Buying a home with a good friend? Read this first

A co-owner’s agreement lays out the terms of combined property ownership and ‘what-if’ scenarios that could arise (Getty Images/Cavan Images)

Despite hints of rising interest rates, Canada’s housing market is expected to remain on the warm side over the course of the year. In fact, a recent RBC report projects that housing prices will continue to rise 6.2 per cent into 2022. 

In response, those entering the market are getting creative. According to a RE/MAX Canada Housing Affordability Report, one in three Canadian homebuyers (33 per cent) are strategizing new ways to enter the market, with 13 per cent mentioning pooling finances with friends and family as one option. (More than half of those considering such strategies are millennials and Gen-Z.)

As this co-ownership trend gains momentum, we asked three experts to weigh in on what the process entails for prospective buyers. 

1. UNDERSTAND THE PROCESS

Get to know the co-ownership process, say experts, as it is somewhat different than buying a home in the traditional sense. Rather than securing a mortgage, for example, you’ll need a tenancy-in-common agreement, which is often more challenging to acquire. You’ll also need to establish a co-ownership agreement.

“People must educate themselves,” says CPA Saman Habibi, sales representative at Durham-based real estate brokerage Right At Home Realty Inc.   

Habibi adds that you’ll also want to know the parties involved in the purchasing process (lawyers, realtors, mortgage professionals who specialize in co-ownership scenarios), as well as the costs that will be incurred (such as legal and realtor fees).

Knowing about any existing rules and regulations is also important. Some provinces, including Ontario, and associations, including CoHo BC, offer comprehensive guides to property co-ownership, outlining requirements in particular jurisdictions. 

Above all, you should set realistic ambitions and avoid spontaneous decisions, says CPA Daniel Steinfeld, broker and co-founder of boutique real estate brokerage On the Block, based in the Greater Toronto Area.

“A home is generally the biggest purchase anybody makes in their life and you may be keen to jump in head first without worrying much about the consequences,” he says. “But just because something sounds good, that doesn’t mean it can work for everybody. It can end up being a big headache.” 

2. ESTABLISH TRUST AND DEFINE THE PROPERTY’S PURPOSE

It may sound obvious but a trusting relationship with open communication between parties—whether they’re family, friends, acquaintances or a combination—is a necessity.

In fact, Steinfeld says the best way to consider owning property with someone is to imagine you’re running a business together. 

You should also determine each party’s purchasing intent, Steinfeld says. Will the property be an investment or principal residence? Is this a short-term cash-out scenario where the goal is to sell and make a profit or is it a longer-term investment strategy? 

If the property is meant to serve as a dwelling for multiple family members, you’ll also want to discuss how it will be divided between the parties, says real estate lawyer Richard Bell, partner at Vancouver-based Bell Alliance, LLP. Will residents be occupying a portion of the main home or will they be in a separate secondary dwelling that exists on the lot?

In a tenancy-in-common scenario, he adds, ownership is based on different percentages of ownership or shares of the property, rather than joint ownership of the entire property, as is typically the case with spouses. 

Arrangements also differ in the event of death: under joint tenancy the property goes to the surviving joint tenant by what is referred to as right of survivorship, while under tenancy-in-common the owner’s share goes to the beneficiaries of their estate.

3. IRON OUT THE DETAILS

Once you know everyone is on the same page, you can start drawing up the terms of the agreement, says Bell. This should be done through consultation with one lawyer representing all the parties or different lawyers representing the parties independently.

Questions to discuss include:   

• How will proportional ownership be calculated based on down payments and the portion of the property occupied by each party?
• How will legal, real estate and other costs such as land transfer tax and property tax be divided? 
• Will you be able to make use of the first-time homebuyer incentive?
• If this is an investment property, will you both be focused on capital appreciation or will you be focused on generating rental income? Will the property be used to generate rental income from short-term rentals or long-term tenants? 

You should also consider various “what-ifs,” says Bell. For example: 

• What happens if one party dies or decides to sell early, either cashing out or passing on ownership? 
• Is a first right of refusal clause in place, giving the other party the right to purchase that portion of the property first? 
• What if a party wants a partner or child or someone else to move in? 
• What happens if one party loses their primary source of income (e.g., job loss)? Will the other party be forced to absorb the full costs of the property?

With those questions answered and your discussions complete, the results should be laid out in a master document drawn up by the lawyer you consulted. 

But, even with that document in place, it’s important to remember that it’s your ongoing relationship with the other parties that will ultimately determine the success of your co-ownership arrangement.

“It is really a joint venture where everybody is effectively a shareholder,” he says. “Part of that is establishing what your rights are as a shareholder and where the decisions have to fall.”

PREPPING FINANCIALLY FOR HOMEOWNERSHIP 

Considering exchanging your rent for a mortgage? Part 1 and Part 2 of CPA Canada’s financial literacy blog: The decision: buying vs. renting a home weighs the pros and cons of buying versus renting, helping you make the right choice.

Also, see our coverage on home buying during COVID, real estate scams, and the big costs of lying on a mortgage application.