House Hacking Partnership

[Jacob Zivanovich]

Hey there,

I'm almost ready to purchase a house hack and have found some good deals right off the MLS. Trouble is that I don't yet have long-term employment in place (just moved to the area a month ago). I really want to make this happen, but I won't be qualified without that income. I have the reserves in place for the 5% down payment, 15K for emergencies, and have no debts!

I recently connected with a gal through a BP meetup and want to try and organize a partnership. I would provide the cash and backup reserves, I house hack one of the units, then she becomes the cosigner for me in order to be approved. In exchange, I'm thinking that she would collect all the cash flow and potential equity until I refinance and get the loan originated in my name... Is this a thing? Is this a equitable partnership?

Thank you!

[Eric Fernwood]

In the last 16+ years, I’ve worked with many investors. Occasionally, I'm asked about two or more people pooling their resources to buy properties. This can work, but there is a potential pitfall: assumptions.

NOTE: I am not an attorney or business advisor. The following is a list of topics I've encountered in partnership agreements, although it's not exhaustive. I advise working together to identify and agree on potential issues. Then, have the document reviewed by an attorney.

For example, suppose two people decide to pool resources and invest together. They have known each other for many years, so no issues are anticipated. A few months later, the refrigerator breaks down at a property. One wants to install a used refrigerator to save money, while the other wants a new refrigerator with a warranty. Although this seems trivial, I have seen friends argue over less. How do you minimize future problems? By writing and signing an agreement that covers as many potential issues as possible. Below are some items I’ve seen in teaming agreements.

1. Ownership Interest: Clearly define the percentage of ownership each party has in the property. This is usually based on the proportion of the down payment, mortgage payments, and other costs each party contributes.
2. Financing Details: Define who will pay for what. This includes the mortgage, who will be named on the mortgage, and how you'll split the mortgage payments. Also, define how you'll share the acquisition costs, such as the down payment, renovation, and closing costs.
3. Payment Responsibilities: Explain how to divide and pay for regular costs like mortgage, property taxes, insurance, homeowners association fees (if applicable), and upkeep expenses.
4. Management and Maintenance: Agree on how property maintenance, repairs, and improvements will be handled, including decision-making processes, funding for these activities, and responsibilities for performing or managing the work.
5. Single Decision Point: For example, I've seen situations where one person agreed to replace an appliance while another strongly opposed it. This kind of indecision is harmful when running a business. One individual needs to make the final decisions.
6. Dispute Resolution: Define and agree on a method for resolving disputes that may arise, such as mediation or arbitration, to avoid litigation.
7. Change in Marital Status: What happens to the ownership if a party gets married or divorced? What happens if a party dies or becomes incapacitated?
8. Exit Strategy: Include provisions for what happens if one party wants to sell their interest in the property. This could involve a right of first refusal for the other party, buyout terms, and a method for determining the sale price.
9. Rental and Use: Define the rules for renting out the property or parts of it, including how income and expenses will be divided. Also, agree on how the property will be used, who can live there, and under what conditions.
10. Contribution Reconciliation: Determine a process for handling situations where one party cannot meet their financial obligations or if there are significant discrepancies in contributions to expenses.
11. Legal and Professional Fees: Decide how legal and other professional fees related to the purchase and management of the property will be shared.
12. Taxes: How will the tax advantages be divided?
13. Signatures and Legal Advice: All parties must sign the agreement, and each party is advised to seek independent legal advice to understand their rights and obligations fully.

Summary

The hours you spend creating the agreement will likely save your friendship and legal fees.