When you buy or lease a home with others, you're not just entering into a living arrangement: You're entering a legal relationship as well. How you own a home together determines how you can get financing, what your rights and responsibilities are, how and to whom you can each sell or leave your share of the property, and more.
Your legal relationship won't extend only to the people with whom you share housing. When you lease a home, for example, you'll have legal obligations not only to each other, but also to your landlord. If you live in a planned community (for example, a condominium or cohousing complex), you'll have to follow its rules and restrictions. You'll also have to follow the zoning laws and building codes of your local government.
Ways of Owning Shared Housing
There are a number of ways to own real estate in shared housing arrangements. Here, we provide a brief overview of the most common arrangements for different types of shared housing, to help you start thinking about how you'll own and finance your shared home.
Worksheet: Rate Your Housing Priorities
Rate each of the following priorities by circling a number
(1 = least important; 5 = most important).
1 2 3 4 5 I would like to have my own unit.
1 2 3 4 5 I would prefer my own bathroom.
1 2 3 4 5 I would like to have a large kitchen.
1 2 3 4 5 I would like access to a yard.
1 2 3 4 5 I would like to be able to garden.
1 2 3 4 5 I would like to on-site laundry facilities.
1 2 3 4 5 I would like on-site laundry facilities.
1 2 3 4 5 I would like on-site parking.
1 2 3 4 5 I would like a large storage space.
1 2 3 4 5 I would like other amenities, such as (a hot tub, swimming pool, etc.) ____________.
Material Needs and Long Range Plans:
1 2 3 4 5 I would like to own my residence and build equity.
1 2 3 4 5 I prefer to rent my residence.
1 2 3 4 5 I hope to save money from this arrangement.
1 2 3 4 5 I am looking for a place that I can live in for a long time.
1 2 3 4 5 I am looking for a short-term arrangement.
1 2 3 4 5 I would like to share furnishings.
Furnishings I own and could share include: _________________
Furnishings I need or would like to have include: ____________
Home Environment, People, and Lifestyle:
1 2 3 4 5 I want to live in a way that is environmentally sustainable.
1 2 3 4 5 I want to feel free to have social events where I live.
1 2 3 4 5 I want to live in a nonsmoking home.
1 2 3 4 5 I would like to have some rules about drug and alcohol use.
1 2 3 4 5 I want to be able to have overnight guests.
1 2 3 4 5 I would like a quiet space (or quiet times).
1 2 3 4 5 I need space to practice trumpet (or other loud activity).
1 2 3 4 5 I want to share housing with someone who can help care for my child/pet.
1 2 3 4 5 I am open to caring for others and/or their children and pets.
1 2 3 4 5 I hope to feel a sense of community with people I live with.
1 2 3 4 5 I want to live with like-minded people. This means:
1 2 3 4 5 I would like to do activities with my cosharers, such as:
1 2 3 4 5 I would like to do mealsharing and collective food buying.
Other wants and needs: ____________________________________
You'll need a lawyer to draw up the documents. Because real estate ownership is governed by state and local laws, we can't cover all the legal ins and outs of various ownership arrangements. For this, and to draft and review the necessary legal documents (such as a tenancy-in-common agreement), your group should definitely consult a lawyer.
Tenancy in Common (TIC)
When you own property as tenants in common (TIC), you each own an undivided share. For example, if you own a duplex with another person as tenants in common, you each own a portion of the whole building, even though each of you may live in and maintain one of the units. TICs are customarily used when two or more unrelated people own a home together, and are also frequently used in multiunit residential buildings, such as a duplex or triplex.
If you take title to property as a TIC, you and your co-owner(s) will want to draft a written agreement covering each owner's rights and responsibilities. For multiunit property, the TIC agreement gives each owner rights to, and responsibility for, one unit, which creates a feeling of separate ownership. You'll also have to figure out financing. Until recently, owners of TICs usually financed their property with a single mortgage secured by the whole property. This arrangement creates some problems, however: All owners must qualify together for the loan, for example, and all owners are at risk if one gets behind on the mortgage. Although the single-mortgage approach is still used for sharing a single-family home, many lenders now offer fractional mortgages for TIC properties that are easier to divide into separate units. For a fractional mortgage, each owner signs a separate promissory note and deed of trust. Each must qualify for the loan separately and can select different loan terms. Each fractional mortgage is secured only by that owner's interest in the property.
