Money Matters - Simplified

Shacking Up With Strangers

Your home is your castle. But what if you have to share it with a bunch of people you don't know? As crazy as it sounds, that's exactly what many San Francisco residents have to do. With sky-high real estate prices, heavy restrictions on new development, and existing homes that are larger than most families can afford, prospective homeowners have come up with a novel way of owning property.


"Common" sense home ownership
Many San Francisco residents buy property with a method known as tenancy in common. Like many other communities that have been around for a while, San Francisco boasts many good-sized houses. In other areas, developers and small landlords renovate and divide these properties into apartments or condominiums, giving each resident an interest in a specific part of the property.

However, San Francisco has extensive laws that limit the use of these more typical strategies. Rent-control laws make being a landlord less attractive, granting tenants substantial rights that severely limit the freedom of the property owner to make future changes to the property's use. On the other hand, the city government also limits the number of existing homes that can be converted into condominiums. Combined with regulations that hamper new construction, the situation puts prospective homeowners in a very difficult situation.

Tenancy in common gets around these restrictions. But it requires multiple families who don't necessarily know each other to collectively enter into a detailed legal agreement.

Agreeing to agree
In order to ensure that all of the co-owners can cooperate with each other, families seeking to own property as tenants in common have to specify how they'll deal with issues that affect all of them, such as regular maintenance, property taxes, and home improvements. In addition, getting financing for a tenancy-in-common interest can be tricky. A lender that forecloses on a tenancy-in-common interest won't be able to sell it as easily as an outright interest in a house or condominium. While some banks offer individual financing to each co-owner, most larger banks, such as Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC), usually require all the co-owners to take out a single joint mortgage.

Risky business
Tenancy in common is inherently risky for the parties involved. No matter how well-drafted your legal agreement, it won't do you much good if you can't collect from your co-owners. Because of this, many agreements set up reserve funds that can be tapped if co-owners default on their financial obligations. Also, you should specify what will happen if one co-owner wants to sell to a prospective buyer. You may even want to do background checks on the families involved, to make sure you aren't getting yourself into trouble.

As complicated as buying a home is in typical situations, the need for a tenancy-in-common arrangement makes it even more difficult to understand. Although you'll probably want an attorney to help draft the legal agreement for everyone, you may also need a second lawyer to defend your own individual interests.

Nevertheless, in a tight real estate market like San Francisco, creative solutions like tenancy in common are necessary to work around the legal, regulatory, and financial obstacles to home ownership. As long as you know what you're getting into, tenancy in common can be the gateway to the home you've always wanted.