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9 Points To Address When Creating A Co-Ownership Agreement
The only situation where you don’t need to clearly define the terms of co-ownership is when you are co-owners with your spouse. Because in that scenario, a lot of legal stuff kick-in automatically concerning assets of married couples.
While it could be ideal to go into partnership with the love of your life, a lot of people can feel that is a recipe for disaster.
And many entrepreneurs actually prefer their spouse to either be a homemaker or hold a less hectic job with more stability and predictability.
Most co-investors are not married couples. And when that is indeed the case, the best practice when entering into such partnerships is to have an agreement that spells out key points concerning the relationship.
1) How tenants are chosen
Although the tasks of landlording is just about similar from one landlord to another. The way each individual landlord goes about them can be very different.
One of the most sensitive issues that can play games with a landlord’s mind is how tenants are selected.
Tenants can be the difference between clear skies and stormy weather. Good tenants can be a dream to work with, while tenants from hell will be a nightmare to handle.
To avoid letting this issue become a thorn in your relationship, it is best to create a system of selecting tenants. This is assuming that both of you will be involved in acquiring tenants. This is not uncommon for multi-family properties.
However, if one party is just a sleeping partner while the other will be running the show, it makes perfect sense to let the active partner have control and final say on choosing tenants.
2) Personal use of property
If you are getting involved in a multi-unit building, it’s not that far fetch to imagine that one party or both are eyeing a unit to live in permanently or seasonally.
Surely if you bought in a vacation area with apartments near the coast, you’d want to use it for yourself during the summer?
Conflicts can arise when one party want personal access while the other wants to max out rental income.
In this case, clearly spell out in the co-ownership agreement of what is the practice when an owner wants personal use of the property. In many cases, partners agree on a special rate or occasional free use.
3) Responsibilities of each party
If both of you are going to be actively involved in managing operations, this is when things can get very tricky when there is no clear agreement of who is in charge of what exactly.
This is no time to be magnanimous. Being friendly can make the agreement easier to draft out. But a lack of clarity can be the key cause of conflict in future.
Don’t be afraid to be as detailed as possible in this aspect of the agreement. No one is going to make fun of you being too meticulous. And if there are people who finds this weird behavior, they probably never had any experience with real estate co-ownership.
4) How profits and expenses are split
It so easy to declare that each party will fork out an equal amount of funds. And all profits and expenses will be added and deducted from that fund for operations.
Easier said than done.
Many factors can emerge that prevents collections from being banked into the corporate account. Or for expenses to be debited from it. So many that it’s not possible to list them out here.
The main issue however, is having an understanding of how these money matter are split.
Money can bring out the devil in people whether they concern cash inflow or outflow. And it’s so important an issue that relationships can completely break down from misunderstandings with it’s roots coming from finances.
As the saying goes… once trust is lost, you can never regain 100% of it back.
5) Improvement costs
Sometimes, an idea pops up in your head to improve a house. And you make an impromptu decision to get the improvements done. This is an action that almost all landlords are guilty of.
But in terms of co-ownership, you cannot expect to make your own decision to do up a place and assume that you can get the expenses reimbursed from the company funds.
Who knows, the party initiating the improvement may have called up vendors that overcharges… splitting the profits with each other.
People experienced with real estating knows the existence of all these holes in the system. And suspecting that a partner is exploiting them can trigger despise… causing the working relationship to deteriorate.
So this is a matter that is best left clearly defined in a co-ownership agreement.
It goes without saying that you should get insurance. The issue is what insurance to get, for how much, and how to pay for them.
It’s generally not a good idea to rely on each other’s resources in the event of adversity.
6) Conceptualizing and amending lease agreement
Since you are now in a partnership, it makes common sense to think that the lease agreement has to be something that both have no problem accepting.
As mentioned earlier, different landlords have different ideas of how business should be conducted.
Tenancy agreements are your valuable assets. And it’s no surprise to find that all parties in a co-ownership would want to have a say in how they are to be drafted.
You might think that just summing up all your regular terms with your partner’s will do the job. But don’t forget that it could be a turn-off for prospective tenants to have to adhere to too many terms and regulations.
7) What happens when one party wants to sell
One of the drawbacks of co-ownership is that different investors can have different exit strategies.
You won’t want to work with someone you are not familiar with. This is especially the case when you don’t have controlling interest in the investment.
How trustworthy is this person? Is he dependable? How will he pull his weight?
In view of such potential problems, you must spell out the process and terms when a situation like this arise. Who knows… you might be the one who ones to exit the investment prematurely.
A common option for co-owners is to have a clause for the “right to first refusal”. This means that should a co-owner wish to sell off his stake, the other owner has first option to buy over the shares before anyone else.
Although a taboo subject that is nobody wishes to discuss, it is something that you have to tackle head-on.
If the property in question is owned via joint tenancy, the surviving party automatically takes over the shares of the deceased. However if the ownership is held in tenancy in commons, the ownership of the decease will depend on the terms listed in his will or trust.
And like the previous point, you can navigate this issue with a right to purchase the shares of the estate belonging to the deceased. Each party will then have state this in his/her will or trust documents.
9) Dispute resolution
It’s not always going to be a fairy tale partnership. In fact, the high possibility of irreconcilable differences is a key reason why so many real estate investors still stay away from co-ownership deals today.
To avoid having to go to court to settle disputes which can be taxing on your mental state and pockets, you might want to list out how disputes should be resolved. Usually some sort of mediation is agreeable to partners.
You don’t have to take on all these orgy of terms yourself. If creating this co-ownership agreement is giving you bad headaches, you can hire a real estate attorney to help you draft and review the documents. In fact, this is an action that is highly recommended when going into partnerships in business.