Solution 2: The Retrofit House
If you're ready to get creative and make more space for sharing, you can remodel an existing house to fit more than one household. One disadvantage of sharing a single-family house is that the space was designed with one household in mind. But what if you could remodel a house to have two entrances and living spaces, plus a shared kitchen, deck, and garage? Or what if you'd like to build an addition to your house so that your mother-in-law can move in but live somewhat independently from you?
There are plenty of ways to outfit existing spaces for shared housing, and there are lots of types of spaces to work with. We've all seen large developments filled with 5,000-square-foot "McMansions" with half a dozen bedrooms and bathrooms and "Garage-Mahals" with space for a fleet of vehicles. The average house size has more than doubled since the 1950s, from just under 1,000 square feet in 1950 to roughly 2,500 square feet in 2008. And there are fewer people sharing that extra square footage: The average number of people living in a house has decreased from 3.7 to 2.6 since 1940. But recently, the growth in home size has finally leveled off. City and county governments are imposing restrictions to discourage huge home developments, and people are learning that they just don't need that much space. This leaves plenty of houses with enough space to accommodate two households; they just need some reconfiguring.
Building and Zoning Issues
Almost any time you change the structure of your house, you'll need a permit from the building department. If you are expanding your house beyond a certain size, stricter building code requirements might apply.
You'll have to make sure your changes meet applicable zoning requirements for setbacks, house-to-lot size ratios, egress (emergency exits), and so on. For example, a "setback" requirement might require at least ten feet between your home and the street or neighboring lot, which could prevent you from expanding your home too far into your front or back yard. If the changes you want to make don't meet the zoning requirements, you might need to request a variance.
If you want to retrofit a house in a planned development, you may be subject to restrictions imposed by a homeowners association (HOA). HOAs often regulate architectural changes to buildings and any other changes they believe could affect the character of the neighborhood. You may need to get your HOA's permission to retrofit your house for sharing. Check the CC&Rs that were recorded with your home, along with any architectural guidelines, HOA rules, and other documents governing your property, for information on what you can do and what might not pass muster.
If you think the HOA might object to your retrofit plans, try to build support from your neighbors. Tell them about your plans and your reasons for sharing; you could even buy them a copy of this book. You could approach your HOA in a similar fashion. As our society increasingly realizes the value of living green and building community, you may find barriers from your HOA are not a problem.
Determining Ownership Percentages
When you divide space, there will be some parts of your house that you share and others that you don't. Most owners want their ownership share to correlate with the value of the parts of the property they use. But determining ownership percentages this way can get tricky, because it means assigning value to separate parts of the house. This requires a highly specialized appraisal. Sometimes, co-owners hire two independent appraisers to make sure they're working from accurate figures. Once you average the appraisers' figures for each share, you can add them together and calculate each sharer's percentage of the total to come up with your ownership percentages, which you can then use to determine how much of the down payment you will each make, how much of the monthly payments and expenses you each will pay, and so on.
When you retrofit and partially divide a house, you are more likely to be able to sell the shares separately than if you were sharing a standard single-family home. If you sell each share separately, the total value may exceed the value of the undivided property. Thus, an appraiser would value each unit as if it were being sold separately. You would then add together the combined values, calculate their relative percentage of their total value, and use that to determine ownership percentages.
As with sharing a regular single-family home, you and your sharing partners will likely also have to share a mortgage. Even though you have created a somewhat divided space, banks will probably be hesitant to provide you with fractional financing. (See "Financing Options" under Solution 1, above.)
Because a partially divided house is more likely to be sold in shares than an undivided house, owners should think in advance about how a partial sale will affect financing. Having a single mortgage means that if one owner wants to sell, the entire property may have to be refinanced. One way to avoid this is to shop for a mortgage that is assumable. This means that the new owner could simply assume the selling owner's portion of the mortgage, and the remaining owner will not have to refinance.
If You Sell the House
When you plan your retrofit housing share, you should consider what you'll do if one of you wants to sell. For co-owners who share some overlapping space, it may not be easy to find a buyer for only one owner's share. If one owner finds a buyer and sells, the other owner may end up sharing a kitchen or other parts of the house with strangers, which is probably not what you envision. Here are some solutions for you and your co-owners to consider:
- Agree that all of you will live in the house for a certain number of years and then sell the entire house or make a new agreement for another period of time. If you go this route, you should also have a backup plan in case someone needs to leave sooner or wants to stay longer.
- Agree on a predetermined price (or a formula to calculate it) for which one owner can buy the other out.
- Give each owner the first right to buy the other's share if the other wants to sell.
- If one owner plans to sell, give the other six months to search for a new co-owner to buy the departing owner's share. You can also come up with a predetermined amount or formula to calculate what the share will cost.
If one owner wants to sell just that owner's share, the price could be determined by the market. However, if you sell the whole property at once, you will need to agree on how you will determine what percentage of the sales price each owner will receive. Even if you've come up with ownership percentages based on an appraisal of the property each owner is using, you may want to reappraise each portion of the property again prior to sale, especially if one owner has spent a lot of money on improvements.
EXAMPLE: Bill and Paul bought a house with two separate living spaces and a shared kitchen and dining room. An appraiser determined that Bill's larger space was worth $300,000 and Paul's smaller space was worth $200,000. Based on those percentages, they divide the purchase costs and expenses 60/40. Ten years later, they sell the entire house. Rather than divide the proceeds 60/40, they had their portions re-appraised. The appraiser determined that each portion was worth $400,000. Paul's share had doubled in value because he had built a back porch with a hot tub, installed beautiful interior cabinetry and bamboo floors, and made other improvements. Bill's unit had fallen into some disrepair, but still appreciated in value. Based on the appraisal, they split the sale proceeds down the middle to reward Paul for his work on the house.