There are different ways to hold title of a property. While joint tenancy and sole ownership tend to be more common, there are other less common ways to own real estate, including ‘tenants in common’. There really are no limits on how many people can be on title to a home, though realistically, lenders will have specific requirements that can restrict who is allowed to be on title.
So, what exactly is tenants in common, and are there any advantages or drawbacks to this type of setup?
Tenancy in Common – Defined
Tenancy in common lets at least two or more people hold title to a property. Each ‘tenant’ has the equal right to use the property, regardless of how much stake they have in it. That means that even if one owner only owns a 25% interest in the property, he or she can still occupy and use the entire property just as much as an owner with 50% interest. As such, all parts of the property are considered to be owned equally by all owners.
The owners don’t have to be married, be registered domestic partners, or even live in the home. All owners also reserve the right to leave their share of the property to anyone they choose upon their death, or to mortgage their own portion of the interest without the other owners approving such a move.
How Does Tenancy in Common Differ From Joint Tenancy?
One major difference between tenancy in common and joint tenancy is how the property is transferred to a beneficiary when one owner passes away. With tenancy in common, the title can be passed onto a beneficiary that the owner chooses, while with joint tenancy, the title is passed onto the surviving owner.
Each owner in a tenancy in common agreement does not have any rights of survivorship, which means that unless the deceased owner stipulates in his or her will that the interest in the property should be distributed equally among the surviving owners, the interest belongs to his or her estate. Such is not the case with joint tenancy, in which the interest of the deceased owner is passed onto the surviving owner(s).
Another big difference between tenancy in common and joint tenancy is ownership interest. Whereas each owner in a joint tenancy has equal ownership in a property, owners in a tenancy in common agreement may own different interests in the property, as stated earlier.
That means one owner may have 25% interest in a property while another may have 60%, and yet another may have 15%, for instance. And since a tenancy in common agreement can be created at different times, owners can take interest in a home at various times.
Pros and Cons of Tenants in Common
Depending on a person’s situation and needs, a tenancy in common agreement can come with its own set of advantages and disadvantages.
Ownership percentage. There’s no need to either be married or considered common law to be tenants in common, nor do owners even have to live in the property. That means investors can participate in a tenancy in common for income purposes without the obligation to take up residency. For those who do not wish to take up a large interest in the property, they have the freedom to take whatever amount of interest they choose without having to split up ownership equally.
Right of survival. The big disadvantage of tenancy in common is that there is little control over inheritance. Without any right of survival, each owner needs to stipulate who the heir(s) will be for their interest portion in the property. When one owner dies, that share in the property is transferred to the individual named in the will without the other owners having a say. Any owner can transfer his or her share in the property to another at any time without having to get approval from the other owners.
Interest. The amount of interest that owners have in the property can be advantageous or disadvantageous, depending on the amount of interest they each have. An owner who holds a smaller interest in the tenancy in common agreement still has the right to use the whole property. Obviously, this is beneficial to the owner with a minority stake, while unfavorable for those with a higher stake in the property. That said, investors who don’t actually live in the home might not have a problem with this situation.
Transferring title. All owners in a tenancy in common agreement reserve the right to transfer their portion to another or mortgage it without requiring approval from the other owners, which is great for owners who want out of the agreement but not so good for other owners who might want some stability in the arrangement.
Best Practices For Entering a Tenants in Common Agreement
Before buying a home with others and entering a tenancy in common agreement, consider the following recommendations:
Talk to your lawyer – You’d be well advised to speak with legal counsel with experience in this realm of real estate to help you determine your legal rights and obligations.
Talk to your accountant – It might also be a good idea to speak with your tax advisor to get all the details on how you will be taxed as a part owner of a home, especially when it comes time to get out of the arrangement.
Understand your interest – Each person in a tenancy in common agreement owns a share of the property. You should be very clear about how much interest you hold in the property versus how much interest the other owners hold, as the shares may not be equal while everyone can use and occupy the property equally. Generally speaking, how much you owe in mortgage payments, insurance, taxes, and maintenance directly reflects your exact share in the property.
Split the maintenance work – It’s important to divide the work required to upkeep the property so that everyone understands their exact responsibilities to avoid any disputes. Decide who will be responsible for each task and come up with a regular schedule to ensure maintenance of the property is streamlined.
The Bottom Line
There are clear advantages and disadvantages to a tenants in common agreement in real estate, which is why careful consideration must be given prior to signing on the dotted line. Buying a home in this manner is a great way to develop some equity, but you could be forced to look for another home should one of the other rightful owners chooses to sell. Make sure you seek professional counsel in the form of an attorney and a real estate agent to make sure you’ve covered all your bases in the purchase of a short sale home.