Co-owning Property

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INSTEAD of putting individual names on a property, you form a company to hold it. Shares of the company are more liquid than the physical property. If you want to get out, you can get the other co-owner/s to buy shares from you. However, note that when you set a company, your cost goes up too. For instance, you would need to pay secretarial and company fees, and there may be tax implications.

Also, there are other considerations to think about when planning a co-ownership. You need to understand why you are buying the property and what your exit strategy is. Are you going to flip it it or make money in the long term? You need to make sure that you and your co-buyers are on the same page to avoid complications.

Ensure that your co-owner is somebody you know really well.  They could be your siblings, spouse and children. Bank rarely give out loans to friends because there are no ties. It is less risky if you co-own properties with your immediate family members and if it is four your own use, because you are more obliged to assist each other.

However, co-owning for investment is “less complicated” compared with co-own for your own use. Assuming you are co-owning with your brother and both of you are staying in the property. A few years down the road, you may get married and wish to sell the property so that you can use your share of the proceeds to purchase a new home. He might have to buy over your equity, or you sell it, he’d be left without a roof over his head. Problems may arise where your co-owner refuses to buy over, sell or vacate.

A common criterion for financial institutions is that all loan the applicants’ monthly financial commitments or loan repayments should not be more than a certain percentate of their joint or combined gross monthly household income. This approved percentage could be as much as 50%.

Term of agreement

Co-owners should also come up with a shareholders agreement. This is critical to avoid arguments between co-owners. The written agreement must include how the cost and profit are to be shared, how a dispute is to be settled, how the property is to be managed (equally or by one person) and the exit strategy/clauses between the co-owners.

Co-owners should also determine their objectives in buying the property and which market valuation to use. To determine the valuation of the property, you can agree on terms such as the average quotation given by three valuation agencies. You can even go to the extent of naming the valuation agencies in your agreement, if need be.

You should also take into account how the property ownership and responsibilities are going to be dealt with in the event that a co-owner dies or opts out. Do the remaining co-owners have the first right to buy over the property? What are the triggers for a sell? How do you determine that market value if the next-of-kin of a co-owner wants to cash out?  Be sure to spell everything out in writing and ensure that each co-owner understands the terms.

You should have different lawyers to handle the purchase of the property and to manage the co-ownership. For the latter, the lawyer’s role would include giving legal advice, negotiating, drafting the agreement and settling dispute(s).

On the financial planning aspect, both of you may also want to open a joint bank accout, into which rental can be banked. You can also use this account to pay expenses related to the property and to receive the proceeds from the sale of the property, if any.

Risks and responsibilities

As co-owners, all of you are jointly and severally liable for the instalment obligation. Thus, if a co-owner fails to honour his financial obligation, you are fully liable for the entire installment due. However, both of you are still the registered owners of the property, and the agreed home equity remains the same.

If any part of the instalment is not paid, the bank may take action against all co-borrowers. This would include but not limited to, repossession and having a force-sell the property eventually.

When a default occurs, you should contact your financial institution to discuss a reasonable repayment programme. This could include extending the tenure of the loan. Include a clause in the agreement to prevent such a situationand / or set out what is to happen if  it occurs. The co-ownership agreement needs to address issues such as, “Can you transfer the equity portion to the co-owners who are paying more? Do you deduct it [the defaulted/lapsed amount] from the selling price eventually. Can you restructure the loan? Such terms are important, especially if your investment property is giving you negative cash flow every month.

Taking up life insurance policy such as mortgage-reducing germ assurance (MRTA) also helps protect the interests of the co-owners. There are two instances in which insurance is useful, First is a policy on the life of your co-owner that ptorects you should your co-wner pass on. You can use the proceeds of the policy to buy out your partner’s share. However, since most people do not co-own a property for life, especially if it’s an investment-type property that you may not want to hold for too long, the cost of insurance may be prohibitive.

However, you may not be able to buy such an insurance policy if your co-owners are your friends, siblings, girlfriend or boyfriend because there’s no insurable interest. Insurable interest exists when the policy purchaser benefits from continuous existence of the insured, or suffers a loss at the demise of the insured. Interestingly, parents can buy insurance for their children, but the converse is not allowed.

However, spouses and business partners can buy insurance for each other, Plus a company that is formed by both co-owners for the purpose of property investment may insure their directors, who are generally, though not necessarily, the co-owners themselves.

Second, you can opt for a policy on your life to protect your beneficiaries and your co-owner in the event of your demise. If you purchase MRTA or life insurance, then the proceeds will be utilised to settle your share of the property.

Your survivors/next of kin can claim through the courts, your share of the property after obtaining a letter of administration [if you don’t leave a will] or grant of probate [if you have a will].

On the flip side, if you do not purchase any MRTA or life insurance, your surviving co-owner will be responsible for all monthly instalments and other charges payable on the property,

Note that the moment a co-owner passes on, the spouse, parents or other beneficiaries could be a new co-owner. If your deceased co-owner does not have a will, that portion of the property will form part of his estate and his spouse, children and parents will have a share of it, in accordance to the Distribution Act [1958]. You must ensure that all co-owners have a copy of the co-ownership agreement dan that all of you have put the co-owned property in your respective wills.

All things said and done, it’s not advisable to co-own properties as things can get complicated. For instance, you may want to sell your shares in your company, and you think the property is now worth RM1.5 million. But the other shareholders think it’s only worth RM1.1 million. If the current shareholders don’t want to buy your shares at your price, or an outside party doesn’t want to buy them from you, that makes your shares in the company illiquid. As investors, all of you have different risk appetites, hopes and goals as you become more experienced.

People change, circumstances may also change, and it is difficult to predict the future.

However, the abode of life partners should be co-owned to give each other some assurance. This is not just for the sake of economic benefits, but also with regard to the issue of probate and divorce or separation. It will be easier to prove ownership if you have your name on the deed.

Is it better to have fewer co-owners? The number of co-owners is not the crux of a successful co-ownership. It is about relationship between the co-owners and the understanding that they have between them,  However, the fewer the co-owners, the easier it will be to agree on how the property is to be managed, especially with regard to sharing of costs and profits.

As for the “ideal” home equity, it should be divided equally. However, while this will spread the cost and profit equally, it can be an issue of dispute. It is never easy for a dispute to be settled if  a property is divided [equally] among two persons. It will be easier if there are odd numbers of co-owners so that the majority will determine how the dispute should be resolved.

On the other hand, how the equity is divided is not as important. It just has to be fair – for instance, if you own 70% of the home equity, you should pay 70% of the expenses and take 70% of the profits.