Should You Buy a Cottage with Friends?

By Kerri-Lynn McAllister
Special to WalletPop Canada


As much as we hate to admit it, summer is over. And with that, it signals the end of cottage season. However, not all is bleak because this may be a good time to scoop up a cottage with your friends. Finding deals "out-of-season" is not only limited to clothing purchases. As cottage country thins out with each drop of the thermometer, now could be the best time to start your cottage shopping. While spring is typically the busy period for sales, savvy buyers will hold off until the fall, since owners are willing to take less money, than have the maintenance and carrying costs of holding the property until next year.

The Cottage Market

The Good: According to agents across Ontario, this summer was a buyer's market, where many properties were and still are available in desirable locations across a broad range of prices.

The Bad: The starting prices in those desirable locations have been north of $300,000, which is pretty expensive considering most will spend only a few weeks every year "living" in that property.[1]

Finances

The cost of owning and maintaining a cottage can be substantial, which will force some owners to consider splitting the cost with a partner. This agreement should be taken very seriously since your partner has the ability to impact your financial standing. It is imperative to get the details of such a partnership down in writing. A co-ownership agreement is something that will set out each partner's liabilities as well as determine what should happen in the event one partner passes away or sells his/her share. Essentially, you need to be prepared and have an exit strategy ready.

Types of Co-ownership

Joint Tenancy

This type of arrangement is colloquially called, "Last Man Standing". Basically, it states that if something were to happen to you (ie. you were to pass away), your share would be transferred to the other owner. Joint tenancy is common among couples. The important characteristic for this arrangement is called the "right of survivorship", since the title is finally unified with the last survivor. Only the last surviving partner can use his/her Will to give or transfer the property to another entity.

There are four important factors that need to occur for each owner:
· The title must be received at the same time
· The title must be received on the same deed
· Equal share of ownership
· Identical right of possession

Tenants in Common

This type of partnership is where a person's ownership is passed on to the estate, as outlined by their Will. No right of survivorship is conveyed. With this type of arrangement, the ownership is split, for example, a 60/40 share split. If you were to pass away, the interest of your defunct portion can be conveyed to your next-of-kin as part of your estate. In other words, your share never gets passed on to your partner, but rather, remains 'in the family'.

What you need to know:

• There is no limit as to the number of individuals who can hold a title to the property in question
• Ownership can be held in both equal and unequal shares
• Co-tenants each have the right to possess the property. Neither tenant can exclude the other.

To dissolve a Tenancy in Common, the co-tenants can buy out each other or the property can be sold with the proceeds distributed amongst the owners.

Be Prepared:

With these types of shared partnerships, you can never get too specific. Always ask the "what ifs". Another important feature is the 'Shotgun clause' – this gives you the first right to buy should your partner wish to sell. You should also recognize that:

One property = One mortgage

So, a $200,000 cottage cannot be split $100k/$100k between two people.

Getting the ownership and financial details out of the way should be priority number one. Which colour jet-ski to buy or which beer to stock up on, although fun, should be last. Purchasing a property and undertaking a mortgage is a large commitment. Purchasing a second property and mortgage should be treated just the same. Make sure you are armed with knowledge before under-taking such a complicated partnership, by talking to an experienced Canadian mortgage broker.