With talk of how difficult it is to purchase a home in Toronto in 2017, there will undoubtedly come talk of alternatives.
Moving out of the city is one alternative, no doubt about it. This is a topic we’ve explored before several times.
But I’m hearing a lot about “co-ownership,” and I don’t mean buying a co-op as an alternative to a condominium, but rather the idea of, say, two young couples, pooling their money to buy a duplex.
The advantage is obvious: getting into the market, and owning real estate. But today I want to look at the disadvantages, and what could go wrong…
There was an article in the Toronto Star on the weekend about “co-living,” which suggested that the style of living that’s gaining popularity in expensive cities in Europe and the US is something that we could see develop here in Toronto.
Read the article here: “Co-Living Could Be Answer To GTA Housing Crunch.”
The problem I see with this, of course, is that it likely relies upon the government to spearhead the initiative, and determine what is legal and how any housing “collectives” would be operated, in the same way there’s legislation for building codes, health and safety, etc.
I just don’t see this happening any time soon, as I consider our government, at all three levels, to be inept. But that’s a topic for another day, and if you get me going about Kathleen Wynne cancelling John Tory’s road tolls in a desperate attempt to gain back favour with the public, well, I’ll never stop talking. On that note – make sure you read Marcus Gee’s fantastic column, “Wynne’s Veto of Toronto Road Toll Plan Is An Act of Cowardice.”
See what I mean? Nothing like politics to throw you off topic…
So while innovative housing solutions will go from novelty to necessity as the years go on, and the population continues to grow, I don’t see them coming down from the government level any time soon.
In the meantime, it’s up to individuals to be innovative, and find ways to get into the real estate market when they otherwise wouldn’t be able to afford it.
The ever-popular “house with basement apartment” has risen in price so dramatically over the last few years, that I honestly don’t know if it’s worth it anymore.
Rewind three, four, or five years – and I was selling $600,000 houses with basement apartments that rented for $1,000. That $1,000 could carry over $200,000 worth of mortgage, and suddenly the cost of living in this house was the same as owning a smaller condominium.
But as the years went by, every buyer in the city of Toronto wanted a house with a basement apartment. And while I’ve long-maintained that the same house with a fully-renovated basement that contains a large rec-room, guest bedroom, and 4-piece bathroom is worth way more than the house with a basement apartment (the ‘single family’ buyer will pay more for the ‘single family’ home than the buyer on a budget, looking for basement income), every house with a basement apartment seemed to rise in value at a greater-than-average rate.
So now that those $600,000 houses with $1,000 in the basement are now $900,000 with $1,100 in the basement, where to these buyers go?
That’s where the creativity comes into play.
And through 2016, I heard multiple cases of buyers pooling their resources, and “partnering” to buy properties.
There was an article in the Globe & Mail last year called, “Two Couples Pool Money To Live Under One Roof.”
My mortgage broker, Joe Sammut, was quoted as saying that these deals account for less than 1% of his business, but when you think about it, if even 1 in 100 sales involves multiple buyers, that’s a lot more than I’d have ever thought. And more to the point, I’d expect this trend to grow as prices rise, and as buyers get more creative.
So with this idea gaining momentum, I thought it prudent to do what I do best, and play devil’s advocate, to point out the potential pitfalls.
The way I see it, there are five major potential issues here:
1) Disposition Of Asset
This is clearly the largest “potential issue” you could possibly come across.
What do you do when one person, or one couple, wants to sell?
Use the scenario from the Toronto Star article, where two couples buy a duplex, and each live happily ever after in their 2-bed, 1-bath unit; one below, and one on top.
I think it’s fair to say that the two couples won’t live there forever, so what do they do when time comes to move on?
Your first suggestion might be, “Have one couple buy out the other.”
But if they’re pooling their money to be able to buy the property to begin with, then what makes you think one, two, or ten years down the line, when the property is worth even more, that either couple would have the funds to buy out the other?
When, how, why – all questions to be answered regarding the eventual sale of the property.
The potential for conflict is massive.
What time of year do you sell?
Who do you hire?
Do you spend money to fix it up, or sell it as is?
Do you move out of the property, like many people do, during the week of showings? What if one couple is on board, and the other isn’t?
I suppose all of this is small potatoes to the “when,” however.
The biggest problem with co-ownership of a property, is without question, going to be when to sell it.
If a couple moves into a 2-bed, 1-bath apartment in a duplex, and then has a kid, are they okay there?
What if they have two kids?
