co-ownership in real estate

The Risks of Co-Ownership Agreements in Real Estate

Co-ownership is a fairly common arrangement when it comes to the purchase of real estate. When someone is married, for example, they will typically co-own the property they live in with their spouse. Siblings frequently end up co-owning real estate property as well. Sometimes this is by choice, but in other instances, they might become co-owners in a property because of circumstances like an inheritance.

Business partners sometimes enter into co-ownership agreements as well. This might happen when partners decide to purchase the building where their office is located, for example. And finally, close friends might decide to co-own a piece of real estate, perhaps to use as a shared vacation home where they can get together with their families.

Co-ownership arrangements can be beneficial to the parties involved, mainly because they can share the expenses of owning and maintaining the property. But this type of arrangement comes with various risks as well.

Below are four of the more common risks associated with real estate co-ownership agreements that you should be aware of:

Limited Control over the Property

When you co-own a property with one or more other individuals, you have limited control over how it is used. For example, you cannot make important decisions regarding the property – whether to remodel it, rent it out, or sell it – without consulting and getting the approval of the other owner(s). The same rule applies to the other co-owner(s) as well. This means that no one can do anything of any consequence with the property by themselves.

Here is an example of how that might cause conflict between owners. Let’s say you and your brother own waterfront property in Gulf Shores. You want to rent it out on Airbnb to tourists as you believe it can be a good source of passive income. Your brother, on the other hand, wants to maintain it in its pristine condition and use it as a vacation home.

In the aforementioned scenario, unless you are able to convince your brother that the income you can earn from Airbnb is worth the risk of renting to strangers who might cause damage to the property, you will not be able to rent the property as you want to do.

Another area where your control is limited with co-ownership is if you want to take out a loan on the property. In the current real estate market where property values have been increasing rapidly in recent years, property owners often want to take out a second mortgage or line of credit in order to make use of the equity that they have gained. But when there are multiple owners, you cannot borrow against the property unless all owners approved.

The Risk of Liens

If the co-owner of your property causes an accident and injures someone and the injured party files a claim against them, if the co-owner’s liability insurance is not sufficient to compensate the injured party, a lien could be placed on their share of the real estate property.

Similarly, if the co-owner of your property fails to pay his/her taxes, the tax authority that they owe the money to might choose to place a lien on their share of the property. Also, if the co-owner of your property racks up a lot of debt and is unable to pay it off, creditors might try to place a lien against their share of the property as well.

Apart from the fact that this could cause serious legal complications, a situation like this could also strain the relationship between the co-owners.

The Risk of Incapacitation

If the co-owner of your property becomes physically or mentally incapacitated to the extent that they can no longer make any decision on their own, you might want to sell the property rather than shouldering the burden of maintaining it yourself. Unfortunately, you would not necessarily be able to sell the property on your own in this situation.

If this were to happen and there was no plan made ahead of time for this type of scenario, you would probably need to file a petition with the court and request that the court appoints a conservator or guardian who can make decisions on the co-owner’s behalf. And even after going through this step, there is no guarantee the person who is appointed would consent to sell the property (as you are trying to do).

Possible Complications if One of the Co-Owners Dies

Related to the last point, people sometimes encounter problems stemming from joint ownership of real estate property if one of the owners passes away. What happens next in this scenario will depend on what type of arrangement the owners had. Alabama recognizes two types of co-ownership:

  • Tenancy in Common: When two or more individuals own real estate property as tenants-in-common, each owner holds a percentage of interest in the property, usually determined by how much they contributed. If one of the owners dies, their percentage of the property passes to their stated beneficiary or their heirs-at-law in the absence of a will or living trust.
  • Joint Tenancy with Right of Survivorship: With this arrangement, if one of the owners dies, then their share of the property goes to the other owner(s) and their estate and heirs-at-law do not receive any of it.

It is important to note that under Alabama Code §35-4-7, a grant of ownership of real estate to two or more individuals is presumed to create a tenancy in common unless the co-ownership agreement expressly states that a joint tenancy with right of survivorship is being created.

This is something that the owners should make sure to work out ahead of time, and it is also why it is crucial to work with attorneys who have a thorough understanding of both real estate and estate planning and how these two areas of law intertwine when there are co-ownership arrangements and similar types of situations.

Contact Our Seasoned Real Estate Attorneys in Baldwin County, Alabama

Co-ownership of real estate property can become complicated, and this arrangement can lead to unintended legal consequences if the ownership documents are not drafted properly. The experienced real estate lawyers at Stone Crosby have been helping Alabama clients with these types of issues for over 100 years. To speak with one of our attorneys about your situation, call our Daphne, AL office today at (251) 626-6696 or message us online.