Is buying a house with my roommate a terrible idea?

[neophyte]

My roommate and I are considering possibly buying a house together to DIY rehab and sell in a few years. We're looking for something that we could live in while we work on it. We're going to look at a place later this week that I suspect will be more than we decide we want to take on, but I figure no harm in looking.

We're considering places that each of us individually could buy it outright right now. There's a chance we would want to be partners on the house, alternatively maybe one person would buy and the other would either rent from them or find a new roommate for our current place.

My roommate and I have been friends for about 10 years now, roommates for a little over two years. I am moderately handy and he's handier, but neither of us has ever owned a home or taken on anything of this magnitude before. I'm more likely to underestimate what I can handle, (I think) he's more likely to overestimate. In general we both enjoy doing this kind of work, we've both done some volunteering for Habitat for Humanity, that sort of thing.

Is buying a house with a roommate just such a terrible idea I should scrap it? If we decided to do this with this house or a different one, we've discussed that we would want to draw up some kind of legal agreement about ownership of the house that would cover what happens when one of us wants to leave or rent or sell, how costs would be split, how to handle potential future rental income, etc. But I have no idea about how to go about that. Any tips on that?

Thanks real estate gurus!

[GizmoTX]

You are proposing a business partnership, so it should be legally structured & documented from day 1 if you proceed. Even so, this will not protect you if there's a falling out, & you don't have any experience for such an undertaking. Starting a business is not automatically easier with a partner. See MMMs posts about his partnership experience.

Solo is safer but only if you will have the money & time to complete the rehab.

[Daley]

Which do you each value more, your money or your friendship?

Business deals can be stressful, especially for first-timers; and as a general rule, one should never owe money to friends/family, or place them in a position of owing you, unless you want to destroy that relationship. Think it through to the worst case scenario, and recognize that you probably shouldn't do it unless you have the money to give away and a heart that allows you to give both the money and the property away without it hardening towards your friend in the process... and the exact same applies to them towards you.

If it doesn't pass that test and you still want to purchase the property, best for one of you to go solo and hire out contractors that aren't the other on the condition that you already have the resources to complete the project on your own.

[neophyte]

Well, we're not longer considering that house, but we're still interested in the possibility of doing something like this in the future if the right place pops up.  But with nothing on the table right now, it gives us lots of time to learn about how to set it up as a business partnership and to consider various possibilities and pitfalls before we decide if we actually want to do this. 

I read MMM's post about his business partnership. Yikes! I've got to say I have a better feeling about this and don't see any dreadful warning signs, but I suppose that's what everyone says before things start heading south!

[Kwill]

It sounds like you are female and the roommate is male, is that right? If so and assuming it's not a romantic relationship, you might want to be extra careful about how you set up the purchase legally. Buying a house together might cause your state to consider you to be in a common law marriage after some time passes. Other people would know better what, if anything, that means on a practical level, but something to consider perhaps.

[Hummer]

You should only buy property with someone you sleep with.

[Goldielocks]

It's a business.

One person will likely end up with more hands on work, arranging contractors, longer hours.  One person may front more money, leverage networks to get lower prices, or complete design decisions and work with city for permits.

You need to decide how you will divide the profits, what to do if the ratio of work is "unfair".      It is easier when one provides money / backing and bookkeeping as a silent partner, and the other is the workhorse / owner / decision maker, but that is for you to decide and document.

If you imagine that MMM's experience were yours, how would each of you structure the contract to make things more equitable by the end?

It is possible, just more difficult with a partner in a business, rather than an employee (with profit sharing, if you like)

[tj]

You should only buy property with someone you sleep with.

You should only buy property with someone you have actually married and intend to stay married to. Can you imagine the extra drama of breaking up while sharing real estate?

[escolegrove]

As a season landlord I cannot stress enough that unless you are married you shouldn't entangle business. I can tell you from assisting friends and family. That the best way these relationship go downhill. I have done well because its been volunteer. If it wasn't volunteer, it would not have gone so well!

[homehandymum]

Not property ownership, but a business partnership experience to share.

My DH set up a small IT company with his best friend.  Was awesome for a while, but by the end it sucked big time, and the friendship was dead long before we disentangled ourselves from the company (at a profit to ourselves, money-wise, as the business was a success, but we'd never do it again).

In hind-sight, it would have been better for one person to be the company, and the other person an employee.  Much more clear in terms of liability etc. 

