Guest Speaker: Lisa Laredo
Part 2 of Shared Home Ownership is from a legal point of view. As housing prices in Toronto climb, we have to find creative solutions to home ownership. I’m a big advocate of friends buying houses together.
- Recommendations for people contemplating on sharing a property with a friend, a stranger, anyone really.
- Should they write those goals on paper together?
- Should they have a legal agreement between them?
- Do they each need to have their own lawyer go through the agreement?
- They always say that you should prepare for your divorce before you get married as the rationale for pre-nup agreements so how would you suggest people considering a shared ownership relationship prepare for what might happen if one partner wants out?
- How long would it take to put together an agreement like this?
- The cost of an agreement like this
- What other items do you think should be part of a shared ownership agreement?
- What if one of the owners is a first time home buyer? How does this affect their ability to use the first-time home buyer credit for the land transfer taxes?
- What other closing costs should they be thinking of?
- Should they be concerned about the legality of a basement apartment on the property?
Davelle M.: Welcome to the Morrison Report. I wanted to create a podcast that would give people insights into the Toronto real estate market. You can follow me on Twitter at Davelle Morrison and on Instagram as Davelle Morrison, and you can like my business page on Facebook. Today we have with us real estate lawyer Lisa Laredo. Welcome, and thank you for joining us Lisa.
Lisa Laredo: Thanks Davelle.
Davelle M.: Awesome. Today we’re going to talk again about shared ownership from the legal point of view. As housing prices in Toronto climb, we really need to look to finding more creative solutions to home ownership. People do this in other large cities. They buy a home together, kind of like a duplex, and will share it. I’m a big advocate of friends buying homes together, so we really wanted to talk to Lisa today to get the legal standpoint of what’s the best way to go about doing that. If someone is contemplating sharing a property with a friend, a stranger, anyone really, what would you recommend they do first Lisa?
Lisa Laredo: Putting all legalities aside, from a common sense perspective I would recommend that people who want to share ownership search for leases on line, look for any relevant agreements that they think would be helpful, and then compile a list with solutions to address as many possible responsibilities, wants, expectations from the person that they’re planning on sharing ownership with, and also what they’re looking for and what they’d like to achieve with shared ownership, and I think that everything should be recorded.
Davelle M.: Right. That makes a lot of sense. When you’re saying sort of wants and needs, are you talking about kids, no kids, married, not married? What do you mean?
Lisa Laredo: There’s so many things to consider when you share ownership, things like why are they buying the property? Are they planning on living on the property and they’re retiring? Are they single? Are they looking to get married? Are they going to have kids? If they have kids, is that going to change where they live? Will the be looking to move? How is that going to affect the person that’s still there? How are they going to look at buying somebody out? Who’s paying the bills? Who’s maintaining the property? If one person lives in one of the units and the other person rents out their unit, how will they divide the maintenance of the property?
If the person that lives there, for example, wants to do the gardening and the snow removal, will that offset payments and what they owe? There are so many things to think about and it’s just basically trying to sit down, put yourself in the day of the life of a shared owner, and think of all the things that could go right and all of the things unfortunately that could go wrong, things to deal with what happens if a pipe bursts? What happens if you want to make improvements to your unit but the other person doesn’t want to make improvements to their unit? That would drive up the price of the sale. Are you going to share in that? How will you share the net gains?
There’s so many things to consider, and it’s better to be safe rather than sorry, and keep the time prior to jumping in with somebody and then finding out that you just can’t even get along.
Davelle M.: Surely. Do you think they should write their goals down on paper together?
Lisa Laredo: Absolutely. Absolutely. Obviously if it’s somebody that you’re buying something with, either you’re … Sometimes you’re very good friends with that person, and I think that makes a business transaction a lot harder, because when you’re friends with somebody and you think that’ll be fine, I’ve known this person for so many years, don’t worry about it. This is what we have in mind and let’s just go … We’ll grab the property. It’s a great price. We can do it.
Then a year later, when things start to change or the circumstances start to change, what’s when you run into the most problems. I find that most people that are really good friends, either the relationship doesn’t endure or it becomes slightly bitter along the way because they just didn’t think that it was important to write anything down and go over what their expectations were. So yes, definitely write it down.
Davelle M.: Got it. Then when it comes to having a legal agreement … I’m assuming that you think they should have a legal agreement between them as well too, correct?
Lisa Laredo: Yes. You need a legal agreement for many reasons. One, I don’t think that you can ever anticipate everything that could possibly go wrong, but I think that if you sit down with a lawyer and talk about what you’re looking to achieve, that lawyer can also bring to the table what the legal ramifications are of your choices. So not only is it just common sense problems, but it’s also money. Who’s paying for the mortgage? Are you splitting the mortgage? Is it a 50/50 split? What happens if someone wants to buy the other person out? There are so many things to consider from a legal point of view, that I would absolutely, definitely recommend that you get a lawyer.
Davelle M.: Once you have that legal agreement drawn up, does each party need to have their own lawyer to go through the agreement?
