27 Feb 2017 – Joining forces with a member of your family or a friend could be a great way to get a foot on the property ladder. However, property is not a short term investment so before pooling your resources and heading out to view properties make sure you talk through the various aspects of property ownership very carefully.
“Buying a property jointly may mean that you are able to comfortably afford the costs of home ownership, as you will be using the power of two people’s income rather than one,” says Albertus van Staden, Head of Credit at FNB Housing Finance. “However, the long time horizon of property ownership means there is a good chance that circumstances will change during your partnership.”
There are also aspects of home ownership that you will have to iron out before getting a joint bond.
Expectations when buying
“There are many types of joint partnerships, parents helping their children with their first house, children buying a place for their parents, friends investing in a property together. It is important to understand what your expectation of the asset is from the outset,” says van Staden.
For example, if your parents have bought jointly with you, are they expecting a return on their investment? If it is two friends buying for investment purposes, what is the timeline line?
Who will be occupying the property?
If both owners are living in the property initially, outline what will happen if one moves out and who is responsible for getting a replacement tenant.
“You or your partner will still be responsible for a portion of the bond after moving out,” says van Staden.
If one of you will be living there, discuss what the rent should be, and what the annual escalation fee should.
If you are renting it out, it is more than likely that you will need to put in more money over and above the rental amount, especially in the first few years as rental won’t cover all the expenses. There is also personal income tax to consider.
“When renting out, also understand that there may be periods where the property does not have a tenant, so you both will need to be able to cover the full cost of the bond and expenses,” warns van Staden.
Taking care of the small stuff
Property ownership is more than just the money that needs to be paid over each month.
“Properties require time and effort, just like a car it needs to be maintained and kept in good condition, discuss with your partner who will be responsible for dealing with the tenants, and any property maintenance issues such as burst geysers or general sprucing up,” says van Staden. “Both parties should have the full obligation to keep up with ongoing maintenance.”
The type of property is key in this instance, for example, in a sectional title complex; maintenance on the outside is generally taken care of along with some structural insurance although the interior remains your responsibility. A freehold is your full responsibility.
If you own the property for some time it will probably need a bit of a makeover.
“Whether it is replacing the carpets or a full kitchen overhaul you will need quotes and contractors as well as additional funds to pay for improvements,” says van Staden. “Agree up front who will deal with what issues and how much you are prepared to spend.”
Change in circumstances
“It is almost guaranteed that the circumstances of both buyers will change over the period of ownership,” says van Staden.
Life changes could include moving to different parts of the country, or even overseas. Getting married or merely wanting to upscale.
“In some instances, having a property in joint ownership will mean that someone isn’t able to afford their dream home later in life as the bank will take into account all your responsibilities when you complete affordability assessments,” says van Staden.
If one of you is no longer able to uphold their end of the bargain because of financially difficulty, what will the solution be?
“This becomes particularly tricky if you haven’t had the property for very long, as it may not have appreciated in value, and in worst circumstances, you may find that you actually owe money if you are required to sell,” warns van Staden.
“Paying a bit more into the bond is a great way of helping work through the reality of finance difficulties,” suggests van Staden. “This will give you both a bit of a breather if there is a problem with payments and time to work out a solution.”
All great things must come to an end, and invariably your property partnership will need to be broken up at some point.
“If you both want to sell and get the capital out, then proceeding with the normal selling processes is fairly straightforward, however, if one partner wants to keep the property, it can become slightly more complex,” says van Staden.
In this case you are able to do a substitute of debtor which is considered an entirely new contract with the bank.
You will need to agree to an appropriate price if selling to one of the partners, as this will not be going onto the open market. Consider using an estate agent or valuator to ascertain a fair estimate for the value of the house.
There will be associated costs with selling the property such as bond attorney and transfer fees, if they apply, so make sure you have budgeted adequately.
Draw up a contract
“Finally, once all of the various aspects have been discussed and agreed upon, draw up a contract which both parties sign. I suggest you go through this process, even if you are buying with a family member or long term partner. It will make life far less complicated a few years down the line,” concludes van Staden.