Buying property together

Getting the cash together to pay the deposit and legal fees for a home is not an easy task, and some people may never be able to afford a home without assistance of some kind. Even if your sights are set on a relatively modest home costing R250 000, you will need at least R40 000 saved up in order to acquire it.

Because of the initial costs of buying a home, more and more single people, friends and relatives are pooling resources. If it works out, the financial and social benefits can outweigh any disadvantages to joint home ownership. The operative words being: "If it works out".

Throwing rent money away?
If you team up with a friend or relative who is in a similar financial and social situation to you, it is possible to cut your monthly living expenses and avoid throwing rent money down the drain.

At the same time you could enjoy a much nicer lifestyle, have more disposable income and build up equity in an asset. There are definitely economies that can be achieved by sharing accommodation and the real benefit comes when you have built up enough equity to afford a home on your own.

Scenario that could work
Let's look at a scenario that could work. Sarah and John are cousins, they have a combined income of around R25 000 per month, good jobs and a clear credit record. If they applied to the bank for a pre-approved loan on a R250 000 home they would no trouble getting the finance.

Both their names would appear on the bond and the registration documents. Five years down the road they may decide to part company, perhaps to get married or move to another town. When they sell the property they will in all likelihood have made a capital gain. That gain would be split allowing them to put a deposit down on another property.

That’s great in theory, but much of the success of a cohabitation arrangement of this nature requires a strong mature relationship, cut and dried rules and a water-tight contract. Each person has to want to make it work, get along and be willing to give and take in order to remain friends and property partners.

Written agreement
The key to successful joint property ownership goes further that just friendship. You need a detailed written agreement. This should spell out the day-to-day living arrangements, alterations to the property, non-payment of the bond by one of the parties, division of expenses, accidental death and an exit clause.

While it is not a requirement of the banks to have an agreement of this nature drawn up, it is highly recommended. If things turn sour the "he said she said" battle does not help in court. The agreement could cover everything from a girlfriend not staying more than one night without the approval of the other, to sharing garden work, being responsible for breakage caused by guests and parking arrangements.

Property as an investment
When interest rates drop, the purchase of a second property to rent out becomes very attractive as the income generated usually covers the bond and provides a nice long-term investment.

It is very common for two parties to jointly purchase a property in this manner and the banks are quite willing to finance deals of this nature because as long as they are good credit risks they have two people responsible for the loan instead of one.

However, before you rush off to buy that second property there are a number of calculations to be made. Firstly, you need to evaluate your current financial situation. Purchasing a second home makes much more sense when the bond on your existing property is paid off. The payments that were earmarked for your first home can then be redirected. If you are still paying off your bond or have other debt commitments paying these off first is a better use of your surplus capital.

For example, if you have a spare R40 000 in your coffers, you could afford to purchase a second home for R200 000, but by teaming up with someone you could buy a property for double the value in a better area thus improving your chances of getting a good rental income.

If all goes well, and you are fortunate enough to have good tenants that look after the property, the investment can provide you with a steady income in retirement. In addition, the capital value of your property will have increased over time.

However, bear in mind that you will be liable for Capital Gains Tax when you sell the property. This will work out to approximately 10.25 percent of the Capital Gain.

A critical element to consider when buying an investment property is the location. If the area is starting to decay then rents will be dropping. This could leave you with a large monthly shortfall and devaluation of the capital value. Make sure that there are no planned developments like highways or office blocks that may reduce the desirability of the properties you consider.

Sub Divisions
If you buy a property with a partner with the view to subdividing you should consult a qualified real estate attorney. They will be able to tell you if it can be done according to the bylaws of the neighbourhood and what you are in for financially. It can be an expensive process, so you need to have a good cash reserve (about R30 000) over and above the costs of purchasing the property.

The bond
If both parties are listed as the bondholders you are "jointly and severally" liable for the payments. This means that if one of you does not keep up your end of the bargain the other will have to pay. Life throws curve balls and if one of you becomes unemployed or is injured and unable to make an income you may struggle to make the payment. The solution to this to agree to have savings equal to three months expenses in a separate account.

Exit Agreement
It is difficult to predict what can happen a week from now, let alone in three years time. There has to be a clause in the agreement that deals with the possibility that one of you wants to leave. The party who wishes to leave should offer their half to their partner. If this happens in the early stages of the partnership then affordability may be an issue.

A reasonable buy-out process should be put in place and both parties must realise going in that early dissolution can be a costly affair. Maybe the remaining party could get in a tenant and use part of the income to pay off the exiting party. The sale of the property in the early stages will probably not be a solution as the property will not have grown in value and both parties could incur a loss. If you have any hesitation about your commitment, joint property ownership is not for you.

Accidental Death
If one of you dies, the issue of who inherits and on what terms, should be dealt with. One does not want to be in the situation where an unfriendly heir forces you out of your home.

Can you commit?
Joint property ownership is not for everyone. If you cannot answer yes to all of these questions, then you should consider other options.

  • Can I afford the monthly payments even if my partner can not pay his share?
  • Am I confident that the person I am entering into the agreement with is acting in good faith and is trustworthy?
  • Could I sustain a live-in or business relationship with this person in the long term?
  • Are the legal agreements professionally drawn up and all issues documented?
  • Are there suitable exit clauses in place if something unexpected happens?

Article by: Iona Minton - www.iafrica.com