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Get a group of friends together, and there’s a good chance that the climbing costs of housing is going to come up at some point. And for some, lamenting the quickly rising rents and steroidal home prices could easily segue into plotting an alternative housing solution: going in on a home purchase together.
Buying a home with a friend can make home ownership more affordable since the down payment, mortgage payment and costs for upkeep can be shared between two or more people. A recent Zillow survey on co-buying found that affordability is a top reason people buy with others: 33% of successful co-buyers and 45% of prospective co-buyers surveyed cited buying with someone else as more affordable than purchasing a home on their own.
While money is a significant concern, co-buying agreements should take into account more than money. Good friends are precious and rare. Buying a home with one could mean losing that friend if things go bad and you can’t work things out.
How one ‘risk-taker’ bought a home with friends — successfully
That wasn’t the case for Alecia Pillatos. Aged 21 and a self-described risk-taker, she roped in a good friend who wanted the same thing she did: a toe-hold in a supercharged housing market where homes were appreciating at double-digits.
“I couldn’t afford a home and I was sick of living in apartments,’’ Pillatos, now 37, said of the 2008 purchase. “We had this great plan where we’d flip it and have all this money and we’d be rich.”
Things didn’t quite work out that way, but they did work out.
Three years after they bought the $329,000 home in a Seattle suburb, her friend had a baby and moved with her husband to another home to raise their family. Pillatos ended up keeping the house for more than a decade.
When she sold the home in 2020 for $510,000, she used the proceeds from the sale to buy a $900,000 property with her sister-in-law.
Pillatos is now a real estate broker and a growth advisor at Zillow who educates and coaches other brokers, sales teams and real estate agents on how to best support customers who are buying and selling homes. In some cases, she said, those customers may be friends co-shopping together.
Buying with a friend, she said, isn’t for everyone. She wouldn’t recommend it unless there’s “extreme trust” in the relationship, and each party gives lots of thought to details a single buyer wouldn’t have to consider.
If you have such a friend, she said, consider what co-ownership might look like with them, and the benefits it could deliver.
“Don’t wait for the dream house,’’ she said. “When your life changes, your dreams change. Just buy something and fix it up while you live in it.”
What to think about before buying a home with a friend
The steps involved in buying a home with a friend — or even a group of friends — are the same as buying alone or with a partner. However, buying with a friend requires extra planning to ensure accountability and provide protection in case plans change.
It’s always a good idea to consult with an attorney before making such a large financial commitment with another person. And, as always, working with a good agent can help you navigate any zoning issues or restrictions on how the home can be used.
Before deciding to move ahead with a joining purchase, here are some issues to consider:
What type of home should you buy with a friend?
Think about how you want to live. Do you want a roommate situation where you share common spaces? Or do you want a separate unit, a division of the home, or something along the lines of a duplex or even triplex?
When Pillatos and her friend searched for their first property, they looked for homes that had separate living spaces or that could be easily divided to create separation. They found a 4-bedroom, 1.75-bath home in a quiet suburban Seattle neighborhood. Her friend put down $5,000, and Pillatos took over the loan when her friend moved out, more or less equalizing their contributions.
Pillatos said, however, that ideally, she would have preferred the down payment be split equally.
Pillatos said she found her second property by searching online listings for homes that mentioned Accessory Dwelling Units (ADUs) or mother-in-law (MIL) units, which would make it easy to divide the property.
Separate units may also allow for rental income outside a roommate situation if one friend decides to move out.
How much of my financial life will I have to share with my friend?
There should be no secrets when it comes to income, savings, debts and spending habits. Make sure you’re comfortable sharing important financial details with your co-buyer, even if it’s not required by a lender.
If you’re purchasing with a mortgage, you and your friend will both need to qualify for financing. Co-applicants can apply for a loan without sharing personal financial information such as pay stubs and tax returns with each other, but they are required by the lender. If either of you has a low credit score, debts that eat up a large chunk of income every month, or collections on your credit report, you might not qualify for a mortgage, or it could cost more.
How will buying with a friend affect my finances?
