There are many ways to own a property, and tenancy in common is one of them. While it is an option, there are a few reasons why this kind of arrangement may not be the best way to secure real estate.
In this post, we'll define tenancy in common to give you a good understanding of what it is and help you understand the associated risks so that you are better equipped to decide whether it is the right option for you.
What Is Tenancy in Common?
There are many ways to own a residential or commercial property, and tenancy in common (TIC) is one of them. Tenancy in Entirety and Joint Tenancy are two other types of real property ownership.
Tenants in common agree to each hold an ownership percentage of the entire property, either an equal or different percentage, and if one of the joint tenants passes away, their heir will have the right to claim ownership of the property for the portion that their predecessor held rather than the joint tenant.
Furthermore, different times may be used to acquire an ownership interest in tenants in common. Consequently, tenants may be eligible to buy an interest after a number of years and at various times. Additionally, individual conveyances may be used to transfer ownership interests to each tenant in common.
How It Works
Owners who are also tenants in common have rights and equal or unequal undivided interest in every part of the property acquired with the same deed. However, each of the tenants may own a different proportion of financial interest in the building or piece of land.
Moreover, any renter may separately sell or borrow against their respective ownership interest. With regard to property tax and other property payments, all tenants in common will receive one bill. A well-drafted tenancy in common agreement will specify the liability of each tenant with regard to property taxes.
Why Tenancy in Common Can Be Beneficial
A structure or piece of land may be owned jointly by two or more parties under this kind of legal arrangement.
The main characteristic of a tenancy in common is that each business partner retains the option to leave their respective shares of the property to their descendants while also being able to sell their respective portions of the property.
Although there are sure benefits, the joint tenancy of this kind also presents a number of risks. We'll explore these risks in the next section.
The Problems with This Kind of Joint Tenancy
It's important to understand the risks involved before entering into this kind of co-ownership agreement. Let's look at some of the problems or disadvantages associated with tenancy in common.
Joint and Several Liability
Each tenant in common is an asset of each co-owner and is liable for the debts of all other owners. We believe that taking that kind of risk would be unreasonable for an investment. You must also worry about the other co-owners' creditors in addition to your own.
Every Co-owner Has the Same Ownership Rights
The biggest issue with tenants in common is that they have complete freedom over how they use their fractional ownership interest in the property. One of the joint owners may borrow money against their share of the property. The interest held by one owner is also subject to the creditors of that owner.
No Direct Right of Survivorship
If there is no will in place explicitly stating the transfer of ownership to an heir, family members cannot claim the right to the portion the deceased tenant in common owned.
Tenants in Common Are Free to Resell Their Portion
Existing tenants in common might learn that they now share ownership of the property with a brand-new co-owner who might not fully understand the motivation for the investment and how it works. The new tenant could force the present co-owners of a property to sell it by filing a partition action lawsuit.
How Can You Mitigate These Risks?
If you prefer this way of owning property, the good news is that there are ways you can prevent these problems.
Do Your Research About Every Co-owner Before Entering into an Agreement
Joint tenancy can pose many risks, so it's important to learn as much as you can about the people you're entering into an agreement with. If you know that a joint tenant has a gambling problem or a poor credit score, for example, you should think twice about the joint tenancy arrangement.
Use a Well-drafted Agreement
The tenants can avoid numerous drawbacks in common by signing a well-drafted written agreement. This is why it's crucial to have a tenants-in-common agreement created by a real estate attorney.
A clause in the agreement may grant the co-owners the legal right to refuse in the event that one of them decides to sell. The authority of the co-owners to approve or reject prospective buyers may also be covered under the agreement to protect existing tenants.
Make Sure You Have a Will in Place
Another way to ensure that your heir receives ownership of your portion of joint tenancy is to ensure that you have a well-written will in place that cannot be easily disputed. We recommend getting sound legal advice to ensure that you are doing the best you can to secure your assets in the event of your death.
Get Sound Legal Advice
It’s also important to seek reliable legal counsel from an experienced lawyer that deals with real estate transactions. He or she can help you identify any potential problems and offer solutions to help mitigate risks.
The Bottom Line
Although tenancy in common might seem like a favorable option for owning real estate, there are several disadvantages that you need to be aware of. Joint liability, the lack of right of survivorship, and more could make this kind of arrangement risky.
Fortunately, there are steps you can take to prevent or mitigate the risks involved. We recommend seeking legal counsel before deciding whether tenancy in common is the right way to go.
If you need help managing your property, you can turn to DoorLoop. With innovative features to help with your accounting, rent collections, and agreement creation, you can make the most of your tenancy in common arrangement.
Want to learn more? Read more about the laws in play in your state and download the free forms you need for your rental business.