Last year more than 100,000 vacation homes were built and sold, according to an article in the June 15, 1998 issue of FORBES magazine. That`s up from 60,000 10 years ago.
More than a few Mississippians visit the shores of Alabama and northwest Florida and come away thinking that the area would be a good place for a second home. Reality sets in when they discover that the prices are as high as the beautiful blue sky. Nevertheless, for many there is a way to make the dream of a second home come true. It`s called shared ownership.
The type of shared ownership I`m talking about is not the time-sharing variety, where one locks in a week or two a year then uses it or swaps it for some other resort. I`m referring to ownership by only a few people, say four to 10 persons. Each contributes a prorate share of the cost.
Let`s use four couples as an example and let`s assume that they are interested in a $200,000 house. By themselves, none of the couples could afford a second home at that price, but all have good credit and could afford something half that. If they split the cost of the house evenly then each couple would contribute $50,000. Chances are good that a lender would loan 75% of the value of the property in a situation such as this. That means a down payment of $50,000 and a mortgage of $150,000. In other words, each couple would pay $10,000 down. Let`s assume a 20-year mortgage at 9% interest. That would mean a monthly payment of about $1,350, or $337 per couple.
Ownership of the property would be as tenants in common, which means that each owner could sell his or interest to someone else without destroying the ownership structure. Such would not be the case if the property were owned in joint tenancy. Another way would be to create a separate legal entity that would own the property, such as a corporation or partnership. The owners would own the entity, not the property.
Assuming that the four couples in our example got their mortgage and set up their ownership there are still many issues to be addressed. The primary thing to take into consideration is the human factor. Therefore there are several important questions that should be addressed. One of the best ways to do that is a written agreement between the parties and any subsequent owners. Below are just a few of those questions.
Can our interest in the property be sold? Any agreement should provide for what happens when one of the parties wants to dissolve the relationship for whatever reason. It should be relatively easy for an owner to transfer his or her interest to another owner subject to the approval to the remaining owners. Also, it would probably be of interest to all owners for remaining owners to have the right of first refusal to purchase the selling owner`s interest.
Do the other owners have to approve subsequent purchasers? In my opinion, this should be part of any shared ownership arrangement. The approval could not be arbitrarily withheld by the owners; neither could the selling owner convey his interest to the co-owner from you-know-where.
What time of year is the property available for use by which owners? Here is where some real concessions may have to be made. Paying an even share for a property that is only desirable for use in the summertime is hardly equitable. The owners may agree to rotate the time of use each year. For example, owner A has the first quarter of this year, the second quarter of next year, and so forth. Likewise, the owners may decide to rotate on a monthly basis. Anything is fine as long as everybody agrees to it and it is put in writing.
What about common expense items? The agreement should provide for maintenance of the yard, replacement of the roof and other such matters.
Can the property be rented to others? This is an important issue and one that should be thoroughly discussed. Turning a property that is used by four sets of owners into a property that is a rental unit will have serious consequences on the maintenance of the property. That may be offset by the income potential, however.
Who is responsible for payment of taxes, utilities, etc.? Will it be one of the owners or will this matter be contracted out to a local property management company?
How are conflicts resolved? The most important part of any contract is the remedy for its breach. Being a fan of arbitration over litigation, I encourage the less-costly arbitration route.
What if one set of owners defaults? The other owners will usually want the right to make a defaulting owners` payment, and have the option to place a lien on that owner`s interest.
Don`t get the idea from this article that shared ownership is more trouble than it`s worth. On the contrary, it is an excellent way to afford and enjoy a second home. Before buying it is critical to consult an attorney and a CPA to understand all of the legal and tax consequences.
Phil Hardwick`s column on Mississippi business appears regularly in the Mississippi Business Journal. His e-mail address is firstname.lastname@example.org.