Should You Buy Real Estate as Tenants in Common?
Tenants in Common Hold Undivided Interests
Tenants in Common is one of the ways to hold title in real estate to property by two or more individuals. You cannot be a tenant in common by yourself. Sometimes this type of title is referred to as Tenancy in Common. There is no limit to the number of individuals who can hold title to property or real estate. A property held by tenants in common can be owned by two owners or 100+ owners.
Of interest to note, to mortgage a tenants in common property, in other words, to take out a loan, most lenders would require the signatures of all of the parties in title.
Otherwise, if a lender made a loan to only one party, only that person's portion of ownership would be security for the loan, and lenders want to be able to seize all of the property in the event of default, not just part of it.
On the other hand, if three people held title as tenants in common and one person stopped contributing to the mortgage payment, the remaining two would most likely still be liable for the loan to prevent default. This is one reason it's important to choose your tenants in common wisely.
How Are Tenants in Common and Joint Tenants Similar?
They aren't, really. Tenants in common hold one unity or requirement that is similar to joint tenancy. That unity is the right of possession. A common misconception is that tenants are like people who rent. The term tenants is this case is unrelated to rental property.
- Tenants in common can be between two or more persons who are related or who are unrelated; the relationship between the parties, if any, makes no difference. Husbands and wives can hold title as tenants in common. John Smith, Mary Johnson and Tallulah Bankhead can hold title together as tenants in common.
- Ownership can be held in equal shares or unequal shares. For example, John could hold 50% ownership, Mary 25% and Tallulah 25%.
- Co-tenants have the right to possess the property by one tenant or by all the tenants. Tallulah can live in the property by herself or share the property with John and Mary. Neither tenant can exclude the other.
- Upon death, the interest of the deceased co-tenant will pass to the co-tenant's heirs. If Tallulah died, John would still hold 50%, Mary would own 25%, but Tallulah's 25% would pass to whomever she designated in her will.
How Can Joint Tenants Become Tenants in Common?
Joint tenancy requires four unities. This is known as TTIP. Unlike tenants in common, joint tenancy involves right of survivorship, meaning the interest held by each tenant will pass to the other upon death. The four unities necessary to create joint tenancy are:
- Time. Each owner must receive title at the same time.
- Title. Each owner must receive title on the same deed or document evidencing title.
- Interest. Each owner receives the same proportionate and equal share of ownership.
- Possession. Each owner has the identical right of possession.
If one of the joint tenants sells or conveys the interest created in a joint tenancy to another person, the joint tenancy is broken, and a tenancy in common is created. Joint tenants cannot stop another tenant from breaking the joint tenancy.
Dissolving Tenants in Common
- To dissolve the tenancy in common, one or more co-tenants can always buy out the others.
- The property can be sold and the proceeds distributed equitably among the owners.
- A partition action can filed. This involves going to court and asking to sell the property under court order and to distribute the proceeds among the owners. When a co-tenant dies, you may see a partition action filed when an heir may want to sell and the other co-tenants do not.
Other Uses for Tenants in Common
Increasingly, many properties are being sold under a "tenants in common arrangement" instead of a limited or general partnership. A builder, for example, may sell portions of a new project to a number of investors, who will all share an undivided interest in the property. If you are considering a venture of this nature, it is wise to seek the advice of legal counsel to thoroughly understand your rights and liabilities.
Some apartment buildings and commercial complexes are sold to investors who hold title as tenants in common.
If this is a syndication and there is no SEC filing, you should ask a lawyer to review.
It is wise to seek the advice of a real estate lawyer any time you buy property. The advice contained in this article is not meant to be construed as legal advice and cannot be relied upon as such.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.