Dear Bintel Brief:
My husband and I live in New York City and are getting ready to buy our first apartment. We realize that a home purchase is a sizable financial commitment, and we are preparing to take the plunge.
Adding to what is already a tremendously stressful decision-making process, we are considering buying a building with friends that we would then split into separate apartments. A decent amount of actual livable square footage is hard to come by in a large city when working within a budget, and we feel this would be a smart way to each get more square feet for our hard-earned dollars. I’ve been told we could essentially condo the building or turn it into a cooperative so that each family is only liable for their own apartment. What contractual precautions should we take to ensure everyone is protected? Is this as good an idea as it sounds? Or are we entering into a minefield that could potentially blow up our friendships?
MIXING REAL ESTATE WITH FRIENDSHIP
Dear Mixy: If ever you’ve gone to a restaurant and fought with another couple over who pays the check or sought to go “halfsies” on a gift, you’ve gotten a tiny taste of issues that can arise when adding dollars to friendship. So before you even consider entering a business with friends, there are a host of non-legal questions to mull in advance of contractual considerations: First, how close are you and your friends? Do you know what their financial status is? How much money they have borrowed from parents (or others)? How stable are their jobs? And most importantly, does their attitude toward money match yours — i.e., what is their philosophy on repairs and capital improvements, and would they rather have an apartment building that is out of Lifestyles of the Rich and Famous, or are they more the This Old House types? Now once you’ve made the decision to move forward with your friends, your first step should be to check in with a New York real estate lawyer because you’ll want to make sure you have the right to make coops or condos out of space that potentially isn’t zoned that way. Keep in mind, in addition to the cost of the property, you must also allow for legal costs and probably the cost to get proper approval from the zoning board, which could add significantly to your bottom line even before you’ve put up one square foot of drywall. Next, you’ll want to create a partnership agreement that spells out both the dollars you will spend, and how you can get out of the deal if need be. The real estate lawyer can tell you what’s standard in this type of agreement, but at a minimum, include in advance any events of default, like the death or disability of the parties, bankruptcy of one couple, and the way that the partners have a right to divide up their shares in the event of default. Lay it all out on the table ahead of time and ask probing questions like: How do you see the ownership working if one of you loses a job, if one couple gets a divorce, or if you are transferred out of state? What’s the buyout and does one couple have the right to force out the other in the event of default? If no event of default occurs but one couple would like to move, does the other get the right of first refusal once the property is on the market? What about transfer by will or as part of an estate? In the best-case scenario where both couples live in the divided space, what’s the annual maintenance for the common areas, the roof, and the entrance way? What happens if one likes to have noisy parties? There are a myriad of questions, most of which you won’t think to consider until you find yourselves with a problem on your hands — like one couple’s beautiful baby whose blood curdling screams can be heard through the inexpensive drywall you chose as the “fiscally prudent” construction option. Finally, set a very large requirement that you both carry insurance that covers not just structural damage in the event of a fire, flood, or other Act of God, but also the cost to replace fixtures and furniture so that the value of both properties doesn’t decline if you can’t afford to rebuild in the manner it had originally been created. The bottom line is that nothing about buying property is easy, and it’s further complicated when friendship turns into business partnership. That said, if you have a great deal on a piece of property in New York, it may be worth the risk and if that’s the case, good luck and let us know when our bedroom is ready!
Amy Feldman and Robin Epstein are the authors of the new book “So Sue Me Jackass! Avoiding Legal Pitfalls That Can Come Back to Bite You at Work, at Home, and at Play” (Plume).
If you have a question for the Bintel Brief, e-mail firstname.lastname@example.org. Questions selected for publication will be printed anonymously. New installments of the Bintel Brief are published Mondays at www.forward.com.