Co-ownership: The road less traveled

The growth in prices of quality residential and commercial properties has put many such properties outside the reach of single investors.

This has led to the explosion of property trusts and syndications, which captured many small property investors who otherwise would have been unable to invest directly in those properties.  

The downside to investing in trusts and syndications was that the trust and the syndication acquired the property in its name.

Investors who still wished to go down the path of direct property investment did so by acquiring property in co-ownerships.

That is, where all of the co-owners are shown on the title deed for the property as co-owners with various shares.

Co-ownership with others can work as long as the purchase is properly documented by way of a co-ownership agreement.

It’s essential to have a well-thought-out co-ownership agreement, not just because of the vagaries of the real estate market, but also because people’s goals and circumstances can change dramatically, particularly over the five to 10 years that a property may be co-owned. 

I encountered an incidence recently of an Australian company that co-owned properties with three other investors and after five years of co-ownership the spouse of one of the directors of the company contracted a life-threatening disease that required immediate and expensive medical treatment overseas.

The company therefore needed to sell its interest in the property to fund this treatment.  

Thankfully the co-owners of the property saw the benefit five years earlier in preparing what appeared at the time to be an expensive legal document.

Following a plea from the director of the company to the other co-owners, all hands now reached for a copy of the agreement from the bottom drawer.

The agreement provided that all investors had the right to exit the property and the terms of this exit were, fortunately for all, crystal clear.

Every co-owner had the right, in these circumstances, of first refusal.

This required the departing owner to first offer their share to the others at a purchase price to be agreed upon.

If they couldn’t reach an agreement the document provided that an independent valuer be engaged to determine the value and calculate the exit price. 

If, following the valuation, the other co-owners didn’t want to exercise their right of first refusal, then the departing owner could offer their interest for sale to others outside the group.

The new co-owner still had to be approved by the others and in the event that the departing owner couldn’t source a new co-owner who was acceptable to the others, the agreement provided the property was put on the market for sale and sold at market price.

And what’s unfair about including such a provision in a co-ownership agreement if everyone was treated equally and all had the same rights?

Nothing at all.

So, while it appeared five years ago that there was little value or positive benefit in spending several thousand dollars in legal fees to prepare such an agreement, the reality was that in the fullness of time, it was money well spent.

from Property UpdateProperty Update https://propertyupdate.com.au/co-ownership-the-road-less-travelled-the-road-less-travelled/