Joint tenancy is a form of ownership that includes a right of survivorship. When one owner dies, that person's share of the property passes automatically to the other owner(s); in contrast, a TIC share goes to the owner's heirs at death. Joint tenancy is most often used by couples and families, but it could also work well for unrelated owners in a small shared housing arrangement who want the security of knowing that their interests in the property will be protected if another owner dies.
Forming a joint tenancy usually requires that all owners have equal interests in the property, and that they acquired title at the same time, on the same title document. Most joint tenancies are financed with a single shared mortgage.
Condominiums are legally divided so that portions of the property can be separately owned. Condominium ownership typically involves owning both an individual unit and a share of ownership in common areas, often called "common elements." Multiunit properties that were not built as condominiums can often be converted to condos; this usually requires the assistance of an attorney and professional surveyor, and the process depends greatly on local laws and regulations.
A condominium form of ownership is often used in housing where residents own separate units. A condominium complex can be as small as a duplex or as large as a multi-story apartment building. Cohousing groups frequently use the condominium form because it facilitates both individual autonomy and sharing. Condominiums are much easier to finance than undivided property, such as TICs.
Condominium ownership typically requires membership in a community association that governs and manages the common elements and enforces restrictions on the use of units. These associations collect monthly dues, often called "assessments," from each owner to pay for the costs of upkeep, taxes, insurances, and other expenses.
In a housing cooperative, residents own shares or a membership in a corporation, which, in turn, owns the entire property, including the individual units. Cooperatives can be formed as for-profit or nonprofit entities. Housing cooperatives are most common in the northeastern United States, but the cooperative form is also used throughout the country to create affordable housing. Because co-ops exist to benefit their owners or members, and there is no landlord seeking to profit from tenants, the cost of living in a cooperative can be kept relatively low.
Want to know more about the philosophy of cooperatives? Many modern cooperatives are guided by a core set of values and principles associated with a pioneering cooperative from the 1840s in Rochdale, England. The Rochdale Principles espouse democracy, economic participation, autonomy, and community—goals shared by co-ops formed centuries later. You can find the Rochdale Principles at the website of the International Cooperative Alliance, www.ica.coop.
A resident buys into a housing cooperative by purchasing shares and signing a "proprietary lease" that entitles the resident to occupy a particular residential unit. Unlike typical leases, a proprietary lease has no fixed term. It lasts as long as the resident is an owner in the cooperative and doesn't violate important lease terms. The cooperative corporation typically holds a single blanket mortgage on the property, and resident shareholders sometimes take out loans to finance their purchase of shares in the cooperative. In addition, residents pay regular fees to cover property taxes, management expenses, mortgage payments on the building, and so on.
Even though residents don't own the real estate directly, they still enjoy some of the tax benefits of home ownership. For example, although the corporation makes the mortgage and property tax payments, residents may still deduct their portion of these expenses from their income taxes. If residents take out a loan to purchase shares, however, the loan is usually treated as a personal loan, so the interest isn't deductible.
Cooperatives are typically governed by a board of directors elected by the resident shareholders. The board of directors has the duty to act in the interest of all resident shareholders of the cooperative, and is usually empowered to approve or deny new owners and to respond when members fail to pay dues.
Limited Liability Company (LLC)
In the process of developing shared housing, such as cohousing, many groups form a limited liability company (LLC) that holds title to the property. By forming an LLC, the group becomes a legal entity and can enter into contracts, which allows it to purchase land and partner with developers and contractors. The LLC form of ownership also provides liability protection to individual group members, should anything go wrong during the development process.
When the shared housing project is developed, the LLC transfers title to the land and individual units to the members, usually in the form of a TIC or condominium. Once the project is complete, continuing to hold the land as an LLC creates certain disadvantages to the owners. For example, owning property through an LLC means that owners cannot deduct mortgage interest and property tax payments, and can't claim the $250,000 capital gains tax exclusion if they sell their residence.
