Fuller House

How to not get burned when buying a house with your BFF
October 26, 2017, 10:42am

Toronto’s housing bubble may have deflated slightly, but an average home will still run you a cool $732,292. Meanwhile in Vancouver, prices shot back up to $1,029.786 after chilling out for barely a year. For Canadian millennials without six (or seven) figure incomes, purchasing a home with friends can be the only way to get a foothold in a cross-country real estate market gone insane.

Partnering up on a property seems like a win-win — you can split the down payment, own a piece of real estate in the city, and always have someone around to feed Sparky when you skip town for the weekend. And it’s becoming an increasingly attractive prospect: a Capital One study found that 46 percent of millennials would be open to buying and sharing a home with friends.

Vancouver-based real estate advisor Smiley Nesbitt chalks the trend up to both the surging real estate market and our generation’s shifting lifestyle priorities. “People prefer to live where they work, and be able to do what they like without having to get into a car,” he explains. “Dealing with the commute from the ‘burbs, the lack of community, just to live in a bigger house doesn’t make sense anymore.”

Now when Nesbitt consults with prospective homebuyers, he always asks if they’d consider exploring co-ownership with a close friend. After all, Nesbitt can speak from positive experience: When he and his wife finally found a decent, almost affordable home on Craigslist, they reached to three couples that they knew — “the ones we knew we could definitely live with” — and proposed that they join forces to make an offer. One couple took the plunge, and ten years, they’re all still sharing an address.

Nesbitt and his friends’ East Vancouver home came split into separate floor units, allowing each family to get their own bathroom and kitchen and minimizing the need for costly renovations. Still, they mapped out all the potential expenses in a legally binding document just to be safe. “Nobody was out to get anybody,” says Nesbitt. “We knew right out of the gate what the breakdown was going to be, and we made it very clear how to separate the costs of the house.” Since then, it’s been more or less smooth sailing when the families discuss financial matters.

Beyond the clear benefits for lower-income buyers, co-ownership also offers the opportunity for urban revitalization. In a city where the high cost of real estate has forced thousands of families to flee for cheaper pastures, Nesbitt credits the prevalence of co-ownership in his neighbourhood for bringing back the kids after an extended _Children of Men_-style interlude. “East Van’s got a really nice family feel to it now,” he notes. “When you ride around in Vancouver’s west side, the only people you see are landscapers. It’s way too expensive for most families.”

Thinking about co-ownership? Here are Nesbitt’s tips for doing it right:

Choose carefully

“It’s obvious, but be really smart about who you’re partnering with,” says Nesbitt. “Because with a joint mortgage, you’re both on the hook for the total.”

On paper, there’s no way to indicate that the $500K debt you’re carrying is actually split between you and your old buddy from musical theatre camp. If you pay off your portion before your friend, you’ll still have their remaining balance on your file, and if they go bankrupt and can’t pay their share, you’ll be the one the lenders call at 3 AM. It’s a sticky subject, but a frank and open conversation about your credit histories and money habits will avoid headaches down the line.

Beyond the financial aspect, think long and hard about your respective lifestyles. Does your friend have a rep for getting wanderlust and jettisoning off to Europe? Do they frequently switch careers? And how, uh, “active” is their social life? The walls can be pretty thin in some of these newer builds.

Get everything in writing

“I couldn’t emphasize enough nailing down all the ramifications if something does go sideways,” says Nesbitt. Prospective buyers should sit down and brainstorm every possible scenario they can imagine — what happens if one of you gets laid off, if you have kids, if the basement floods. Talk it out, take a ton of notes, and then take the pages to a notary. They’ll write it up into a legal document that will protect everyone when you encounter the inevitable roadblock.

Understand the costs

Paying for a home is about more than just the down payment and the mortgage costs (expenses that can still come with their own surprises). Signing the deed makes you the landlord — meaning you’re the one writing a cheque for the repair guy to fix your broken water heater at 4 AM during an ice storm. Going halfsies on a place is great since you’ll be splitting these maintenance costs, but you might still disagree on how often you really need to be repainting your front porch. Talk this stuff out.

Plan your exit strategy. Then plan it again.

Nesbitt’s document had a foolproof plan for when someone wanted to leave the house and sell their share: they’d hire three independent appraisers to assess the house, take the median price as its value, and give the people who were staying the first right of refusal to buy the others out. “At the time, that seemed really sensible,” says Nesbitt. “We all thought we’d be there at least five years, and by then we’d be in a better financial situation to afford the whole house. Little did we know that Vancouver’s housing market was about to go completely insane. At one point, the guys upstairs were considering selling. But there was nowhere for them to go, since everything else out there in the city was so expensive. And their ⅝ share of the place would have cost us $1.2 million, with no warning. But thankfully everyone came to their senses, and everything’s fine now.”