Co-ownership of real property is a cost-effective way of getting a foot on the property ladder, especially in cities like Sydney and Melbourne where the price of real estate can deter some home buyers. However, it is not without its drawbacks. If you are considering buying property with friends or family members, it is important that you understand how co-ownership works and how to protect your interests if something goes wrong.
Joint Tenants and Tenants-in-Common – What is the Difference?
Under Australian property law, there are two types of legal ownership. One is as joint tenants and the other is as tenants-in-common. Co-ownership as a joint tenant involves two people and takes no account of which of the parties contributed the funds to buy the property. Both parties own the property in equal shares. However, when one party dies, their share passes automatically to the surviving party.
By contrast, tenants-in-common allows two or more people to own property in equal or unequal shares. The share division is based on the amount each person puts into the purchase. Each person owns their share separately from the others, and they can dispose of it as they wish. Unlike joint tenants, however, if one party dies his/her share becomes part of that person’s estate. It is not distributed among the other parties automatically.
Seek Legal Advice to Mitigate Risk
When clients come to us to purchase a property as tenants-in-common, they sometimes ask about the risks involved. We always recommend that they seek legal advice, but from our experience here at Prudential Real Estate, we can say it is a viable way for people to own property. The major advantage is that all the costs of purchase and holding the property are split between each owner, lessening the cost burden that a single person or couple have as joint tenants.
Like most other situations, a tenants-in-common arrangement works well until there is a dispute between the parties. There could be a disagreement about the cost of renovations or repairs, for example, or some owners may want to accept a sale offer and the others do not. There are many other examples. That is why we always recommend the parties have a co-ownership agreement drawn up by a legal expert.
Understand the Financial Risk
Some experts consider the financial risk to be the biggest concern. If one owner defaults on their share of the mortgage payments, for example, and the others cannot afford to take over those payments, the credit ratings of the other owners are affected. As co-owners, each person is responsible for the debts of the others in regard to the property.
We like our clients to be well informed so they can make choices they are happy with later. If you need more information about buying property, we have a guide for download at the Prudential Real Estate web site, with our compliments.