SINGAPORE – Many people think that it is a good idea to pool their resources to buy an investment property as it spreads out the cost of an expensive asset, but there are pitfalls aplenty in such an approach.
The key consideration is an exit strategy, even if you are making the purchase with relatives or good friends. This is because unlike shares, which you can easily offload in the stock market, a property sale requires the consent of all owners, and this can become tricky if one party disagrees.
So if you need money and want to sell the property, you may end up fighting with the other co-owners if they refuse to sell. You may not even be able to offload your share if the others do not have the means or inclination to buy you out.
The case of two brothers who bought a property offers perhaps the starkest reminder of how such an investment can turn out to be a nightmare; their relationship was so bitter that they did not even speak to each other for a decade.
When they finally decided to sell the house, they communicated through lawyers but even that did not stop them from going to court.
The elder brother applied for a court order to compel his sibling to either sell his share of the house to him or sell the property on the open market so that they could then split the proceeds.
The younger brother responded with a proposal that he buy his brother’s share instead but this also never took off because he failed to raise sufficient funds to make the purchase.
In the end, the High Court ordered that the house be sold on the open market but even that did not end the dispute because it was sold at a price that was less than the amount initially offered by the younger brother.
That prompted the elder brother to file a claim for the shortfall and the costs of selling the house. But his claim was thrown out because the younger brother’s proposal to buy his share was just that and not a binding agreement.
Here are three tips that may help you avoid such tangles.
1. Know your budget. Investing in a property is a big responsibility that requires long-term financial planning because you must ensure that you have the means to stay afloat even if things go wrong. It is usually rosy during the purchase phase but you must also plan for the contingency of shouldering the mortgage payments alone if your co-owners are unable to pay their shares.
2. Know your limit. Anyone wishing to buy a property jointly should always discuss the exit strategy, such as what happens if one co-owner wants to bail out.
Of course, fellow co-owners are usually given the first right of refusal to buy the other shares but such agreements may not be useful if the other parties do not have the means to do so.
To avoid a stalemate, it is prudent for everyone to state in writing that if the majority owners want to sell, the others have to abide by such decisions to spare themselves the painful process of going to court.
3. Know your taxes. Buying residential property jointly for investment may make sense if all the co-owners are first-time buyers. Otherwise, the purchase will attract the hefty additional buyer’s stamp duty (ABSD).
That said, if all parties still agree to proceed, the ABSD should be added to the purchase price when determining each co-owner’s share. This is because such expenses are deemed as direct contributions to the purchase so those who pay them are entitled to claim a higher share of the asset.
Property investment does not come cheap so you should always do your numbers properly to ensure you won’t be hit with a cash-flow problem that will make you asset rich but cash poor.
“Source:[The risks of investing in properties with other people] © Singapore Press Holdings Limited. Permission required for reproduction”
