Buying a House or Real Estate as an Unmarried Couple? Why you should you consider a Co-Ownership Agreement

By: Patrick J. Cappello, Esq.

There’s nothing unusual about buying a home or real estate with someone who is not your spouse. Despite the fact that this is a common occurrence, it is important to note that there are a number of challenges you will face that married couples do not.

Some of your advance planning has to do with the possibility that you may eventually break up. While that is not the first thing on your mind, it is important to understand and have a plan for the division of property if that occurs. Married couples have well-established laws that govern the division of marital property in a divorce. The same cannot be said for unmarried couples. This is why it is important to make informed decisions that may affect long term outcomes.

How to take Title to Property; Whose Name is on the Deed

The Deed is the legal document which transfers ownership of a property and is recorded in the public records. Assuming both of the parties will be paying the expenses associated with owning property, it is likely that you both will be on the Deed. If only one party is the record title owner then the other party is unprotected in the event of a possible breakup or the death of the record title owner.

            Choosing the Form of Ownership When both Parties are on the Deed

If you decide that you will both be on the deed and both have an ownership interest in the property, there are two different types of ownership by which an unmarried couple may take title in New York. This is set forth in the Deed, and it’s important to understand the difference.

The first option is to own the property as “Joint Tenants” which is also known as “Joint Tenancy”. In New York, joint tenants hold a right of survivorship. This means that if either party dies, the other party automatically holds 100% ownership in the property.

The other option is to own the property as “Tenants in Common.” This is usually indicated on the Deed; however, it is important to note that if the deed does not specifically state “Joint Tenants,” unmarried couples will automatically take property as Tenants in Common. Each tenant in common will own a certain percentage of an undivided interest in the entire property. Each party does not necessarily have to have an undivided ½ interest in the property.  However, if it is not stated on the deed then each party will have an undivided equal interest in the property.

The most important difference between Tenants in Common and Joint Tenants is what happens if one person dies before the other. If the parties own the property as Joint Tenants, then full title ownership will be automatically held by the surviving owner at the time of death and, as a result, no administration or probate proceeding is necessary. Whereas, if the parties own the property as Tenants in Common, then upon the death of one party the property will pass to whomever the decedent named in their Last Will and Testament or, if the person dies without a will, through an administration proceeding.

Creating a Written Co-Ownership Agreement/Contract

To make sure that each party understands the exact nature of the co-purchasing arrangement and to plan for future issues or changes in the relationship, it’s wise to create a written contract detailing each party’s rights in and to the property. Doing this right away is sensible and avoids the possibility of later uncertainty and conflicts.

One way to deal with the property after a split of the parties is a sale. The only issue in this case is how the proceeds of a sale are to be divided. Equal shares may not be equitable depending on the respective contributions of each partner. Some of the possible issues are detailed below:

  • How the parties shall own the property? (discussed above);
  • What happens in the event of a breakup and how will the proceeds be divided from the sale? If one party contributed more money to purchase the property, then he/she may be entitled to a greater share of the proceeds;
  • Terms for a sale; and
  • How will the costs associated with the property (closing costs, insurance, taxes, maintenance, etc.) be divided during the time before the sale of the property?

Complexities mount when one partner stays so a co-ownership agreement/contract should address the following issues:

            Valuing the Property: When one party remains in the house, the terms of settlement are more complex. There is no sale price, so the parties must agree on an appraisal procedure and who will pay for it. They should also agree on whether a real estate sales commission should be deducted from the valuation used in the settlement.

            Buying out the Departing Party: Another problem arises if one party wishes to keep the property but does not have the money necessary to pay off the departing party. The more equity the property has, the higher the buyout for the remaining party.

            Removing the Departing Party from Liability: An important issue arises when one party departs and both parties are responsible to a lender upon a note and mortgage.  Just because you leave the property and are no longer making mortgage payments, does not remove your obligation to make payments.  Further the loan will still be reported on your credit report and will be taken into account for future debt to income ratio calculations. Many people believe that they are no longer liable for a mortgage debt if the party remaining on the property has agreed to assume full responsibility. They overlook the fact that the lender was not a party to that agreement. Due to strict lending policies, departing parties who remain liable for prior mortgage debt are often unable to purchase a new property or even borrow to purchase a vehicle.

Lenders have no incentive to voluntarily release one of the parties from the obligation of the payment. Some lenders may allow it if the party that is remaining with the house has a perfect payment record and they qualify to hold the loan without the departing party’s income and/or credit score. But if the lender refuses, the only way to release the departing partner from the payment obligation is for the remaining party to refinance the debt in his or her sole name with another lender.

            Implications of a Declining Market: If the house is worth less than the mortgage balance when the couple split, which is possible if they purchased at a peak in the housing market, the options are even more limited. Typically, the property cannot be sold unless the debt deficiency is somehow paid.

If the parties cannot come up with mutually agreeable terms for resolution, the only option left is starting a partition lawsuit.  This can be costly and if the property cannot be easily split, as is often the case with a home, then the property is sold, generally to the detriment of both parties.

What’s Next?

Be sure that any contemplated purchase of property as an unmarried couple is accompanied by a conversation about the issues raised above. It is important that both parties have the opportunity to speak with an attorney to ensure that their rights will be protected if issues arise down the road.

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