Co-owned second homes
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What is co-ownership?
Co-ownership is when an asset such as a home is jointly owned by two or more parties. In this arrangement, all owners are listed on the asset's title, signifying that each holds a specific percentage of ownership. Opting for co-ownership means entering both a legal and financial partnership with the other buyers, as well as an agreement about property access.What is a co-owned home?
A co-owned home is a property that was purchased and is owned jointly by two or more people. All owners are included on the title of the home, and all parties hold a portion of ownership in the property. When you choose to buy a house with other buyers, you enter into a financial and legal partnership and a new living arrangement.Why is co-ownership on the rise?
The practice of co-ownership has traditionally taken the form of a group of friends or family members coming together to buy a second home or a child who inherits a house from their parents or grandparents. While co-ownership isn’t a new concept, it has become a more viable path to second home ownership. As real estate prices continue to rise, it can make more financial sense to combine finances with other buyers and share the costs of buying and owning a home — especially for those who feel priced out of a home in the current market. In fact, the number of co-buyers with different last names has increased by 771% between 2014 and 2022.Understanding co-ownership of property
There are different types of co-ownership, including tenancy in common, joint ownership, community property and tenancy by the entirety. Each type corresponds to a different set of rules and allowances.Tenancy in common
A tenancy in common (TIC) is for two or more people with an ownership interest. Tenants may have unequal investment stakes. For example, one owner might have an 80% interest with two co-owners at 10% apiece. Often this corresponds to the financial investment contributed at the original purchase. Unless explicitly stated otherwise in the deed, TICs do not have rights of survivorship. If a tenant dies, property shares pass to an heir instead of the remaining tenants. Tenancy in common is available for all people, regardless of their marital status.Joint ownership
Joint ownership, also known as joint tenancy with rights of survivorship (JTWROS), specifies that tenants hold equal ownership rights. This holds true even if only one person paid for the property — anyone listed on the deed has ownership of the complete property.- Time. Ownership interest must begin at the same time for all joint tenants.
- Interest. All the tenants must have equal interest in the property.
- Title. All the tenants must receive the same title in the deed.
- Possession.Access to the property and usage rights must be the same for all tenants.
Community property
Married couples may co-own title as community property in nine states: Arizona, Texas, California, Idaho, Louisiana, Nevada, New Mexico, Washington and Wisconsin. These states recognize couples as a single financial entity. A right of survivorship must be specified so that when one spouse dies, the other can automatically take over the title. Unlike JTWROS, there’s no guarantee of automatic survivorship rights.Tenancy by the entirety
Married couples can also choose tenancy by the entirety (TBE) as their co-ownership model. TBE is a type of joint tenancy that comes with rights of survivorship. This ensures the property avoids a costly probate process and passes immediately into the widowed spouse’s hands. Tenancy by the entirety views couples as one financial entity as well, so the property is considered to be owned by “one person.”Pros and cons of co-owning a home
As an alternative to buying a whole second home, co-ownership offers owners a unique set of benefits for buyers — as well as things to consider:Pros
- Opportunity to own. Co-owning a home with other owners gives you access to a home that might be outside of your budget. With multiple owners sharing the costs, you can enjoy all the amenities or use it as an investment without breaking the bank.
- Usage time. Because you own the home, you have the right to enjoy your property to the fullest extent based on the type of co-ownership you have.
- Deeded ownership and equity. Shared co-ownership gives you a deed to a fraction of the home, which means the value of your unit of ownership moves in line with the real estate market. You get the same opportunity to build equity as with a whole home.
- Shared maintenance costs and responsibilities. Most co-ownership agreements include guidelines for how owners can share home upkeep and handle any issues. Shared ownership means you are only responsible for a portion of the expenses and responsibilities. This could be beneficial for owning a second home, which has expenses, maintenance concerns and logistics to consider.
Cons
- Personal challenges. Co-ownership is subject to changing dynamics, relationships and conflict that could arise between owners.
- Fewer financing options. Fewer banks offer mortgages for co-ownership, so you may need to shop around for ways to finance your purchase.
