Now that you’ve got your group together and you’ve decided that you would be a good fit, it’s time to get real about everyone’s financials.
The reality of financing co-owned real estate is that it presents more challenges than real estate purchases made by single people, families or couples. There isn’t the same financial infrastructure set up in the same way as there is for traditional real estate financing.
For most cooperative lenders, all parties, i.e the whole purchasing group, are liable for the full mortgage payment. Financial readiness is a little more complicated with co-purchasing because your debt, equity, and income need to be considered as a group.
This can be daunting for lenders unfamiliar with the process and many are unwilling to take on a co-purchasing group.
But never fear! GoCo can help you set yourself up for success and even connect with you experienced lenders and mortgage agents well-versed in co-ownership real estate purchases.
What You Will Achieve In Step 2
Creating your group purchasing strategy
Knowing the types of lenders available; and
Assessing your financial profile
Common Challenges
Before we begin assessing and compiling all the financial information you need, you should be aware of some of financing your co-ownership real estate purchase.
Managing Risk As A Group
In today’s market, there are no mortgage products that allow “fractional mortgages” i.e. mortgages where you are responsible for only a portion of a home. To be on the title, everyone must be on the mortgage. You are responsible as a group to make the mortgage payments.
It’s important that everyone in your purchasing group becomes financially naked. Every member needs to share - with complete transparency - their financial history including their credit score and debt. It may not feel like your personal consumer debt has anything to do with a co-owned real estate purchase but, to a lender, it does. A group member who has high debt, despite having a good income, might impact your application negatively.
Lender Discretion
Different lenders have different limitations. Most lenders allow for up to 4 people on your mortgage. Only a few allow more. Some require credit scores higher than 680. Some will allow borrowed down payments, others will not. Not all lenders are comfortable with non-familial members on an application; beyond family, married or common-law relationships, their sense of risk increases.
With more financial histories to review, the process also takes longer than other mortgages to approve. With more than 4 people, larger homes, and multiple units, this process will take even longer.
Determining Accountability and Equity
As you build your financial profile with your purchasing group, you will need to make decisions about each member’s accountability, or equity and decision-making power: How will decision-making power correspond to the equity assigned to each member? Will they be equal, or distributed differently? Later in this section we’ll break down an example of one group’s distribution of equity vs. decision-making power.
Now that you have the basics, it’s time to get started with the first section!
How Do You Build Your Financial Model?
Click on the sections below to learn more.
Introduction to Building Your Financial Model
What are all the Steps to Becoming a Co-owner?
Click on the links below for all the blog articles related to each step.
Other posts from The Ultimate Guide to Co-Ownership
Now that you’ve made it this far, let’s talk about what happens when you find a property that you like and that fits your group. Again, the market is competitive so you and your group have to be ready to act fast.
As we said at the beginning of this step, the real estate market is a seller’s market most of the time. In the GTA, that isn’t looking to change any time soon. While there are a lot of different types of properties that your group can look at, you should always keep in mind that supply is limited.
Building on your understanding of the needs and wants of each group member, you can begin to create a list of criteria that you are looking for in your co-owned real estate purchase. This Home Brief will help your agent’s guide to finding you a property.
The final step in a co-ownership real estate purchase is to find the perfect property for your group! This step is last because all of the preparation you and your group have done will make this step much easier. So once you are comfortable with your Group Agreement and have worked through your Legal Agreement and budget, you are finally ready to consider properties.
Once you have done the work of determining your legal rights and responsibilities, financial obligations, and future scenarios as a group, we recommend finding a lawyer who has some experience drafting co-ownership agreements. It is essential that your agreement is created with all members of your purchasing group and the contents of any wills or spousal agreements are shared with your lawyer as they prepare your group’s Legal Agreement, so that they align.
It is impossible to anticipate all future change, and you or members of your group might find yourself in a position of wanting to exit your co-purchasing arrangement. Members of your purchasing group must be in agreement about how and when your property will be divested (disposed of, sold etc.).
We recommend that you include a schedule for mortgage payments and a clear delineation of other payments, like bills and taxes, in your Legal Agreement.
Over the next three sections, we will be covering the three important features to include in your legal agreement. Starting now with Rights and Responsibilities!
Generally, there are two types of legal relationships between co-owners: you can buy property as either tenants-in-common or as joint tenants.
Your legal agreement is an essential part of the co-ownership real estate purchase. It may feel daunting or uncomfortable to discuss certain aspects of your living arrangement through the lens of a legal agreement, but your Legal Agreement is in place to protect you and your group, both individually and collectively.
Finally let’s finish up with some case studies to summarise Step 3 before moving on to Step 4: Creating Your Legal Agreement.
Conflict resolution is an important aspect of co-ownership and collective functioning. Find out the best ways to get through these situations.
Communication is an essential part of a co-ownership agreement. Your group needs to open and honest as well as regular in your frequency when it comes to house meetings and general communication.
There are many models and resources for collective decision making, and we recommend that you determine a decision-making structure with your group early on.
It’s important to harmonise and identify your group’s shared goals. This will build the foundation for your group agreement.
It’s time to look at how your group is going to function when living in a co-ownership arrangement.
Summarize Step 2 and take a look at the final parts to make sure you’re ready for Step 3!
Finally, the last piece of your financial puzzle is to assess your ongoing costs using the Combine-Leverage-Split method!
It’s Budget Time! Check out the example of the McGill group and create your group budget together!
It’s time to get your finances together and create your financial profile! Get together with your group and create a group outline to figure out your buying power!
Now that you’ve completed your crash course on mortgages, it’s time to move on to who will lend to you and how will you convince them to lend to your group.
Mortgages can be complicated. Co-ownership can make the process even more complicated. While it is helpful to have a working knowledge of the basics on mortgages, we’ve compiled a quick crash course aimed at co-ownership.
Now that you’ve got your group together and you’ve decided that you would be a good fit, it’s time to get real about everyone’s financials.
That’s all of step one and finding your purchasing group for co-ownership. This step can take a lot of time depending on a number of factors but, as it is the first step, it’s one of the most important. You need to work hard and dig deep to solidify your purchasing group and ensure the success of your co-ownership purchase.
Now that you have a clearer sense of your own needs, wants, and dreams in co-purchasing a home, and you’ve found a group of people that share your vision of co-ownership, you can assess and discuss your compatibility with your co-purchasing group. The more detailed and clear your ideas are, the easier they will be to convey to others.
There are many ways to form a purchasing group for co-ownership purposes. While co-ownership is still relatively new, there are plenty of services that are available to you even if you are a single buyer looking for a group.
There is a broad spectrum of co-purchasing relationships. You and your potential co-purchasers get to decide where you fit on that spectrum, and develop your own shared goals for your home. You might be entering into this process with friends or family members, or with complete strangers.
There is a broad spectrum of co-purchasing relationships. You and your potential co-purchasers get to decide where you fit on that spectrum, and develop your own shared goals for your home. You might be entering into this process with friends or family members, or with complete strangers.