Friends and family buying property together becoming more popular in SA

The rising cost of living and high interest rates are challenging consumers, and many are looking at alternative ways to buy property. One solution when a house or apartment is just too expensive is for friends, family or business partners to do it together.

FNB says collective mortgage bond applications have been increasing sharply – with collective loans increasing 36% in the six months to end December 2023 compared to 2022, according to its latest interim results.

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Mfundo Mabaso, head of growth at FNB Home and Structured Lending, says co-ownership of property and banking products to cater for this demand is not a new concept.

“Buying homes in groups – co-buying or joint ownership – has been a growing trend in various parts of the world, including SA,” he says.

“Its popularity has increased in recent years due to several factors, such as affordability due to rising property prices that have made it increasingly difficult for individuals to afford homes on their own. Collective buying allows people to pool their resources and buy a property together, making home ownership more accessible.”

FNB launched its collective buying home loan in September 2021. It enables up to 12 owners to buy property together.

Mabaso says that while collective buying is popular in the affordable housing market, there is also a lot of uptake from affluent customers, such as families buying holiday houses.

He says FNB has financed families pooling their resources to buy a home for all of them, groups of single people buying a big house to use as a commune, siblings and extended family members buying a house for ageing parents, and friends buying a house to share as a holiday home, as well as groups wishing to finance investment and rental properties.

How it works

When several people buy property together, the bond works slightly differently from a traditional bond as it is registered in the names of all owners and the property’s title deed will reflect this.

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It comes with an important caveat – co-applicants are jointly and severally liable for the loan. This means that each individual is liable for the total debt if something goes wrong.

Mabaso says most of the transactions FNB has processed involve four to five people who have agreed to buy together. The bank does not require a specific agreement between the co-owners, but he recommends that all the owners agree and discuss payment structures and the additional costs associated with a property before starting the process.

“All FNB home loan agreements are between the bank and the applicants of the bond. FNB does not provide agreements between buyers outside of the mortgage agreement when a bond is granted.”

The bank can split the payments and every borrower will be billed for their portion of the bond repayment on a date agreed to with each owner.

If someone wants to exit …

Where one person wishes to leave the agreement, FNB will embark upon a ‘substitution of debtors’ process.

This involves the remaining owners requesting that the bank transfer the portion of the individual who is exiting the arrangement into the names of the remaining owners – or the name of a new co-owner if one is added.

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This process involves a credit assessment of the remaining individuals or of the new co-owner who is brought in.

A new mortgage agreement will then be drafted, and amendments to the title deed will be made accordingly.

Types of co-ownership

The Gawie le Roux Institute of Law says there are several types of property co-ownership, including:

Joint tenancy

Here, each owner has an equal and undivided interest in the property. Should one owner pass away, their share automatically transfers to the surviving owners, outside of the deceased’s estate.

Tenancy in common

With tenancy in common, each owner has a distinct, separate share of the property. The shares can be unequal, and if an owner passes away, their share is distributed according to their will or applicable inheritance laws.

Partnership property

As the name suggests, this type applies when a property is acquired for the specific purpose of running a business partnership.

Ownership rights and responsibilities are not governed by standard co-ownership of property rules, but rather by the terms outlined in the partnership agreement. This agreement serves as a roadmap, specifying profit-sharing ratios, decision-making mechanisms, and procedures for handling dissolution if the partnership ceases.

While offering flexibility, partnership property can become intricate, especially when navigating disagreements or winding down the venture.

Co-ownership trusts

In some cases, a trust might be established as the legal owner of a property, with multiple beneficiaries acting as co-owners.

Undivided rights and responsibilities

The Gawie le Roux Institute of Law says there are a few legal principles to consider.

“The principle of undivided rights and responsibilities states that even though ownership is divided, the rights and responsibilities associated with the property remain undivided.

“Each co-owner has full rights and obligations towards the entire property, not just their specific share. For example, if the property is a house, each co-owner has the right to reside in it, but they also share the responsibility for maintenance and repairs.

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“The principle of proportional sharing dictates that costs and benefits associated with the property are shared in proportion to each co-owner’s share,” it says.

“This includes expenses like maintenance, utilities, and taxes, as well as any income generated from the property, such as rent.

“For example, if one co-owner owns 60% of the property, they would be responsible for 60% of the expenses and entitled to 60% of any income.”

Each co-owner has the right to occupy and use the property based on their share, but this right cannot be exercised in a way that interferes with the enjoyment of other co-owners or restricts their access to their own share.

Pitfalls

Potential buyers in groups must realise that property ownership is a long-term game.

“Pitfalls that clients may face in collective buying would be an instance where an individual of the collective default[s] on the home loan repayments. This will still require all customers to jointly upkeep full monthly repayments of the bond,” according to FNB.

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Mabaso says the bank’s experience is that 12 individuals find it easier to pay a R12 000 monthly instalment as opposed to two individuals where they would have to pay R6 000 each.

“In this tough economic environment, affordable housing customers earning a gross salary of between R3 500 and R29 600 per month are increasingly buying homes as a collective to cope with high interest rates and the rising cost of living,” he says.

He points out wages have been stagnant while property prices increased.

Conflict must be anticipated and avoided

Mabaso says it is important for those considering collective ownership to select individuals who are trustworthy and like-minded.

“Put legal considerations in place to guard against disputes and consider all the financial implications such as a deposit, bond registration costs, transfer duties and transaction fees. Designate a representative or two to handle communications, decision-making and administrative tasks on behalf of the group.

“Do long-term planning. Consider the long-term implications of property ownership, including potential appreciation, rental income and maintenance costs,” he says.

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The Gawie le Roux Institute notes that co-owning property can lead to disagreements and conflicts, particularly when it comes to decision-making, usage restrictions, or financial obligations.

“It’s crucial to establish clear communication and legal agreements to mitigate these risks,” it says.

“The actions and decisions of co-owners can directly impact all parties involved. If one co-owner fails to fulfil their responsibilities or decides to sell their share, it can create challenges for the other owners.”

It says clear legal agreements and advice are essential to navigate legal complexities and protect each owner’s rights.

This article was republished from Moneyweb. Read the original here