What to consider before co-owning a home

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For many Canadians not already in the housing market, the dream of home ownership can seem just like that. But some who would otherwise be priced out of real estate are finding creative ways into the market, such as co-ownership.

A survey conducted by Royal LePage in August last year found that 6 per cent of Canadian homeowners co-own their property with someone other than their spouse or significant other.

“The reason why most people do things [with others] is because they can do more together than they can separately,” says Rocky Bellotti, an investment advisor with Wellington-Altus Private Wealth Inc. in Toronto.

According to a Royal Bank of Canada report released in March, more than two-thirds of Canadian households can’t afford to purchase a home with earned income alone. Still, home ownership has been a reliable way to build wealth, the report found, with residential real estate driving almost half of Canadian household wealth accumulation for the past three decades.

It’s no wonder some people are trying to enter the market using whatever means available.

Mr. Bellotti advises clients planning to co-own a property to view it as a business. Like any business, he says, the hope is that the partnership will be beneficial for all sides. However, everyone involved needs to understand the possible outcomes and how to deal with them.

“It’s important, first of all, to have everything in writing,” he says.

A co-ownership agreement is a crucial first step, Mr. Bellotti says. Similar to a shareholder’s agreement, the co-ownership agreement will help the people planning to purchase the property set terms and conditions, responsibilities and obligations.

Ryan Martin, founding partner and principal lawyer at Aura LLP, a Toronto-based firm that specializes in real estate law, says he typically starts the process of drafting an agreement with a questionnaire.

“The whole process is an education in the issues that could arise,” Mr. Martin says. “So, it’s not just the agreement that stops the argument from happening, but it’s also the process of thinking about the issues that can arise.”

One example is closing costs. In the event the property is sold – to one of the co-owners or a third party – the owners might not be clear on who’s responsible for covering closing costs, which Mr. Martin says can cost around $50,000.

His firm typically charges $3,000 to $5,000 for a co-ownership agreement, but covering all the issues in advance can save the co-owners tens of thousands of dollars in legal fees if a dispute comes up, he says.

Co-owners also need to make sure other documents – such as wills and marriage contracts – align with the clauses set out in the agreement, Mr. Martin says.

The language in the contract should cover what Henry Korenblum, a tax-planning specialist and president of Korenblum Wealth Inc. in Toronto, calls the four Ds in business: triggering events such as death, divorce, disability or dispute.

Mortgage protection insurance could come in handy in the event of a death or if one person loses their job or becomes disabled after an accident and can’t continue making mortgage payments. Depending on the policy, the insurance provider will continue making mortgage payments directly to the lender on behalf of the owner.

“Getting insurance behind the ownership agreement can provide liquidity in those dire situations in which one of the owners can’t make payments. And it’s tax-free,” Mr. Korenblum says.

An ownership agreement could also come in handy in the event of bankruptcy, Mr. Martin says.

Similar to how an executor of an estate carries out what is written in the will, the trustee in bankruptcy has an obligation to liquidate debts of the bankrupt, but may take into account the intention of the co-owners if a co-ownership agreement is drafted.

“What’s important is that you make it clear in your agreement that not only do the terms bind you, but they also bind any trustee who is involved with your estate,” he says, so that a trustee considers the terms of the agreement as part of the liquidation process.

“As to whether the agreement could be set aside as a result of what the trustee believes is in the best interest of the estate is another issue. I haven’t seen that happen, but it is a potential risk.”

Beyond managing the risks and worst-case scenarios, Mr. Bellotti says there are ways to make the daily reality of co-owning a property smoother. These include a plan for the flow of funds, agreeing on some sort of property management, and having a third-party mediator to settle common disputes.

Concerning the flow of funds, he recommends a joint account to pay property taxes, maintenance bills and all the other monthly costs associated with owning property.

“There will be a lot of in-and-out of the account, but the fact that all the home-related transactions are coming out of one account makes it easy to track who made payments and for what,” he says.

Mr. Bellotti says anyone exploring co-ownership should speak with a real-estate lawyer, a financial advisor and a tax advisor with insurance knowledge to understand the risks.

“As a result of the different expertise, the person will be well covered,” he says.

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