But the biggest thing we learned is to never, ever go into a monetary arrangement with someone without having all the various termination circumstances agreed upon.

for example, in real-estate, the clauses might go something like:
1. In event either person wants out, their share is offered to the other partner to purchase at market/retail/agreed value (specify!).
2. If partner is unable to buy them out, the whole property is sold on open market and proceeds divided evenly.

You would also need a clear and obvious way to decide how much equity each of you has in the property - if one is contributing more hours to the project that needs to be 'billable' somehow.  The other partner also needs to be protected against lazy or just plain inefficient make-work that is invented to look like hours being spent on the property!

Personally, I would say that if you have the money to do it yourself, buy the property in your own name only.  Your friend can be a tenant/boarder/lodger and pay rent, and also do handyman stuff which you pay him a fair rate for (either hourly, or per job).

This is an uncomplicated arrangement, with no hand-wavy chasm of undefined nature for your money to disappear into.

You just never know what the future will hold for either of you - ill parents requiring you to relocate, un-turn-downable job offer that sucks up 80 hours a week (so no handyman work being done), relationships beginning/ending/developing that necessitate different living arrangements, market crash meaning you're stuck with the house for a few years longer than you plan, someone (god forbid) dies or becomes really ill...  the list is endless, but the less entangled your business affairs are, the easier it is to sort out under pressure (and the end of a business relationship is ALWAYS pressured).

[clifp]

You should only buy property with someone you sleep with.

I completely disagree, sex complicates things immensely.  My first two house were bought with partners, the first was college roommate who I had known about 7 years before buying the house the second was girlfriend who I dated for about 2 years.  The first was a win-win for both of us and ended after about 5 years very amicable, the second only last about 2 years, and while it was not particularly bad as breakup go it still was tense and involved yelling at times.  My mom and her boyfriend (they got together in the 70s after their spouse died) also bought a house together.

Many, maybe most great business start of partnerships of two or sometime three people. Hewlett-Packard, Google, Ben & Jerry, Apple, Intel.

The most important thing to do is sit down and write up an agreement between the two of you and then have a lawyer make a contract.
The agreement should specify the following.
1. The initial contribution
2. On going contributions both time and money
3. The time frame for selling (We specified that in the first 2 years both of us had to agree to sell after that either one could force a sell)
4. The process of selling. For us this was about 3 paragraphs, which talked about time frames, what happens if we disagreed about excepting an offer etc.
5. A process for appraising the property.  Each person was allowed to find an independent appraisers and the appraisal were widely different and we couldn't reach an agreement than the two appraiser would nominate a 3rd appraiser and he would set the price.

It seem to me we spent about $500 drawing up the contracts. The reasons to do so are both the obvious it makes dissolving the partnership much easier, and just as important if you can't work together to draw up an partnership than you shouldn't be business partners.

[clarkfan1979]

If you have a well written contract it is a good idea. If not, it is a bad idea.

I think this idea gets a bad rap because many people do not take the time to write out a common agreement. Any business deal (friends or no friends) is going to be a disaster with no contract.

[Georgiaboy]

I'm a lawyer (and have owned small properties with partners) and second what Handiemum, Clifp and clark fan have said.  Owning a house, and figuring out how one partner can buy out another, is much less complicated than buying a partner out of an operating business.
While going the appraisal route to set a value works, it can be expensive.  You can also just have the buyout value be the initial "all in" price increased by some percentage if the buyout occurs in the first few years. That value will probably be reasonably close for a few years and the valuation can switch to an appraisal after that.
While it's easy to structure a fair buyout if you don't know who will be the buyer, and who the seller, and that seems to be your situation, you also need to be aware that when the time comes the buyer may not the ability or willingness to buy the property, and if that coincides with a weak real estate market, the seller may be stuck longer than they'd want or planned on.

[neophyte]

Thanks everyone for the discussion.  I'm glad to see that the answers across the board aren't "no way!" and I think the discussion of things we need to consider before going into business together is very helpful. We both agree on the importance of having a good contract before we have any skin in the game, and some of you have brought up scenarios or potential points of contention that we hadn't thought of before.

I edited the first post to make it a little more general since I was commingling general questions with questions about a particular house. The general discussion is much more relevant to me now.

It sounds like you are female and the roommate is male, is that right? If so and assuming it's not a romantic relationship, you might want to be extra careful about how you set up the purchase legally. Buying a house together might cause your state to consider you to be in a common law marriage after some time passes.

This is correct and our relationship has never been romantic or sexual in nature, but fortunately our state has no common law marriage.  At least that's one thing we shouldn't have to worry about!