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How to buy a vacation home with friends or family

Sales of vacation homes have been rising sharply lately. Across the country, the number of vacation homes sold last year was up 30% from the year before, according to the National Association of Realtors.

Vacation homes now account for 13% of all home sales. The median price last year was $168,700. Interestingly, most vacation home buyers are under age 45.

Many people have long dreamed of owning a second home, but buying one can seem like a big stretch. One solution is to join forces with friends or family and purchase a home together.

This can be an ideal solution – you get to use the home for part of the year, just as you planned, but you can also share the cost, the maintenance work and the expenses with others.

But before you take the leap, it’s important to think through everything that will be involved, and what will happen if something goes wrong. You’ll want to have a frank conversation with your partners and draw up an agreement that covers all the bases – a kind of “real estate prenup.”

Here are some things you’ll want to take into account:

What will you use the home for? Are you primarily interested in using the home yourself as a getaway, or renting it for income? You’ll want to be on the same page about this right away, so you don’t wind up disappointing someone’s expectations.

How will the time there be shared? This is critical, and you need a plan. The problem is that it’s often hard to work things out in advance and set a schedule in stone, because everyone’s needs will change over time.

If a brother and sister are sharing a property and they both have small families, it might not be an issue at all. But if four or five families are splitting a home, there are bound to be schedule conflicts, and it can be good to have a formal system.

Some co-owners have created an online spreadsheet on which they can sign up for use of the house. Some randomly assign weeks at the beginning of the year, with the owners being allowed to trade and barter among themselves.

This type of system can be tweaked depending on your needs. For instance, all the owners might be guaranteed a certain number of weeks during the peak season, or families with children might be given priority during school vacations.

You’ll also want to consider whether owners who spend more time at the property should also contribute more to maintenance, insurance and utilities.

Who – or what – will own the property? Often, the best solution is to set up a limited liability company to own the real estate. The owners can set out all their rights and obligations in the company document. An LLC can also help with protection from creditors, and can make it easier to sell or give away an interest in the home. (On the other hand, it might limit your ability to deduct mortgage interest on your taxes.)

What happens if someone wants to sell is key. Even if your best friends plan to keep the home forever, they could suffer financial problems and need to back out, and you could wind up co-owning a home with strangers or people you don’t get along with. A good idea is to give the other owners a “right of first refusal,” which means that if someone wants to sell their share, the other owners have the option of buying that person out.

Since it can be hard to sell a fractional share of a home, many agreements say that every few years, the co-owners will each have the option to force a sale of the entire property.

How will expenses be handled? While it’s possible for owners simply to contribute money for repairs and other expenses “as needed,” this can lead to a lot of confusion and even conflict. In most cases, the better method is to have owners contribute a fixed amount of money on a regular basis that can be used to pay expenses.

It’s a good idea to have a separate bank account for the management of the property, which is especially easy if the property is owned by an LLC. A separate bank account will minimize issues over who owes what and who paid for what. And if you plan to rent the property to generate investment income, a separate account will make it much easier to track expenses and profits for tax purposes.

If you’re planning to use the property to generate income, you’ll want to make some rules about when the profits can be withdrawn from the account versus being kept there to pay future expenses.

What about routine maintenance? You’ll want a plan for this. Will you pay someone to perform routine maintenance? Will you take turns doing it yourselves? Will one partner handle the maintenance in return for making smaller financial contributions?

Should one person be in charge of handling all the maintenance issues? Will the other owners have veto power over expenditures?

If maintenance is going to be a big issue – say, because no one lives close enough to the property to easily take care of things as they arise – then it might be wise to consider purchasing a condo unit rather than a separate home. That way, a lot of the work will be handled by the condo association without anyone having to be on-site.

What other rules do you need? Some vacation home owners have additional rules for how the property can be used. For instance: How many guests can stay there at once? Can an owner let friends use the property if he or she isn’t there? Are pets allowed? Can children under a certain age be left alone there? What sorts of decorations and alterations are permitted? The more you plan ahead, the fewer disputes there will be down the road.

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