The affordability issues in the housing market aren’t going away for younger buyers.
The financial challenges hindering millennial homeownership have been well documented between overwhelming student loan debt and record-level home prices. However, some within the cohort are carving their own path to the American dream through teamwork.
“Affordability is a key issue for young buyers or first-time homebuyers entering into the market with limited housing inventory, so pooling incomes with a roommate becomes a really good solution for many buyers to be able to enter into the housing market,” says Jessica Lautz, vice president of Demographics and Behavioral Insights for National Association of REALTORS® (NAR).
Recent data from ATTOM Data Solutions, reported by the Wall Street Journal, suggests that the number of home and condo sales across the country by co-buyers has soared since millennials became the largest share of homebuyers in the U.S. in 2014.
The number of co-buyers with different last names increased by 771% between 2014 and 2021, according to ATTOM.
Like other market trends, the pandemic accelerated the trend, according to Lautz, who also suggests that declining marriage rates among younger generations have also contributed.
Despite the generational lull in nuptials, that hasn’t kept buyers, particularly millennials, from pursuing homeownership. Based on NAR’s recently released 2021 Profile of Home Buyers and Sellers report, for the third consecutive year, the share of unmarried couples that purchased a home accounted for 9% of the buyer pool.
According to NAR’s data, the share of first-time buyers who were unmarried couples rose slightly to 17%.
Navigating the Trend
While co-buying isn’t a novel concept in real estate, experts and agents told RISMedia that it’s a worthwhile trend to keep an eye on, as affordability issues and student loan debt plague millennials—the largest cohort of buyers in the market.
Along with working as an agent, Nicholas Ritacco is also a co-buyer. The New York-based Corcoran agent teamed up with his roommate to buy their first home during the pandemic to escape renting.
Looking at the numbers, Ritacco says low mortgage rates since 2008—and record lows during the pandemic—presented an opportunity to finally tap into homeownership while living in or near more major metro areas.
“The affordability is in our favor, and it is time-sensitive, whether it’s two, three or five years down the line, no one can predict, but I can tell you every point we go up is pricing out somebody,” he says.
Compared with traditional buyer scenarios, Lautz suggests that agents work with their co-buying clients to identify long-term intentions for the property they are looking to buy and how they will address any life changes.
“If someone gets a job on the other side of the country, are you going to rent the room that the roommate has been living in?” Lautz asks.
Discussion over income between the clients is also essential, as Lautz notes that will become an issue when it comes time to divvy up the down payment and closing costs in very similar ways, so they are earning equity in the same way.
“Questions like that may get into the nitty-gritty, but I do think it’s important for keeping that relationship and the home-buying transaction on track as well about what is realistic and what may not be realistic.”
Having gone through it himself, Ritacco says that he also started working with friends that want to partner up to buy a home.
Part of his guidance strategy is helping his clients identify their “exit strategy” before going into a co-buying partnership. This typically involves determining how long they intend to live in the property and how they want to approach selling or renting it out when one or more parties is ready to move.
“You have to understand what your options are and what your rights are,” he says, noting that he gets “granular” with his clients when working out the details so that each party is comfortable entering into the deal from the beginning.
“It’s really about understanding every step of the process and what is expected of everybody,” Ritacco says. “It’s a joint venture. You’re just changing it from that typical investment-focused agreement to adopting it for a joint venture for a primary.”
According to agent Kate Wright at Better Home and Gardens Real Estate Metro Brokers in Atlanta, Georgia, taking a deep dive into buyer goals and expectations during an opening consultation is a helpful tool to mitigate future issues.
“That way, I know what they are looking for and what their goals are, and I can direct them toward the best avenue for pursuing the purchase,” Wright says, adding that her market has been popular among millennial buyers because of its affordability.
Wright’s pool of millennial co-buyers have already bought their first home and have joined friends to start investing in other properties.
While she admits that her pool of first-time buyers co-buying is negligible in her market, broker Shonna Peterson at the Warmack Group with Keller Willams in Seattle says that the trend is popular with the millennial investment group.
Peterson notes that investor buyers’ motivation focuses more on the numbers and turning a profit rather than living in the home primarily.
Despite the difference in approaches and desired outcomes, Peterson indicates that managing emotions is essential to navigating millennial investors.
“While they have a great grasp on the numbers, there does still tend to be an emotional component just because it’s human nature to get somewhat competitive when you know that the competition is stiff,” Peterson says.
Legal Protection
While the trend of co-buying opens doors to homeownership, it’s not without its challenges, which is why agents told RISMedia that they encourage their clients in co-buying situations to speak with legal experts.
Real estate attorney Edwin Farrow recommends hashing things out in writing before closing on a home when it comes to co-buying partnerships.
“What they’ve done is create a partnership, and partnerships can go bad,” Farrow says. “You need to know what happens in the event the partnership is dissolved, keeping in mind the fact that the bank doesn’t care that you’re friends and agreed to whatever you agreed to.”
Farrow’s co-buying clientele typically consists of unmarried couples and family members teaming up to buy homes together. He indicates that getting a better understanding of the risks and benefits of teaming up to buy a property together is vital for any buyers looking to take this route toward homeownership.
Eric Smith, a real estate attorney with Timoney Knox in Fort Washington, Pennsylvania, echoed similar sentiments, adding that the biggest problem that he notices among co-buyers is that many tend to bypass getting a written agreement before closing on their home.
If the partnership doesn’t end amicably, Smith says a written agreement could save buyers “tens of thousands of dollars in attorney fees” if their friendship or relationship dissolves and they end up selling the property.
“In the end, it will be costly to prove that the person who paid the down money is entitled to get it all back or any of it back,” he says.
By default, Smith says tenants in common (TIC) is the route that clients take. The option gives each property owner an “undivided interest of the whole thing in equal shares.”
“It essentially means that each owns a slice of the pie,” Smith says, adding that shares can be passed on to an heir in the event of a death.
A joint tenancy with the right of survivorship is another route, Smith explains, noting that each partner owns the whole property together, and the last of them to die would keep everything.
“You could also imagine a circumstance where you might have a number of people who buy a piece of property as legitimate business partners,” Smith says.
He thinks the best option is to buy with an entity—like a limited liability company—so parties can have an operating agreement for the property.
“It just makes it easier to manage,” Smith opines.
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