While the housing market soared throughout 2020 and 2021 and home prices skyrocketed, buyers with enough accumulated equity or outright cash took advantage of low mortgage rates while many were iced out of home buying. A majority of these buyers were young, first-time home buyers with less than stellar credit ratings or a lack of cash on hand to compete in high-stakes bidding wars. According to the National Association of Realtors, about 15% of all first-time home buyers will be shut out of the housing market in 2022. While the housing market is beginning to cool, home prices remain higher than normal as mortgage rates rise, creating an even greater barrier between some home buyers and the chance of homeownership.
One way that buyers are working around low inventory and record high prices is co-buying. Co-buying is when two or more people purchase a property and agree to share ownership. This can be a partnership that is between a non-romantic couple, relative, friends, or a company. This year, over 60% of HomeLight real estate agents have seen an increase in non-romantic co-buyers purchasing homes together.
What are the types of co-buying?
Tenancy in Common (TIC) is the most popular form of co-buying. In this type of co-buying, shares of the property do not have to be divided equally. This allows flexibility for how much each individual would like to invest in the property. The second type of co-buying option is called Joint Tenancy. In this situation, ownership will be divided equally between owners no matter how much each invested.
Who are the individuals driving the co-buying trend?
43% of HomeLight real estate agents have seen an increase in parents, grandparents, and adult children buying homes together. Families as large as three generations of people are finding homes that they can live in together and also afford. For some families, this may be temporary, especially if the adult children are simply living with their grandparents and parents in order to save up for their own home. For others, it is a permanent solution that they plan to continue with for many years to come. Of course what type of home and more importantly the size of the home is what matters for these types of co-ownership situations.
In addition to family members purchasing a home together, friends and roommates are also taking advantage of co-buying. 10% of HomeLight agents have seen an increase in friends and roommates purchasing a home together. One reason that so many younger individuals are co-buying with friends and roommates is the tendency for millennials to postpone getting married and having children In 1965 the average age for a woman to get married was 21 and for a man, it was 23. Currently, the average age for a woman to marry is 33 and men are marrying at age 35. There is also considerable lag in the time that young couples have their first child due to more focus on careers and the rising cost of living.
On top of lifestyle choices and cost of living, millennials also carry a much higher debt than generations before. According to an Experian consumer debt study, millennials carry an average of nearly $90,000 in debt. With so much debt and a minimum wage that is not increasing with the cost of living, millennials have a much harder time saving for a down payment. At least 63% of millennials do not have money saved for a down payment on a home. With this in mind, many young co-buyers are planning to generate income from a portion of the property they purchase. This strategy, known as house-hacking, generally means buying a property, living in one part of the property while renting out the other part. This enables those that invested in the property to pay off all or a portion of their monthly mortgage payment with the rent from the additional unit.
Pros of Co-Buying a Home
In the short term, purchasing a home with friends and family members is a great option, especially for young people who are unable to save or simply cannot find a home due to excessively high costs or limited inventory. Purchasing a home allows an individual to build equity that they can later use to purchase a different home when they are financially prepared. Co-buying also saves money on the down payment, mortgage payments, utilities, and other household maintenance expenses.
Cons of Co-Buying a Home
Co-buying a home does not come without some difficulties. Remember, if you are buying together, you are collectively asking for a mortgage from a lender. This means the buyer with the lowest credit score will determine the interest rate. Additionally, if one co-buyer cannot make his or her share of the payment the burden will fall on the other co-buyer(s). These are just a few of the top challenges that can come about when co-buying a home. According to 24% of HomeLight real estate agents, not considering a mutual exit plan from the home is a top challenge for co-buyers. Second to that is the difference in credit scores that will affect the mortgage interest rate, followed closely by the division of responsibilities and financial contributions.
How to make co-buying successful
Even in the best situation with the best of friends or family members that have known each other since they were in diapers, situations in life will arise. Maybe one co-buyer will suddenly fall in love and move in with their new partner leaving their end of the mortgage to be paid by the remaining co-buyer(s). Or perhaps work will force one co-buyer to move away suddenly. Or, in a worst-case scenario, a co-buyer could become ill or die unexpectedly. What will the remaining co-buyer(s) do in the event of unforeseen circumstances? While these scenarios may seem far-fetched, they are not impossible and if they are not impossible they should be planned for, legally. Before signing anything, visit with a real estate attorney who can advise and prepare documents that will include the type of title to the home that you want and how the shares will be distributed. You should also have written who is responsible for what percentage of the down payment and mortgage payments, what happens when one co-owners can no longer afford payments, and how the shares will be passed on in the event of a death.
Co-buying a property is a perfect way for individuals who have been unable to find a home due to low inventory and high prices to become a homeowner. Purchasing a property with friends or family means less money spent on a down payment, mortgage payment, utilities, and other house-related expenditures. With proper planning, clear expectations for payments, and legally written responsibilities in the event of a life-altering event co-buying a home will help young individuals become homeowners.