Lisa Laredo: Yes. I would not recommend that anybody waive their right to independent legal advice or counsel, because it’s better to have two objective points of view as much as you can, rather than one party just thinking it’s okay, it all sounds good, and then later on having a problem and it could contribute [inaudible 00:05:55]. It’s just not worth it.
Davelle M.: Yeah. Of course.
Lisa Laredo: Yeah. If you do it right from the beginning, I think it’s a much cheaper outcome.
Davelle M.: Yeah. Totally. Absolutely. I guess they always say that you should prepare for your divorce before you get married is the rationale for prenup agreements, so how would you suggest that people considering a shared ownership relationship prepare for what might happen if one partner wants out of the relationship?
Lisa Laredo: I try to look at this from a divorce perspective, because at the end of the day, I mean that’s really what you’re gearing up for, the way that you’re going to end this relationship. I think that the most important things to consider are first of all are you financially matched? Are you each putting in the same amount? If you’re not putting in the same amount, how are you going to make that more equal for each person? Does that mean that one person perhaps will maintain it? That perhaps they’ll be entitled to more of the net gain upon a sale? Can you buy the other person out? Are you going to have in your documents the right of first refusal?
Is one person going to be living there and the other person going to be renting? That could also lead to not being as financially matched with the other person that you’re going to be a co-owner with. Also, just think about it as well, if you live in a unit and the other person is renting out their unit, the person renting out generally has more excess money, and perhaps what they have is already covering their rent, the property taxes for the unit, any type of maintenance. So if you’re the person that’s living there, you may stand to have a lot more to lose if this relationship doesn’t go well, because you could be out of house and home, whereas that other person could just be out of a rental property.
Davelle M.: Right. Of course. That makes sense.
Lisa Laredo: I was also just thinking about things like a vendor take back mortgage. If you are the person that’s living in the unit, is the person that you’re going to be co-ownering with open to a vendor take back mortgage so that hopefully you can get kind of a break? If you can’t afford to buy the other person out and you live there, and perhaps it’s a big enough unit that you are married and you do have kids in this shared space, so this is somewhere where you’d like to live for a long time and you do have long term goals, is the person that you’re going to be a co-owner with open to a vendor take back mortgage?
Will they do it in stages? For example, if it’s $400,000 to buy them out, are they going to expect $400,000 on the day that you decide you’re going to buy them out and if they want to sell, or perhaps they’ll let you do it $200,000 this year and 100,000 the following two years after that. That needs to be considered, especially when you’re drafting your agreement, because this is your end of it strategy, and everyone is much happier if they know exactly how things are hopefully going to end, if they do.
Davelle M.: Right. Of course.
Lisa Laredo: It makes it a lot more amicable.
Davelle M.: Yeah. Absolutely. I mean how long do you think it would take to put together an agreement like this for a shared ownership?
Lisa Laredo: Honestly this is such a tough question, because it … I think it depends on how much you’ve brought to the table initially. If you come saying, “I want to go into co-ownership with Bob. I haven’t thought much about this. Can you draft something for me,” that’s probably going to take hours into months, because I’m going to be going back and forth with Bob’ lawyer and there’s probably going to be a whole host of issues that arise that neither party thought of and both parties want to deal with.
I think if you as a person who wants to be a co-owner with somebody really sits down and give it your all, think about all the things that are important to you, then at least that way I have somewhat of a roadmap so that I can start to draw up agreements. I also have a checklist that I give to people that are looking to become co-owners to find out what it is that’s important to them, because that’s exactly what’s going to have to go into the agreement.
Davelle M.: Right. Yeah. Absolutely. That makes sense. Actually I’d love to get a copy of that checklist. If you could email it to me after, that would be great. I like that. That sounds like a great idea.
Lisa Laredo: It’s a helpful tool, because then at least you know what somebody is looking to achieve. It’s a completely different world between someone who wants to live there and someone who wants an investment property. You’re coming at a problem from two totally different streams.
Davelle M.: Absolutely. How much do you think it would cost to draw up some kind of agreement like this?
Lisa Laredo: Again, this is completely dependent on the parties. It also depends on how much time it takes. If the parties come prepared and they know sort of what the person I’m representing is looking for, then it’s a lot hopefully easier and quicker for me to get the agreement signed, sealed and delivered. I generally charge at an hourly rate, but if … More often than not I can look at the whole agreement and see kind of what I think it’s going to take, and then I can have that initial conversation with the person, so they’re not blindsided when I say it’s going to be this much money.
Davelle M.: Right. That makes sense.
Lisa Laredo: I really am a proponent of dealing with things properly from the get-go. I think it’s a cheaper. A lot of people don’t agree with that. They think that they want to go the cheap way, but I assure you it generally does not work out. I mean it’s always more expensive when you’re not well-equipped.
Davelle M.: Right. Yeah. That definitely makes sense. What other items do you think should be part of that shared ownership agreement?