Legal Restrictions on Shared Housing
Municipal laws may impose some restrictions on whether and how you may share housing in a particular neighborhood. If you move into a planned community, its rules may also limit your shared housing options.
Each city or county has a planning agency that enacts zoning ordinances controlling how particular neighborhoods are used. Typically, planning agencies divide residential neighborhoods into different zones. Some zones allow only single-family homes; other zones allow multiunit dwellings; others allow commercial or light manufacturing activities, and so on. The intent of these laws is to control the atmosphere and quality of neighborhoods and to control population density.
Zoning rules can conflict with shared housing in several ways:
- Restrictions on number of residents. Some zoning ordinances limit how many people can live in a home and how many unrelated people can live together. For example, in Cobb County, Georgia, every single-family house must provide at least 390 square feet of living space per adult, and no more than two unrelated people may live in the house.
- Laws allowing only one "household" per house. Some zoning laws restrict houses to one "household," usually defined as residents who are related to each other or have shared finances.
- Restrictions on the number of dwelling units on a parcel. Zoning ordinances usually define a "dwelling unit" and limit how many units are allowed on a parcel. For example, an ordinance might provide that a dwelling unit contains a kitchen, bathing facilities, and sleeping accommodations. Thus, if you wanted to add a second "kitchenette" to your house to create a separate living space for someone, you might run into zoning hurdles.
- Limits on building sizes. Zoning laws often restrict the size of buildings and the number of buildings you can have on each lot, as well as building height and proximity to the property line.
- Extra requirements for multiunit housing. Your zoning law might impose additional obligations on multiunit housing, such as requiring a certain number of off-street parking spaces.
To find out how your neighborhood is zoned, look at your city's general plan, ask someone at the planning agency, or check your city's website. If you find a law that could pose a barrier to your sharing arrangement, don't despair. You may be able get a special permit or request an exception to the zoning rules (called a "variance"). Although the application process varies, you'll probably have better luck if you get the support of your neighbors. Often, the planning agency's biggest concern is whether your plan will adversely affect the neighborhood's character, livability, or development.
When you share housing, and particularly if you remodel, you may have to comply with building codes. Generally, residential buildings with multiple units have stricter safety and access requirements than single-family homes. For example, multifamily housing may require increased fire safety mechanisms, such as sprinklers and access roads, and swimming pools in multifamily housing are more carefully inspected and regulated than pools at private homes. Sometimes, stricter building codes are triggered when you expand your home. For example, in Marin County, California, homes that expand to more than 4,000 square feet must fill out a green building checklist and get a certain number of "green points" to pass inspection.
Building laws vary from city to city, but most derive from a uniform set of laws. If you are building a shared housing project from the ground up, your contractor and architect should know the rules.
In addition to legal restrictions, you should also check for privately imposed restrictions on your home, in a lease or the written rules for a planned community.
Leases and Rental Agreements
If you decide to rent shared housing, your state and local laws will determine many of your rights and obligations vis-à-vis each other and your landlord, from how much a landlord can charge as a security deposit, to when and why a landlord can enter your home, to what happens if one of you doesn't pay your share of the rent. (You can find detailed information on these rights—including state-specific information on a variety of topics—in Every Tenant's Legal Guide , by Janet Portman and Marcia Stewart (Nolo).)
Your lease or rental agreement will also establish the rules of your relationship to the landlord—such as how much rent you must pay, whether you can have pets, and how the tenancy can be ended. Certain lease provisions could prevent you from sharing rental housing as you'd like. For example, a lease might limit how many people can live in the house or prohibit subletting.
Planned Community Restrictions
Common interest developments (CIDs) are planned communities comprised of individually owned houses or condominiums, along with commonly owned areas, such as streets, a swimming pool, or a golf course. By some estimates, 25% of people in the United States live in such communities.
When these communities are created, a set of covenants, conditions, and restrictions ("CC&Rs") are developed, which residents must follow. The intent of the rules is, in part, to preserve the character of the community and protect property values for all owners. Typically, a property owners association has the right to make more rules and enforce them. Even when you own your home, you could still be subject to use restrictions that could limit your shared housing options, such as rules about how many people can live in a home and whether and how houses may be remodeled.