What if one changes jobs and starts to work from home?
What if the couple’s parents start coming to visit once per month, and need a place to stay?
Life in 2016, for just about everybody on the planet, will not be the same as life in 2021.
And eventually, one couple, or one partner in the property, is going to want more space.
That’s when the couple downstairs is going to look above, or vice versa.
As I said in point #1, buying out the other partner might not be financially viable. But if it is, then how do you go about it?
Many businesses with two partners have a “shotgun clause,” where one partner pulls the trigger and names the price, and the other party can either pay that price, or be bought out at that price.
The first time I ever heard of this was back when I was in high school. The Toronto Raptors co-owner, Allan Slaight, enacted his shotgun clause with co-owner, John Bitove. $50,000,000 for, I believe it was, a 39.5% stake in the team. Nine years later, and hindsight, I wonder how Mr. Bitove feels, as the Raptors have to be worth $600-$700 Million, don’t they?
In the end, it’s fair to say that most people eventually outgrown their home, save for those at the completely opposite end of the spectrum who elect to downsize. But we’re talking about first-time buyers, and sooner or later, everybody needs more space.
If you own a condo, and you sell to buy a house, that’s simple enough.
But when you’re joined at the hip with a partner or co-owner, moving up, and on, is no longer that simple.
The points that follow will demonstrate that some expenditures are necessary, and some are discretionary.
But for items that need to be done, is everything split 50/50?
Who pays? Who reimburses who?
What if one party is “having cash flow problems” after the other party pays $4,000 to replace the busted A/C unit?
Who is responsible to monitor the systems in the home?
Who takes out the damn garbage?
Who mows the lawn?
If one person enjoys gardening, is that an individual hobby, or is that value-add on the home, and thus the gardening-party would expect reimbursement?
Remember back in university, living in a house with five people, how the Bell Telephone bill was in one person’s name? And each month, that person would ask the other occupants to go through the bill, highlight their calls, and determine what they owe. The person with the bill in his or her name never got full reimbursement.
Imagine doing this as an adult, with every expensive on the house? The property taxes, hydro, gas, water, insurance, and then the ongoing maintenance?
Let me give you a scenario.
Owner-A lives upstairs, and wants to renovate his kitchen.
Owner-B lives downstairs, and already has a renovated kitchen. For whatever reason, when they bought this duplex, one unit had a renovated kitchen, and one unit didn’t.
So Owner-A goes to Owner-B and says, “I’m going to spend $20,000 on the kitchen.”
Does Owner-B then simply write a cheque for $10,000?
What if Owner-B says, “Tough luck,” then what?
Or change that scenario above – what if both owners have outdated kitchens, and one wants to renovate, and the other doesn’t.
Do they go ahead? And if so, who pays for what?
These aren’t two condominium units within one building. Each partner owns half of the entire property. Who lives in which unit has nothing does not change the ownership of the property as a whole.
I could see this issue arising a lot as the years go by.
This follows from point #4.
When do you agree to “update” the property? Often renovations come not from need, but rather desire.
If the furnace breaks, then both parties would agree to fix it.
But what if the property just becomes stale?
Some home-owners will re-do their kitchen every five years. Some never do.
How do you decide when to spend money on aesthetics?
After reading these five points, you’ll undoubtedly conclude that co-owners really need legal advice before taking on the endeavor.
And not just legal advice – I’m talking an ownership agreement, that lays everything out.
What if one owner wants to take out equity on the property? Where is that written in the agreement? That doesn’t fall into the five points above! Imagine if one owner found out that the other owner had taken out a $200,000 loan against the home? Can he or she do that, or does the other party have to sign?
Many of you will comment that the points above, and any subsequent points or discussion, simply highlight the problems that any partners, in any business, will ultimately face.
And you’d be right.
I’ve never been a big fan of “partners” in investments.
And if and when you do take on partners, working with friends and family simply gives you a 50/50 shot of losing a friend, or becoming estranged from a family member.
Now I said at the onset that co-ownership an idea that is gaining momentum, and I would simply play devil’s advocate.
I think I’ve done that.
And if I had to take it a step further and give a “yes or no” on the matter, I’d honestly have to straddle the middle ground, and say, “It really depends on the people, and the situation.”
I would never co-own.
And I can’t think of any of my clients who I would advise to do so.
But there’s something to be said for getting into a hot real estate market, when you wouldn’t otherwise be able to.
Gaining a place to live, and riding the appreciation wave, might make sense to a lot of folks out there…