Monday, October 3rd, 2016
Before buying a vacation home with a friend or relative, work out all the details, such as how to finance the purchase, divide expenses and schedule getaway time slots.
Most important, decide what happens if one side wants out. Failing to negotiate these issues ahead of time can lead to disputes that can turn friends into enemies.
To head off trouble, you should consider drafting an equity-share agreement to help prevent conflicts. Regardless of how close you are, things can change.
The agreement should spell out monthly and annual expenses, such as property taxes, insurance, utility bills and repairs. The agreement should also detail what happens if one person no longer wants the property, giving the other person a way to terminate the arrangement and either sell the house or buy out the other party’s share at fair market value.
Buyers who plan to finance their purchase should be prepared to put at least 10% down for a conforming loan—with amounts below $417,001 for most of PA and South Jersey. Buyers typically apply jointly, and both need to qualify based on their total income and debts. The qualification is based on the borrower who is least creditworthy, so a friend with a poor credit history could affect your ability to get a loan.
Vacation homes are typically purchased with the title held by a limited-liability company, or LLC, a hybrid legal structure that offers members the limited liability of a corporation with the tax advantages and flexibility of a partnership. Alternately, ownership can be structured as a tenancy in common, where two or more people hold title without the right of survivorship. Either way, buyers should also have an operating contract—a sort of prenuptial agreement that governs the use and maintenance of the property.
Even if buyers plan to use an LLC to hold the title, they will most likely need to apply and qualify for a loan as individuals. That’s because an LLC set up solely to hold title to a vacation home will usually have no other assets or income. But if one owner fails to pay his fair share, the other could be responsible for paying 100% of the loan.
Here are a few things to consider before you buy a vacation home with friends or relatives:
• Keep emotion out of it. Think of your purchase as a business deal. Negotiate all aspects of ownership—usage and expenses—and put it in writing.
• Create an exit strategy. Decide what happens if one party dies or wants out. Include a buy-sell agreement or succession plans in the property’s operating agreement.