Safe legal framework for co-ownership

[forestj]

Hi,

I have been a fan of co-housing ever since college, and I don't think I want to stop in the foreseeable future. Right now I am 23. As I consider Renting vs. Owning, I've always thought of it in terms of a single family home scenario -- and I've always come up feeling better about renting. However, if I could share the cost and share the house so I didn't have to get a mortgage or front the cash for the full cost of the house, I would feel a lot better about it.

An aside: I have been co-renting with a revolving rotation of friends for a few years now. Currently we have 7 people living in a large 6-bedroom unit. Each person pays a share of our rent, utility, and grocery bills, thats Rent:$270, Utility:$30, and Grocery:~$80 per person. We are very happy with it and I think it's a great way to live frugally.

Anyway, the only thing I know about trying to do co-ownership in the real world: It's a legal mine field. The only times I have ever heard of people co-owning properties, it sounds scary -- No one wants to finance it, it often fails and disputes arise, where one party essentially loses ownership, maybe unfairly, and maybe lawsuits get filed.

I don't think that I, or my friends, are somehow special and immune to those issues... I want to know more about what's possible, what someone like me could do, to organize co-ownership in a well-defined, fair, and safe way.

My first thought: If no one wants to finance it, and since trying to finance it probably introduces extra liability risks (http://www.mrmoneymustache.com/2012/02/01/mr-money-mustaches-big-mistake), we will probably  have to front cash for the house. Since there would be many people involved, and many of them have FI on the mind, this might not be as hard as it sounds, especially since we are also very frugal, and would seek out the cheaper option.

Second thought: We probably don't want all of our names to be on the title for the house. People tend to come and go, interests change, lives change, so the arrangement has to be built for change from the start. In my imagination, I can create a legal entity (corporation, LLC, something like that) which would own the house, and have its own legally binding rules that govern individuals ownership and rights.  Is that possible? Unheard of? I have heard from friends at work that it is easy to create an LLC, but don't know much beyond that.

Third thought: Not everyone will come to the table with the same amount of money. It has to be organized such that ownership of the property is proportional to the initial investment made. In other words, if there are six bedrooms, and if you only own one 12th of the company that owns the house, then you must pay rent to the company that owns the house. If I own half of the company that owns the house, then I will collect rent proportionally. The rent amount per person would be determined by some measure of the "opportunity cost" of having money tied up in the part-ownership.

Also, the stake in the company that owns the house must be trade-able. If I own a a full share (enough to pay and receive zero rent) and I want to leave, I should be able to sell my share to someone else who wants to move in, or sell my share to someone else in the house. I am assuming these shares would not have a fixed price, beyond their initial basis on the cost of the house.

Final thought: all of this has to either fly very low under the radar, or it has to comply with all zoning laws and ordinances for the municipality in question. I know a bit about the zoning laws where I live currently, and the outlook isn't great. Does anyone else have any experience with rules that would govern this where you live? How does it look?

Thoughts? Am I crazy? 

[Cathy]

I'm not going to analyse anything in your post, but I will offer you the following tip. You are definitely on the right track with wanting a written instrument to govern rights and responsibilities relative to the property. Many disputes relative to property arise because of the lack of written agreements. I would recommend you focus on hashing out the substance of what you want to be in the agreement, and then retain a lawyer to draw up the necessary documents to implement what you want, or at least to offer some advice on how to draw up the documents. Drafting contracts for you is definitely far beyond what we can do in the context of this forum.

[englyn]

I don't have anything slightly resembling an answer, but I admire the question.

[mooreprop]

I am not an attorney, but isn't this what a REIT (real estate investment trust) does?  Maybe an attorney could tell you whether you have to be a publicly registered entity to be able to do this legally.  Personally, I think this is more work than I would want to do in order to save on living expenses.  I would only do this level of legal work if I stood to make a significant profit on the deal.  If there is any way you could swing the financing, could you just buy a house and then charge the others rent and a portion of utilities?  That is what my daughter and son-in-law did.  They purchased a foreclosure, fixed it up, then rented the two extra bedrooms for enough to pay for the payment, taxes, and insurance.  This means that they live free except their 1/3rd of the utilities and their groceries.

[forestj]

Thanks for the replies. I guess I'm not asking for ya'll to draft legal documents for me, mostly I was asking if this sounds like something you have done, or someone you know has done.

I think its very different from a REIT, as I understand it, a REIT does this on a grand scale, and probably focuses on profit rather than good outcomes in peoples lives. This would be for one house between friends, where a REIT could be a multinational company. At least as far as I can tell.

So maybe it would be a micro-REIT, or something? That sounds interesting.

[Proud Foot]

I would definitely check with a lawyer about it but to me it sounds like you are thinking in the right direction.  You definitely want things to be defined as far as ownership and what happens when someone moves out.  I have no idea about the legality of it or tax consequences but setting up a LLC to own the house which is owned by the group and then you could charge rent to each person.  This would make you able to "buy" and "sell" ownership as your group changes.