Buying a House With a Friend? Don't Make the Same Mistake I Did

The dynamics of couples and families have changed dramatically even in my lifetime. According to the Pew Research Center, the number of Americans who don't live with a spouse or partner is rising. That has an impact on buying property -- it's harder to get a foot on the property ladder if you're buying alone. 

That's one reason I opted to buy with a friend. It makes homeownership more affordable, whatever your relationship status. If you're considering going that route, here's how you can learn from my mistake.

The pros and cons of buying a house with a friend

One of the biggest benefits of buying with a friend -- or even friends -- is that you can afford a property that would otherwise be out of your reach. Assuming you both have good credit, you may find it easier to qualify for a mortgage loan. You could also get a better mortgage rate than if you were going solo, particularly as pooling your resources will help you raise a bigger down payment. 

Plus, you can split some of the costs associated with buying a home, such as origination fees, home appraisals, and other closing costs. And once you own the property, you can share the bills and maintenance costs. If you've never owned property before, the process is less scary if you're doing it with someone else. 

On the flip side, you're tying your future and a significant chunk of money to someone who is not your spouse or significant other. If your friend doesn't pay their part of the mortgage, you will be on the hook for that money. Any missed payments will impact your credit score. And, unlike a flat share, if one of you wants to move out, it isn't a simple process. You may need to sell the property or refinance the mortgage to get it under just one name. That can take time, and -- as is the case in my house -- you may still need to live with one another while it plays out.

My biggest joint house-buying mistake

My friend and I did a lot of things right when we bought the property together. We'd already lived together for several years, we trusted each other both personally and financially, and we knew we had similar priorities. We talked through what we could realistically afford and kept money aside for renovations and unforeseen expenses.

We talked a lot about, for example, what would happen when one of us wanted to sell. How we'd manage it if one of us entered a serious relationship. Who'd pay which utility bill and how we'd keep things fair. We weathered the COVID-19 lockdowns better than some married couples.

But the big mistake we made was that we never got around to putting our agreement in writing. That's come back to bite us big time. One of us wants to move out and we have very different recollections of the conversations we had years ago.

Get everything in writing

Making a legal agreement between friends can be awkward and time consuming. It's easy to put it off for a day that never comes, particularly when times are good and you trust the other person. But when times are not so good, you'll kick yourself for not tying down the details. 

What’s more, there's value to the process of transferring a verbal conversation into a written agreement. It may highlight areas where you're actually not on the same page that got glossed over in conversation. The discussion process itself can help avoid any misunderstandings and clarify your thinking. 

Here are a few of the points to consider: 

• If one of you decides to sell, how will that work? Could one person buy out the other? How would you agree on a fair price? What notice would you need to give one another? Having a clear exit strategy will make a big difference when the time comes.
• What happens if house prices fall and you have to sell at a lower price? On the other side, if you make money, how will you handle any capital gains on the property? 
• How will you manage utility bills and maintenance costs? Will you share any renovation costs equally?
• What homeownership structure do you want to use? There are different types of joint property ownership, so it's good to understand your options. Related to that, consider what would happen if one person died. What would happen to their share of the house?

If I were doing this again, I'd also get legal advice. You might be able to hammer things out over the kitchen table, but a lawyer might think of things that haven't occurred to either of you. Plus, they might know about local laws or tax considerations that impact your situation.

Bottom line

Whatever type of relationship you have, breaking up can be painful. And sadly, the good intentions people have when they embark upon a project don't always hold through to the end. Getting things in writing avoids a lot of misunderstandings and can at least minimize some of the financial ramifications. Sure, one side may still try to renege on the deal. But a legal agreement makes that harder to do.