Should You Buy Real Estate as Tenants in Common?
Tenants in common hold undivided interests
Tenants in common is one way for two or more individuals to hold title to real property. You can't be a tenant in common by yourself, but there's no limit to the number of individuals who can hold title to the property with you. A property held by tenants in common can be owned by two owners or 100-plus owners.
Sometimes this type of title is referred to as a tenancy in common.
Lender Issues and Financed Property
Most lenders require that mortgage documents include the signatures of all the parties who hold title in a tenants in common property. In other words, you must all take out the loan together. Otherwise, if a lender made the loan to only one party or "tenant", only one person's portion of ownership would act as security for the loan. Lenders would not be able to seize the entire property in the event of default.
If three people hold title as tenants in common and one of them stops contributing to the mortgage payment, the remaining two would still be liable for the loan to prevent default. It's important to choose your tenants in common wisely.
A common misconception is that tenants are people who rent. In this case, the term "tenants" is unrelated to rental property.
The Rights of Tenants in Common
Tenants in common can be related to each other or 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 Sally Doe can hold title together as tenants in common.
Ownership can be held in equal shares or unequal shares. For example, John could hold 50 percent ownership, Mary 25 percent, and Sally 25 percent.
Sally can live in the property by herself or share the property with John and Mary. No tenant or tenants can exclude the others.
Should one of the tenants die, her interest would pass to her heirs. If Sally died, John would still hold 50 percent and Mary would still own 25 percent, but Sally's 25 percent would pass to whomever she designated in her estate plan or to her relatives according to state law.
How Can Joint Tenants Become Tenants in Common?
Joint tenancy requires four unities known as TTIP. Unlike tenants in common, joint tenancy typically involves a right of survivorship. In this case, the interest held by each tenant would pass to the others upon death.
The four unities necessary to create a joint tenancy are time, title, interest, and possession. Each owner must take title to the property at the same time. Each owner must receive title on the same deed or document evidencing title. Each owner receives the same proportionate and equal share of ownership, and each owner has an identical right of possession.
Title usually reverts to a tenancy in common if these four unities aren't met. If a joint tenant sells or conveys the interest created in a joint tenancy to another party, 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
One or more co-tenants can always buy out the others if they elect to dissolve the tenancy in common. The property can be sold and the proceeds would be distributed equitably among the tenants according to their ownership percentage.
A partition action can also be filed. This involves going to court and asking a judge to order that the property be sold so the proceeds can be distributed among the owners. You might see a partition action filed when an heir wants to sell the property after a co-tenant dies but the other co-tenants do not.
Other Uses for Tenants in Common
Properties are increasingly being sold under a tenancy in common arrangement instead of a limited or general partnership. A builder might sell portions of a new project to a number of investors who will all share an undivided interest in the property. Seek the advice of legal counsel if you're considering a venture of this nature so you're sure you 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 the contracts and deeds.
Always seek the advice of a real estate lawyer when you buy property. The advice contained in this article is not intended as legal advice and should not 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.