The ins and outs of shared ownership
Breaking into the Australian real estate market is tough, it’s becoming more common for parents and young adults to come together and purchase a property together.
Before you go down the road of shared ownership, you need to think about future-proofing your relationships. Have the hard conversations. Talk to your lawyer and your accountant and develop an overarching ownership agreement. Doing this will ensure you all profit from property ownership and maintain relationships that are important to you.
Real Estate Hot Topics lawyer, Kristen Porter, advises, “If you are going to come together to buy property, you want it tailored for your exact needs and your family’s needs. Every family is different, and every family has different priorities at different points in time.”
If you decide to go ahead with shared ownership of a property you have a number of options and Kristen explains the potential benefits.
Tenants in common
Kristen says, “Essentially tenants in common are where Lee and I buy a property together, he owns his half and I own my half. I can leave my half in my will to whoever I want, or I can transfer it to whoever I want. So, we’ve got 50-50 ownership or whatever percentage you like. Once you’ve got more than a couple of parties, you’ll be looking at tenants in common or another structure.”
Kristen says, “Lee and I would own the property 100% together. There’s not a little bit that you can carve off. When I pass away, I can’t leave that in my will to someone else. It goes to Lee straight away.”
A unit trust
With a unit trust (as opposed to a family or discretionary trust) this allows for exact ownership proportions. Kristen says, “In this instance, Lee and I could own it 50-50, for example.” If a standard purchase was made with a mum, dad and two kids with different monies coming in, and different ages, different generations, the common way forward would be a unit trust with each contributing in whatever proportions they can afford.
Kristen says, “You would have one entity on the title, and then within the trust, you can have different ownership levels. Then you’ve also only got one bank loan to the trust. Each of the beneficiaries, each of the family members coming in may have to give guarantees. It depends what you can negotiate with your bank, but generally, a unit trust is a very good way to go when you have family members involved and you’ve got different proportions for everybody.”
She adds, “The banks are very comfortable and familiar with unit trusts provided your trust deeds are what I call quite vanilla and off the shelf. They don’t like it when we go tweaking the unit trust too much. So when we talk about these ownership arrangements, you’d still have the trust deed itself, but any ownership arrangements would be documented in a separate document so that the bank doesn’t need to be concerned with that part of it.”
Is it expensive to set up a unit trust and an owner’s agreement?
Done through a lawyer, Kristen says, “Unit trusts, cost anywhere between $300-800 to set up., On the owner’s agreement side, that would generally be between $1,500 and $4,000, depending on how complicated the arrangement is. Whilst that might seem like a lot of money, when you put that against the value of the property you’re buying, the fact you can get into the market faster and you are future-proofing that family relationship – it’s an investment that’s well worth it.”
Are there any restrictions on unit trust?
When you’ve got your trust, there are two positions that become very important. Kristen says, “A unit trust at law, isn’t its own legal person, so it needs a trustee to sign documents and do all those things. You need to appoint a trustee, whether that is Kristen Porter in her own name or Kristen Porter Pty Ltd as a company, you can have either and will depend on your situation. Whoever is going to control the trust becomes very, very important.” The ownership agreement can direct that person in control and advise them what they’re allowed to do.
What are options, and how can they be used with the property?
There are two concepts here. Kristen says, “For example, one person could have their name on the title because there was an option and there wasn’t quite enough time to get everything done. Maybe some of the kids aren’t sure if they want to buy in or something like that. So, you can have things that are called options and if certain triggers happen, then they can actually tap in and say, yes, I do want to buy. Often these options are more in relation to if someone passes away or there’s a divorce or something that an option is triggered to get that person out, but you can have options to trigger to buy in as well. For example, a child might say, ‘Oh, I don’t want to buy now, but I do definitely want it in five years’. That trigger could be the five-year mark. They tap in and the option agreement would set out what that ownership looks like and what that price would look like as well.”
What if someone passes away?
