What Unmarried Couples Should Consider When Buying Real Estate
(Ellen Shanna Knoppow, March 9, 2024)
Michigan – While the decision to purchase real estate should never be made lightly, unmarried couples in particular should proceed with caution, advises attorney Scott Galloway.
“When we represent people in commercial real estate transactions, decisions regarding the purchase or the sale of the property are done very intentionally,” said Galloway, who has 30 years’ experience practicing real estate law. His law firm, Galloway and Collens, PLLC, offers both transactional and litigation work for commercial and residential properties. With commercial property, he explained, there’s a lot of thought and planning involved: what to buy, whether to buy, how to buy, and how to manage the property.
Not surprisingly, what often happens with residential transactions is that “they’re less viewed as an investment or business transactions,” Galloway said, “and there’s a lot more emotion involved.” Unmarried individuals —whether their relationship is romantic or platonic—are advised to think of their residence from a business perspective, as a jointly held asset.
Galloway said he’s seen situations where a couple had the best intentions or even planned to marry and purchased real estate together as joint owners, but with no agreement in place as to how the property expenses should be shared and what would happen if disagreements arise. When a married couple holds property jointly there is a well-defined path to what happens if the marriage ends, namely divorce. There is no similar established mechanism for unmarried couples which is why a written agreement between unmarried co-owners is so important. Even if it seems cold or unromantic to sign an agreement that considers a possible dissolution of the relationship or other negative outcome, planning ahead can avoid the substantial expense and uncertainty of litigation.
“Generally, if a couple is not willing to enter into a cohabitation agreement, then our strong advice is to not own the property together,” Galloway said. Rather, he advises them “to come up with some other arrangement where one member of the couple purchases the property and then the other rents it, or loans money or something that perhaps allows them to recoup some of their contributions to the household without creating the complicating factor of being on title to the property.”
A common situation occurs when a younger couple that doesn’t plan to marry and lacks the resources to purchase real estate or get approved for a mortgage individually pool their resources. In the event of a breakup, the expectation that the other party will be cooperative in either refinancing the loan to pay to buy out the partner who’s leaving or sell the property and then divide the proceeds to sale often doesn’t pan out. “In the absence of an agreement, they oftentimes are not able to sell the property or buy the other side out. And so they’re left in limbo,” Galloway said.
This can lead to a scenario where one partner refuses to leave the property while the other co-owner pays the bills to protect their credit rating but is compelled to live elsewhere. Without a written agreement in place, a long and protracted negotiation with no clear means to a resolution can end with threats of letting the property go into foreclosure.
Similarly, Galloway shared the case of a hunting property purchased by three hunting enthusiasts who didn’t have an agreement in place. “They formed a limited liability company, took title in the name of the limited liability company, but didn’t have any operating agreement in place to describe how that business would wind up its operation,” he said. “And then they developed different ideas on how that property should be used or who should be allowed to use it.” The result was a stalemate that was not easily resolved.
Without an operating agreement or a co-habitation agreement the attorney can provide can’t easily predict for the client litigation to resolve the conflict might end. Instead of litigating in circuit court which can be a costly, drawn-out process, the parties often negotiate. Here it depends on who has more leverage in the negotiations; again, a scenario that could have been avoided if the owners had an operating agreement for their property which takes the place of a cohabitation agreement for couples living together.
Having an agreement in place is also recommended when the owner doesn’t reside in the home; for example, a family member who purchases property for another. Galloway provided an example.
“Maybe I’m going to buy a piece of property for my brother and we’re going to both be on title together but maybe our understanding is that he’s going to pay the loan,” he said. “But we agree that he can live in it and I’ll just lend my name to the mortgage application, but I don’t want him to be able to sell it out from underneath me or something like that. If that’s your thinking on it, then you still have to have some agreement in place as to how it’s sold and how maintenance and other expenses are handled.”
When unmarried people do decide to buy property, Galloway advises consulting with an attorney and making decisions about how the property will be used and how expenses will be paid, etc. first. “It’s something that should be done before you sign a purchase agreement for the property because these conversations are oftentimes not easy to have,” he said, “and they’re not things that are resolved in days or, sometimes, even weeks.” There may be tax implications and other considerations that need to be considered such as an event of a disability or death.
Bottom line: According to Galloway, the cost to do a cohabitation agreement might ranges from around $1,000 to $5,000, depending on the circumstances of the parties and how much negotiation is necessary to reach an agreement. “But as expensive as that may be, it pales in comparison to the cost of fighting about it without an agreement in place,” said Galloway, who regularly represents parties that are trying to get out of co-owned property. And while each case is unique, it is often highly emotional and perhaps involves legal matters like PPOs and custody of children. It can be a lengthy, expensive process.
“Investing in a good cohabitation agreement or a good, limited liability company operating agreement before you buy the property is going to be a very cost-effective approach to resolving disputes in the future and it’s going to set you at ease,” Galloway said. “You’re going to be a lot more comfortable co-owning the property with some assurance that if things do go badly for the relationship, that at least there won’t be the added factor of an unexpected and unplanned for financial hardship.”
Galloway and Collens advertises on Oakland County Times. Learn more about Galloway and Collens at https://www.gallowaycollens.com/.