Before Co-Buying a Home, Draft an Exit Agreement

You're planning to move in with another person (whether the relationship is romantic or not) and decide to buy a house together. Homeownership is, after all, a good investment, right? Before you launch in, though, make sure you and your future roomie agree on a few matters; not just everyday things like who takes the trash out, but what happens if and when you decide the relationship isn't working, or one of you has a major life change such as a new job in another state. Such events will raise such questions as:

• Who gets to keep the home?
• If one person wants or needs to leave, do you have to sell and both leave?
• Can one of you buy the other out of the property and if so, at what price?

Well before such an issue turns into a personal or financial crisis, it's wise to plan for the possibility that you and your roommate will eventually want to part ways. The best way do this is to create a legally binding contract that outlines your various options and more. Below is a rundown on what to include in this written agreement. You'd be wise to start working on it well before you have a house in mind, since you'll have many decisions to make and financial and practical matters to deal with during that busy and intense time.

Including a Statement of Each Owner's Percentage Share

Start by determining what the amount of each of your ownership interests, as a percentage. Typically, each owner would want a 50% share of the property, but that's not your only choice. Maybe, for reasons unique to your situation, one roommate wants to own (and be responsible for) more or less than 50%. This could be due, for instance, to one of you planning to front more of the down payment, or one of you wanting to limit the value of your property ownership in order to qualify for certain benefits.

A legal ownership share is different than literally dividing the space into parts (although the two could be correlated if, for example the house has two wings and each of you will occupy one). This is more of a legal concept, about how much of the home's value and title you can call your own.

You also want your agreement to be clear about how the legal form in which you will take ownership of the property (how you "take title"). This is particularly tied to succession issues. For instance, do you want the property to go to your roommate in the event that something happens to you? Or do you intend for someone else to inherit your share? See How Unmarried Couples Can Co-Own or Take Title to a Home for further tips.

In order to fairly divide up your ownership interests, factor in not only how much each of you pays toward the property initially, but what each is expected to contribute to it later, in the form of monthly mortgage payments or even services. If one of you is willing to clean, cook, and grocery shop, for instance, such services have a value that can count as a contribution to homeownership.

Over time, be sure to keep track of each contribution you make to the home—not just the initial one—so that when you leave the investment, you will get back your entire share.

Including a Clause to Allow for Renegotiation of Ownership Terms

Flexibility is important when making any type of agreement, and arranging for shared homeownership is no exception. That's why it's worth adding a clause to your contract stating that you have the option to renegotiate the ownership terms .

This gives you options not just when things go bad, but also when circumstances change for any reason. One of you might get a raise at work and want to make a cash contribution to pay down the mortgage. Or maybe one of you needs to free up some cash and wants to take a lesser share in exchange for a one-time payment from your roommate.

Knowing that you are not stuck in a situation can make what seems like an irreconcilable problem—one that might otherwise lead to one or both of you having to leave or sell the house—solvable. And, by including a contractual option to renegotiate, you are laying the groundwork for this, just in case.

Including Language to Allow One Roommate to Buy the Other's Share

The simplest exit strategy is what's called a buyout. In this scenario, each roommate is given the option to purchase the other's share of the property. The terms of the buyout must be outlined in your contract. Will you want a cash buyout? Or are you willing to let your soon-to-be-exiting roommate pay you over time? How will you decide the current value of the house? And then, will you charge interest on payments made over time, and at what rate?

Valuation can be an especially contentious issue, so be clear in your agreement about acceptable methods. The simplest way to arrive at a sales price is to look at recent sales of comparable houses on the market. This is something a real estate agent or professional appraiser can assist you with.

Including a Provision That Requires a Sale If One Roommate Wants to Leave

If both of you think you might not want to renegotiate terms of ownership, nor consider a buyout, nor deal with rentals, you can include a provision in the contract that requires a sale of the house when one roommate wants to leave. You might never actually use it, but it could come in handy someday.

Allowing One Roommate to Rent Out Their Space as After Leaving

Sometimes, one co-purchaser wants to move out but the other does not have the money to purchase their share from the other. Or maybe one roommate gets a temporary work assignment in another state, but wants to be able to return to the house after it's completed. What then?

This is when it is helpful to have a rental clause in your contract. The roommate who is leaving can rent out their portion of the house and continue to enjoy the benefits of homeownership in the form of passive income. Note, it is wise to have a clause stating that the remaining roommate has the right to interview prospective tenants for compatibility and veto anyone they're unwilling to live with.

Allocating Responsibilities for Costs When Jointly Selling

Both of a house's co-owners can, of course, eventually decide to sell and recover their respective percentages plus any profits. All selling costs (such as painting, staging, and paying a commission to a real estate agent) should be shared according to ownership percentages. Be sure to consider the logistics of preparing a house for sale.

To prepare for this, your contract should answer questions regarding whether you agree to stage the home prior to sale, when furnishings will be removed from the house, and what other routine items need to be taken care, and at whose expense, before the home can be listed for sale.

Do You Need an Attorney to Draft Your Co-Buying Agreement?

If you and your co-buyer are savvy about financial matters, and lucky in how your future plays out, everything could go smoothly if you draft your own agreement. Nevertheless, there are several advantages to consulting with an experienced real estate attorney. You'll get the agreement drafted in a way that's less likely to contain ambiguities (i.e. fuel for later lawsuits), you'll be sure it complies with any state-law requirements, and you'll be mutually assured that neither you nor your co-buyer unfairly took control of the drafting process.