A young relative called over the long weekend. He had just made an
offer
on a house and wanted advice about inspections and other details. We had been
in e-mail touch for several weeks as he worked through his mortgage pre-approval,
structured the offer and generally obsessed over a very important decision. But
I had never thought to ask a critical question of my own: "Are you and Leslie
- his girlfriend - buying this house together?"
They would, he responded, both be on the deed, but only Eric
would sign the note; as a retired Marine it would be a VA guaranteed
loan.
Alarm bells went off everywhere. It was a touchy subject and it is tough to
burst bubbles at 10 a.m. on a Sunday morning. Eric and Leslie are no doubt convinced
they will be together forever as are most married couples, 50 percent of whom
will, at some point, no longer be. But there is a very big difference between
the legally married and likely to be divorced and those in Eric and Leslie's
position. Significant others (SOs) lack a ton of legal protections that are
automatically available to the married.
I laid out a few possible scenarios on the phone, the least uncomfortable I
could come up with on the spur of the moment, and then started researching the
subject. The dangers inherent in buying property with a significant
other are - okay - significant. And worse than I thought.
This is not to say that unmarried couples should not own a home. Financially,
where two people are sharing rent and paying taxes, it is a financial no-brainer.
Sometimes people are ready to own but not ready to wed. It could be that an
unresolved previous marriage precludes wedlock, and of course, in 49 states
same sex couples are denied the legal protections available through that institution.
In each of these situations buying a home may be exactly the right thing to
do - financially and/or emotionally - but still may be darn dangerous
legally. At its heart (and it is probably better in this case to ignore the
heart) buying a home is a financial and legal transaction and should be approached
with clear and open eyes. If the principals are not protected by the legal cover
of marriage, it should be approached with clear and open eyes and the advice
of an attorney.
Among the scenarios I gingerly laid out for Eric.
- With the deed in both names, if Leslie should die Eric could end up owning
a home with her heirs - her parents or siblings - while being totally responsible
for the mortgage;
- If the loan is solely in Eric's name and he should die this might not only
endanger Leslie's partial ownership of the home by triggering the "due
on sale" clause in the mortgage but tie up his estate which would still
be obligated to pay the mortgage without the right to sell more than half
the house.
- With Leslie not a participant in the mortgage and because as SOs they have
to file separate tax returns, Leslie would be unable to claim a part of the
homeowner's deduction for mortgage interest or property taxes.
They are non-traditional students (i.e. older than others in their classes)
and earning low wages. The available deductions may well be more than Eric's
tax obligation could absorb and these deductions would thus go to waste.
Since they are young and in love and I want to keep their trust and friendship
I didn't even mention the biggest danger to their real estate dream. In
a year or two they might split and if they do disentangling their real estate
relationship could be more complicated and ugly than anything they might encounter
in dissolving a marriage.
What if they did break up and both wanted to keep the house? There have been
a couple of movies based on this situation and while it might be funny in fiction
it is likely to be costly and emotionally draining in real life.
If only one wants the house how does that work? Can one SO force the other
to sell or, alternatively, be held hostage by his or her refusal to do so?
What if the pair had made unequal contributions to equity?
Maybe Leslie provided the bulk of the down payment or owned the good credit
that made the purchase possible but Eric contributed dozens of hours to upgrading
or maintaining the home or had the income necessary to carry the monthly payments.
Somebody has to decide how to value the contributions and if it is the courts,
the costs of the conclusion may be more than the equity is worth.
Eric was very quiet at the end of our talk. Perhaps he thinking quickie wedding.
More likely he was deciding never to call this particular relative again. I
hope he isn't thinking about giving up his dream of home ownership. I have seen
the pictures and the house is lovely and probably perfect for both Eric and
his SO. But, as I said before, I then began to do some research on the subject
and found even more uncomfortable scenarios but also some helpful information.
We will go there next.