Even though you may be splitting the mortgage payments, the entire mortgage obligation will be reported to lenders as your sole responsibility when calculating your debt-to-income ratio, which is a measure of how much debt you owe in relation to your income.
The larger debt assigned to you could increase your cost of borrowing on things like credit cards and auto loans.
If your friend is suddenly unable to pay their share of the mortgage and costs, that also would have a huge impact on your finances, as you would be responsible for the entire cost.
What are the legal arrangements when buying a home with a friend?
There are a variety of different arrangements that can be explored when co-owning property. You should speak to a legal and tax professional for more information and to decide what options might exist in your state and what would work best for you.
Is co-buying common?
Zillow’s co-buying survey found that 13% of successful homebuyers bought their home with a friend, and 13% of prospective buyers intend to buy with a friend in the next 12 months.
Questions to ask before you buy a home with a friend
Who pays for what?
The first thing to decide is the upfront cost of buying the home: How much is each person putting down on the purchase, and how will you split the cost of the appraisal and closing costs?
The costs don’t necessarily have to be split evenly — they can be split according to room or unit size. But it’s important to clearly document how you plan to handle the costs.
It also takes money to maintain and improve a home. Are you in agreement on what improvements you want and how you’re going to pay for them? Do you both have money to pay for repairs or do you want to start a Home Maintenance Fund? How are you going to plan for expenses? What about utilities?
When Pillatos bought her first home with a friend, they split everything 50/50 — not only the costs of buying, but the cost of fixing it up and maintaining it. Any repairs required full agreement by both, and if one couldn’t afford a project the other wanted, it would be nixed.
When she bought her second property with her sister-in-law, they configured the monthly costs according to the space each occupied.
How will disputes and differences of opinion be resolved?
When Pillatos bought her first home, she and her friend didn’t have a legal agreement drawn up by an attorney — something experts recommend to provide legal recourse in case things go wrong.
But they did have a detailed set of house guidelines that covered everything from preferred bedtimes (no noise after 10 p.m.) to chores and shared meals. Their close friendship and trust was the glue that bound the agreement.
Ask yourself: How well do you know your friend and how well do you get along? Can you work through disagreements in a respectful and fair way? Do you share similar lifestyles and habits, or will you have to spell out even ordinary things such as laundry days?
Can your friendship withstand the stress test?
Cohabitation came easy for Pillatos and her friend, mostly because they were young and accustomed to it.
“You’re fresh out of college and you’re used to living with other people,’’ Pillatos said. “But you’ve got to be close to someone and want to spend time with them.”
Disagreements are going to come up, and how they get resolved can have a lasting effect on the friendship. People can get weird when it comes to money. Is it worth risking a friendship or is the friendship so strong that the risk seems minor compared to potential benefits?
What if one of us needs to move out?
Life is unpredictable. You can chart a course for your life, but any number of things can throw you off, for better or worse. Loss of a job. An opportunity in a different city. A new love in your life. A bad investment. You may find at some point that your home no longer fits into your plans — or your friend’s.
Do you have the option to buy the friend out? Can you afford to refinance it or does the home go up for sale? If a buyout is possible, how is the price determined? Things happen. You won’t likely need every contingency, but it’s good to have a plan just in case.
When Pillatos’ friend decided to move out, the pair owed more on the house than it was worth — a common problem for people who bought in 2008, just before the start of the Great Recession. If the pair had decided to sell, they would likely have had to sell at a loss.
Pillatos said she was able to remain in the home mainly because her friend didn’t ask for it to be sold or to have her down payment returned. Had she made that request, Pillatos would have been in the position of negotiating a buyout or some other arrangement.
As the sole owner living there, Pillatos installed a second full bath, and rented out the bottom of the home to help with the mortgage and improvements. When she sold it at a profit, she offered to share the proceeds with her friend, who refused it since Pillatos had lived there for more than 10 years.
“I’ve been lucky to work with generous people,’’ said Pillatos. “Be sure that you’re working with generous people who support each other and want to be kind.”
*Results of the Zillow Successful and Prospective Buyer Survey on Cobuying, conducted in February & March 2022.
Source: zillow.com