Kristen says, “It depends on which structure you went for. If it’s a unit trust, the units that person owns will follow that person’s will. So if I die, I might have in my will, that everything I own goes to my husband, which is quite normal, but my family may say, well, actually we don’t want your husband involved. We want this just to be our blood relatives only. That’s where the ownership agreement becomes very important and will detail what is to happen on a voluntary or involuntary exit. For example, an involuntary exit could be on the death of a person, so what then happens to my proportion?”
A family or a discretionary trust
They are the same thing. Kristen says, “A family trust is a pool of beneficiaries. It’s a pool of people coming together. So, there’s actually no exact entitlement to any part of the trust. However, there are some very good tax benefits for having an inner family trust, but generally, if you are coming together and everyone’s tipping in certain bits of money, certain proportions, I think a unit trust would be better for that situation.”
Is there an age limit for a child to be put on a title?
Kristen says, “My understanding is there are definitely age limits and that’s another reason why trusts are often used, especially when we’re in the testamentary trust in the will’s arena. That way a trustee can hold the property on trust for that minor until they reach a certain age and the parents might decide that age is 18, or they might decide it’s 25.”
Ownership agreements – what to consider
Kristen says, “Again, every situation’s different. Often if it’s just mum and dad and one child and the child will be living in the house – the parents don’t require rent as such. They just require that person to contribute to their portion of the mortgage.”
She adds, “If though you have several children involved and only one is living in the house, then you’ll need to find a fair way to deal with that.
If you’re the one living in the house, you’ve got two hats on, you’ve got the tenant hat and you’ve got owner hat. Depending on what circumstances you’re in, you need to separate those things out. What I’ve seen is when it’s parents or grandparents helping one child in, it’s not as big an issue with the rent component, but when you’ve got siblings at the same time in life, the same pay brackets and all of that, trying to build their future, then that becomes more of an issue. It needs to be sorted out.”
Other things to consider are:
a) High-level decision-making, who gets to decide what?
b) If someone wants to sell the property and another party doesn’t, what happens? Is there a stalemate or do we have a mechanism in the agreement that tells us what happens next?
c) What happens if I want to just sell my interest out? Does Lee have to buy it? Can I sell it to my sister, but then maybe Lee doesn’t want to be in business in property with my sister?
d) Can someone encumber their interests? Can someone slap a second mortgage over their interest because that will affect the other owners?
e) How do we value the property or someone’s interest in the property when someone does want to leave? Is it market valuation? What if there’s a dispute as to the value?
It’s important to think of the tax implications for exiting the arrangement. Kristen says, “Different exits have different tax consequences.” Discuss with your lawyer and accountant.
Kristen says, “If you are about to be a guarantor for your children or someone else buying a property – the bank will always push for you to guarantee the entire loan, the entire value of the property. You don’t have to do that. Often, the bank is only missing a certain percentage of a deposit, for example, it might be $20,000 to get them over that ten, twenty per cent or whatever they need. My advice is to push back on the bank and only guarantee the amount you need to. And then once that has been paid off in the loan, come off as a guarantor straightaway.”
Dangers for guarantors
Kristen says, “I did see a gentleman guarantee a loan, it was a business loan but he guaranteed the whole thing. The child ended up sick and didn’t have insurance. The bank foreclosed and came after dad for the money. Dad had to sell his farm to pay back the bank. It was a horribly upsetting situation for everyone. The child didn’t mean to put dad in this position, but if dad had only guaranteed, for example, $20,000 of it, he may not have needed to sell the farm.”
Remember you are trying to future-proof a family’s relationship.
What if someone dies?
Can they leave their portion in their will to their spouse?
Does the portion need to stay with the blood family or the investment group?
Who will pay the stamp duty on any transfer? Each state is slightly different with stamp duty, if it’s a land rich entity, there could be stamp duty on transfers within the trust.
If you would like any more information please contact Kristen
LinkedIn or Facebook.