. Problems could cost you both, so it’s doubly important to be prepared.
- Close on your new home: Closing is an exciting occasion — this is what makes everything official. You will both sign a lot of paperwork and write a lot of checks, and in the end, you and your friend get the keys to your new home.
Two common arrangements for co-ownership include joint tenancy, in which you share ownership equally, and tenancy in common, in which each owner may have a different percentage of ownership. A real estate attorney can advise on what will work best for your situation and draw up the documents needed to make it legal.
It can be. Two incomes can significantly boost your buying power and get you into homeownership much sooner than if you waited to be ready on your own. However, you need to be extremely careful about who you choose, as you and your friend will be tying your finances together in a way that can impact you both. Securing the right kind of legal agreements in advance of the purchase can keep the business side of things efficient.
If you and your friend are purchasing an investment property, buying via an LLC can be a smart move. Even if the home will serve as your primary residence, there may be legal reasons to own through a jointly formed LLC instead of as individual owners. “LLCs are formed for a variety of reasons, and when you’re thinking about property, they can be a shield from personal liability,” says real estate attorney Ian Brandt. While an LLC can protect owners in the event of an accident on the property, for instance, purchasing the home through one “doesn’t eliminate the need for an operating agreement,” he says. Consult an attorney if you’re considering forming an LLC to buy a house.