A new Zillow advertisement promotes a workaround for high housing costs: sharing homeownership with friends to maximize purchasing power.
They refer to this as “Homeowner Mates”.
While attractive on the surface – especially in today’s market – co-owning with friends is filled with risk.
Post-divorce, this approach is especially risky due to financial, emotional, and legal factors that can lead to unexpected complications.
Here’s why we generally don’t recommend this path without substantial caution:
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Financial Entanglement, and Unintended Consequences.
Joint Liability:
Co-borrowing increases purchasing power but also binds each party to the loan.
If one person misses a payment due to unforeseen circumstances (e.g., job loss), all owners’ credit scores suffer, even if the others are financially responsible.
Example: Imagine three co-owners; one loses their job and cannot pay their share of the mortgage. The others must either cover the shortfall or face collective credit damage and potential foreclosure risks.
Conflicting Financial Goals:
Over time, financial priorities can diverge. While one owner may want to sell, others might prefer to hold, leading to potential deadlocks.
Example: If one co-owner decides to move for a new job opportunity, they might wish to sell. The remaining owners may not want to, leading to complicated buyouts or forced sales that benefit no one.
Exit Strategy Challenges:
If a co-owner wants out, navigating buyout terms or finding an external buyer for their share is complex, especially if there’s little to no home appreciation.
Example: In a flat or declining market, a co-owner might struggle to recoup their investment if they need to exit early, leaving them with less-than-expected financial return or prolonged involvement in the property.
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Emotional Dynamics, and Personal Dynamics.
Shared Decision-Making on Major Expenses:
Owning a home involves significant financial and upkeep decisions—from essential repairs to aesthetic updates. With multiple owners, reaching a consensus on when and how to handle these expenses can cause ongoing friction.
Example: Say one owner wants to replace the HVAC system immediately for comfort, while the others feel it can wait. This conflict could lead to tension or even legal disagreements.
Life Changes and Shifting Priorities:
Personal changes—like a new relationship, career shifts, or health issues—affect each owner differently. Friends may not account for these potential shifts when entering a homeownership agreement.
Example: If one co-owner marries and wants their spouse to move in, the other co-owners might feel their privacy or original agreement is compromised, creating emotional stress and potential legal challenges.
Privacy and Autonomy Needs:
Post-divorce, personal space and independence are often crucial to recovery. Co-owning with friends compromises privacy and reintroduces daily interpersonal dynamics that can disrupt this personal rebuilding phase.
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Legal and Logistical Complications
Ownership Structure Complexities:
Choosing between joint tenancy, tenants in common, or a partnership agreement has significant implications for inheritance, taxes, and division of assets.
Example: If one co-owner passes away unexpectedly, joint tenancy might automatically transfer their share to the surviving owners, possibly against their intended wishes. Tenancy in common might allow inheritance, but it can complicate ownership for the remaining friends.
Dispute Resolution Mechanisms:
Homeownership disputes often escalate without clear, legally binding agreements, which can lead to costly legal battles.
Example: If two owners want to sell, but the third does not, the situation might end up in court, consuming time, money, and emotional energy for all involved.
Inheritance and Estate Planning Needs:
Each co-owner should have estate plans that clarify what happens to their share in case of death or incapacity to avoid burdening the remaining owners.
Example: If an owner without a will dies, their share could go to distant relatives, introducing new individuals into the ownership and further complicating the arrangement.
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Long-Term Financial Considerations and Market Uncertainty
Investment and Appreciation Uncertainty:
Real estate traditionally appreciates, but it’s not guaranteed. Friends may have different investment timelines or expectations, leading to conflicts if property values don’t meet anticipated growth.
Example: If the housing market dips, one co-owner might want to sell quickly to cut losses, while others prefer to wait, expecting values to rebound. This difference can delay or complicate exit plans, impacting everyone’s finances.
Liquidity Constraints:
Unlike other investments, real estate is relatively illiquid. Cashing out without mutual agreement is challenging, especially in soft markets.
Example: If one friend needs quick cash for a personal emergency, they might be unable to withdraw their portion or face a difficult buyout scenario, creating tension and financial pressure for the group.
Alternative Approaches
- Timing and Patience: Often, renting during transitional phases like post-divorce offers necessary flexibility, reducing the risk of entanglements.
- Clear Agreement on Roles and Exit Strategy: If co-buying is still under consideration, clarify roles, define responsibilities, and create a binding exit plan in case any party needs to leave.
- Avoiding Forced Financial Decisions: Not all moments in life suit homeownership. Post-divorce is typically a time for rebuilding, and binding agreements may limit needed flexibility.
Pooling resources to buy property with friends may seem like a creative workaround in today’s market, but it often leads to complex entanglements that challenge personal, financial, and emotional boundaries.
Especially post-divorce, we highly advise taking the time to stabilize financially (and emotionally) before diving into homeownership with friends.