Lisa Laredo: I think things that people don’t think about and are very important is what happens in the case of illness? Should each party buy critical illness insurance? How do you handle noise? Will there be shared laundry? Are there two parking spaces? Who will park on the street? Will a parking permit be part of the shared cost? What happens if one unit requires repairs? Will this be a shared cost? What if one owner wants to make improvements to the unit? Will this be a shared cost? If these improvements increase the value of the home, do each of the owners share in the increase, and how do you even divide that? What’s a reasonable split? How can you value improvement and what it [inaudible 00:12:23]?
Davelle M.: Wow, that’s a lot to think about. Absolutely.
Lisa Laredo: Yeah. So I think it’s not always the case if both parties live there or if both parties are looking to rent it out, but when there’s a difference between one person living there and one person renting out, I think that a lot more questions need to be answered, because I think that they’re coming at it from two different angles. Even people that co-owner and live there, or even people that co-owner and invest, it’s an investment property, they may have wildly different thoughts about the outcome of it.
Davelle M.: Right.
Lisa Laredo: I you’re renting with somebody who’s heading into retirement and somebody who’s just starting their life, they could be looking at two totally different reasons why they want to share ownership with somebody, just because they want to have another property and this is the only way they can afford it.
Davelle M.: Right. Well, that definitely makes sense. What if one of the owners is a first time home buyer? How does this affect their ability to use the first time home buyer tax credit for the land transfer taxes?
Lisa Laredo: If you’re a first time home buyer, then you would still be eligible for your rebate. It becomes a little bit more complicated, depending on how you hold title with that other person. If it’s a 50/50 split, you would be entitled to your half of the rebate, but you wouldn’t get the total rebate. Depending on who you’re buying it with and how you’re holding title … For example, if you’re a co-owner with somebody and they don’t have much of an interest, 1% interest let’s say, then you still would be eligible for the 99%. But I think that sort of comes out in the wash when you figure out how you’re going to hold title and how you’re going to co-owner the property.
As a first time buyer you would still be eligible for your rebate, and the rebate would be based on the percentage of what you’re taking of the ownership. I’m trying to make that as easy and understandable as possible, but it sometimes becomes a bit complex, so ask a lawyer.
Davelle M.: That sounds good. Are there any other closing costs that buyers who are doing shared ownership should consider?
Lisa Laredo: Yes. Land transfer tax, legal cost or disbursements, registration, title searches, title insurance, home insurance. Also home insurance might be different. If you’re the person that owns a unit, part of the unit, and the other person rents out the unit, then your insurance premium is maybe different, and how do you deal with that? Do you just split it down the middle? So there’s a lot of things to consider.
Davelle M.: Yeah. Absolutely.
Lisa Laredo: Those are the main closing costs though.
Davelle M.: Okay. Should they be concerned about the legality of the basement apartment on that property?
Lisa Laredo: You and I are always on the same page with that one. It’s not the fact whether it’s legal, but is it safe? I always … My thinking is whether or not an apartment is legal, you should always make sure that it’s retrofit for fire and that there is always two points of egress. If you have a non-legal conforming use, that doesn’t necessarily mean that you can’t rent it out, but I think as a prudent homeowner your main concern should be safety.
Davelle M.: Right. Of course. Yeah. I definitely would agree about that for sure.
Lisa Laredo: Yeah. That’s pretty much my bottom line, can they get out in case of fire?
Davelle M.: Yeah. Of course. Absolutely. Is there anything else you think our listeners should know about when it comes to shared ownership from the legal perspective?
Lisa Laredo: I think that the most important thing to think about when you’re considering sharing ownership is that you need to be honest with yourself and you need to really think about the future. The items that you think are not important today will probably become an issue in the future. For example, if you lose your job, if you get sick, if you start a family. My biggest piece of advice and most important piece of advice would be always seek legal advice and always have a written agreement.
Davelle M.: Perfect. That’s great. Lisa, I always like to ask some of my interviewees whether they rent or own and what part of the city they live in. Can you tell us do you rent, do you own, and where abouts do you live in the city?
Lisa Laredo: I do own my own home. I live midtown, in the city.
Davelle M.: What do you love about midtown? Why midtown?
Lisa Laredo: We love it. I’m not a downtown girl. I don’t love all the concrete. I do prefer to walk the trails and still have all the shops around me and still be in a relatively not horribly, terrible area for traffic, and still be able to circumvent on the side streets.
Davelle M.: Absolutely. Lisa, how can my listeners reach you if they’ve got further questions?
Lisa Laredo: Anybody can email me at firstname.lastname@example.org. Alternatively, they can also give me a call at 416-727-2704.
Davelle M.: Awesome. Thanks so much for joining us today Lisa. It was great to have you.
Lisa Laredo: Thanks a lot for having me Davelle. I had a great time.
Davelle M.: Awesome. Thanks.
Thanks again for joining us for some Toronto real estate marketing insights. You can visit my website at morrisonsellsrealestate.com or visit morrisiontalksrealestate.com for more episodes of the podcast. Thanks for listening.