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Pitfalls are as follows:
More limited range of lenders to lend against 4 applicants on a mortgage (but if they lend to 3, they should lend to 4, so this may already be sorted)
If you want to move and the others do not, then that's a bit complicated. You would need to sell your share to the others, or sell to a new person to go on the property and mortgage via a transfer of equity with everyone (including the mortgage lender's blessing)
Should you want to move later with all 4 of you, and rent out the existing then you can potentially remortgage the current property, raise equity (you would need to leave approx 25% equity, for a BTL lender's requirements) and purchase another.
It's possible you can raise more against the property as a second home if you are not renting the property out, in which case your income needs to be able to support both mortgages.You would be subject to the new 3% second home additional stamp duty if you bought a new home and stayed owner of another, whether rented or not.
Having said all that, leaving with half a house is better than no house, and if the arrangement works for you, and you know the other owners well, it can allow you to live somewhere that you could otherwise not afford. Also if it is in an area of strong growth, and prices have increased substantially, then you would benefit from a proportion of this.
As the original idea was 3 people, are they wanting you to have a 1/3 share or 1/2 share? Often this is determined by the amounts of deposit that everyone puts down.
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Depending on your mortgage requirements you may find the lender effectively ignores the one or two lowest incomes, so in effect as a group you can't borrow more. This happened to some friends recently.
I would 100% recommend drawing up a contract to cover what the exit plan is and as many eventualities as possible.
One of the key advantages to doing this is you all discuss, understand and agree what outcome you are happy with collectively. And more to the point it's agreed now while you like each other.
Things to think about:
- minimum collective holding time (probably with a default position to sell at that point unless extended)
- maximum collective holding time (be realistic - use the difference between this and the minimum to set sales hurdles)
- equity splits in the property based on deposit and mortgage payments.
- valuation method.
- decision making (could be there be a deadlock? How will this be broken? Is there a deciding vote? - you could always use something totally impartial like a random number generator and a rule).
- event of a default.
- minimum collective holding time (probably with a default position to sell at that point unless extended)
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Acliff
hugo7
@Thoma
We've put in a load of offers around asking price but keep getting outbid.
Yesterday some old friends who are looking in the same area got in touch having had an offer accepted. They had a third person who was going to go in on the house but has pulled out. They've asked if we want to take her place.
The house is awesome. Much nicer than we could afford on our own but what are the pitfalls of being tenants in common? If we want to get our own place in a few years and we want to re-mortgage and buy as the four of us, using the equity of the first house, is this possible?
Will this leave us in a weak position if we leave with only the value of half a house?