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3 Things To Know About Tenants In Common Ownership
There are many forms of ownership structure in property. And tenants in common is one such structure that is very common among co-investors.
Under such legal arrangements, each individual or entity owns an undivided interest in the whole property in question. No party is able to exclude any other party or make a claim for any portion for themselves.
While many partnerships between investors go in as equal partners, this is not always the case. And tenants in common permits unequal ownership that even allows individual owners to sell their individual portion of interest to other parties.
From a legal standpoint, this action is possible because each tenant has a separate title representing his undivided interest.
If for example, you get into a real estate investment with a couple of friends using a tenants in common structure. The total investment capital for a 100 acre piece of land is $100k segmented into $50k, $25k and $25k respectively with you making the $50k outlay.
This means that the ownership of the property in question, assuming that the proportion of ownership equals to the proportion of capital contributed, would be 50%/25%/25% accordingly.
Meaning you will own 50% of the property.
However, you cannot mark out 50 acre out of the land and declare that area as belonging to you alone. Your 2 friends will own 25% each of that specific 50 acre that you have pointed out. This also means that you will own 50% of the other 50 acre too.
All parties will have their rights on each acre of land.
However, you retain the legal right to sell off your share of the investment. Or even just a portion of your 50% to other investors. A new purchaser will then become an additional tenant in common with all remaining owners.
1) Wording of conveyance
If you are getting into real estate investments, you have to get acquainted with how important wordings in contracts are.
Deeds endorsed in this ownership structure will include the words “as tenants in common” after the legal names of the co-owners.
For example: John William Smith and Bruce Brooke Wallace as tenants in common.
If there is no mention of specific ownership allocation, the law presumes that there is equal interest among all co-owners. So if the ownership is unequal, it must be stated explicitly either as a percentage or as a fraction.
In most states in USA, when 2 or more people are identified as owners, and there is no mention of how ownership is structured, the law presumes the parties as tenants in common.
However, take note that it can be a little more tricky when it comes to married couples. In such cases, they might be considered as joint tenants by default. This depends on the state and local laws in the particular area.
2) No right of survivorship
In a joint tenancy arrangement, and upon the death of an owner, the surviving party automatically takes over the portion of interest left behind by the deceased.
This does not hold any water in tenants in common.
For tenants in common, upon death of an owner, his shares in the property will be passed down to heirs or devisees. This is assuming that there is no will in place indicating otherwise. The new owner(s) will then become tenants in common with the surviving owners.
As you can see, there is no right of survivorship.
Should the new co-owner decide to liquidate his stake, he can do so and transfer ownership to a new co-owner. This new co-owner then becomes a new tenant in common.
3) Co-owner responsibilities
Don’t forget that real estate is not all about profits. There are expenses to pay for as well.
Although each owner can legitimately claim a proportionate share in the proceeds of sales or rental, he is also proportionately responsible for paying his share of expenses too.
Because this is a responsibility in legal speak, should an owner fail to make his contributions he is responsible for, the other owners can legitimately sue his for the money they had paid for his behalf.
Is this a good way to structure ownership?
While tenants in common is a simple way to co-own real estate investments, there are many disadvantages that you should consider.
Partnerships are seldom simple. Even going into investments with a spouse can trigger potential problems.
For example, what are you going to do if a party fails to pay for his share of the expenses? What if there is death and new co-owners enter the partnership with very different outlook on how the business should be run?
Property ownership is something that should not be taken lightly. Do get advice from a proper real estate attorney on your options for ownership before agreeing to anything you do not have 100% faith in.