- Less freedom. Any decisions about maintenance, repair, decor and selling your ownership must go through the other owners, which can be a hassle.
- Payment risk. Co-ownership financial responsibilities fall on all owners — even if one owner does not pay.
What’s needed to start a co-ownership agreement?
Whether you are doing DIY co-ownership, buying community property or using a fully managed co-ownership provider like Pacaso, it’s important to have a written agreement that outlines the terms, structure, management, and financial and logistical aspects of the shared ownership. Common elements of a successful co-ownership agreement include:- Buyer names
- Home description
- Ownership structure (amount of interest for each person)
- Roles, rights, and responsibilities
- Individual contributions
- Payment management
- Maintenance and repair management
- Decision-making process and resolution
- Contingency plans
- Exit strategy
Types of co-owners
You can co-own a home with a family member, friend and even a stranger. The people you’re looking to co-purchase a home with could influence the type of co-ownership. For example, friends, partners and strangers might consider a TIC or joint ownership, while married couples might benefit from community property and TBE.Regardless of the co-owner, buying a home with other people is a major undertaking. Not only is DIY co-ownership challenging, but it presents factors outside of your control. Job changes, financial disruption, health issues and other major life and lifestyle changes could impact each person’s commitment in the second home.Co-ownership mortgage differences
If you decide to purchase a home through co-ownership, you and your co-owners will likely take out one mortgage loan — unless you plan on paying all in cash.One of the advantages of co-ownership is that buyers can combine their income and debts to improve their chances of getting a larger loan. A solid credit score, however, is still essential, as many mortgage lenders will use the lowest credit score to determine qualifications.A key consideration for securing a co-ownership mortgage is payment risk. If one owner is unable to make their payments, the financial responsibility falls on the other co-owners. Otherwise, it results in penalties on the account and even foreclosure.If you are co-purchasing a home part of a TIC, you may be able to qualify for a fractional loan that reduces your financial responsibility to only your loan and not your co-owner’s. However, mortgage interest rates are usually higher for a fractional loan, and they are only offered in certain locations.Differences between a co-signer and co-buyer
A co-buyer (or co-owner) is different from a co-signer as it relates to ownership and payment. Co-signers take full responsibility for a loan along with a primary signer, but they do not have any ownership rights to the home. In contrast, a co-buyer has equal or similar rights to other buyers co-owning the home.Another difference is that co-buyers are responsible for payment from the start of the loan. Co-signers, however, only assume responsibility if the primary signer is unable to make their mortgage payments.Selling a home with co-owners
If you decide to sell your home, there are scenarios to consider: The first is where all owners want to sell, and the second is when one owner wants to sell their ownership interest but the others do not.If all owners of a co-ownership property decide to sell, the situation is less complicated, as there would be no debate over the right to sell. Outlining these terms in the co-ownership agreement from the beginning is critical.What happens when only one person wants to sell? With certain co-ownership models like Tenancy in Common or joint ownership, you have a right to sell your interest in the home. While you cannot sell without the permission of the other owners (as you do not hold sole ownership), you can still share your share at any given time once approved. The buyer of your share — which could be another co-owner — would take on the same portion of ownership that you held in the property.Co-ownership vs. fractional ownership
While co-ownership and fractional ownership are often used interchangeably, there are slight differences between the two models. Fractional ownership involves a buyer purchasing ownership interest in a resort property or unit. Co-ownership is a step above fractional ownership, where people can co-buy a private, high-value home or investment property with other buyers. However, unlike timeshare, both co-ownership and fractional ownership models provide deeded ownership, shared costs and usage time in your home.Takeaways
Here are the most important things you need to know about co-ownership:- Co-ownership empowers people to own property and build equity while lowering the financial and logistical burdens of buying and owning a whole home.
- Joint ownership and TIC are options for people who are not married to each other.
- Owners have unique rights to the property depending on co-ownership type.
- Survivorship rights are critical for property shares to remain with existing tenants.
- Financing a co-owned home is similar to financing a whole, but does include additional considerations and risk.
