Co-Ownership of Real Property – Your Co-Owner’s Fortunes Can Affect Your Own.
Co-owning a residence, investment or vacation property can make a lot of sense, but one should accept the fact that co-ownership is more complicated. Doing it the right way takes experience and care and should be done with the help of a good lawyer and broker.
1. There’s no substitute for integrity when picking a co-owner. No matter how great the investment, matters of integrity will come up. There is no lawyering that can serve as a perfect substitue for a great partner.
2. A co-owner, or its creditors, may be able to force a sale that would be harmful to the other owners.
• A client went through a tough divorce made worse by huge business debts of my client’s spouse. Most of the debts were only the spouse’s, but they had to be paid. The residence held most of the wealth, so the couple agreed to complete the divorce and co-own the residence as “tenants in common.” When the property is a home, a condo, or other property that can’t be divided, a tenant in common can force the sale of the entire property through a “partition action” in State court or through bankruptcy. This can force the other owners to sell at a time that would be bad for them (the market is down or they would rather defer the income for tax purposes).
• Where the ownership is in a corporation or limited liability company the creditors could force a sale of only the membership/stock of the indebted owner. This is just one reason why it is usually best to co-own real estate through such business entities.
3. Absent a written agreement:
• A co-owner could sell its interest without consulting the other owners;
• Co-owners would not have the first chance to buy out an owner looking to sell
• Co-owners would not have the opportunity to match a third party offer
• A co-owner’s heirs could become co-owners
• Co-owners willing to pay their share of expenses would have a harder time getting contributions from the other owners.
• Maintenance, insurance and improvement decisions would have to be unanimous.
• One owner could allow others to use the property without the consent of the other owners.
• The decision to sell could require a unanimous vote.
• An owner’s death or divorce could affect everyone.