The competitive nature of today’s market has increased home values across the country for the better part of a decade. More specifically, however, the median home value has increased nearly seventy percent since the housing market bottomed out during The Great Recession in the first quarter of 2012. In that time, acquisition costs have made it increasingly difficult for buyers to partake in the market in a traditional way.
Today, more than ever, prospective buyers need to find a more affordable means of acquiring real estate. Fortunately, there’s a solution: concurrent real estate acquisition strategies. In particular, tenants in common (TIC) agreements may help buyers acquire real estate that would have otherwise been unaffordable. With the help of a tenants in common agreement, buyers may finally realize their dream of homeownership, which begs the question: What does tenants in common mean?
The following is dedicated to explaining what tenants in common are and what it means for prospective buyers.
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What Does Tenants In Common Mean?
Tenants in common, otherwise known as tenancy in common, is a subcategory of concurrent real estate: a legal term used to describe co-ownership in a property or parcel of land. As the most popular subcategory of concurrent real estate, tenants in common doesn’t actually refer to renters. Instead, tenants in common is an arrangement between two or more parties who share ownership in a single real estate asset.
Not to be confused with a limited partnership, tenants in common is a way for multiple parties to go in on the purchase of a real estate asset. While each owner isn’t considered a partner, they do own separate interests in a subject property.
Tenants in common can be legally established by a deed or will, or each individual may agree to the idea of co-ownership. In doing so, everyone with their own interest in the property will be responsible for their part of the mortgage.
While the specifics of tenants in common are relatively flexible, the concept may be broken down into three subcategories:
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Space-Assignment Co-Ownerships (SACO-TICs): This particular type of tenants in common refers to co-owners who split ownership between different parts of the subject property. SACO-TICs are usually reserved for assets which are easily divisible, like triplexes and row houses.
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Time-Assignment Co-Ownerships (TACO): Similar to timeshares, TACOs represent fractional ownership. With a TACO, each individual owner is assigned a specific time to use the property.
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Equity Sharing Co-Ownership: As its name suggests, equity-sharing co-ownership will witness one owner use the property while others are simply investors.
How Does Tenants In Common Work?
Exercising a tenants in common agreement can occur at any time, with just about any property (commercial or residential). Regardless of current ownership, a tenants in common agreement can be made on a respective property provided the necessary owners agree to terms.
When two or more parties agree to share a real estate asset’s ownership by exercising a tenants in common agreement, each area of the home is split evenly between the group. In other words, no single owner may claim a specific part of the property. While their individual investment interests may vary, they still own the same parts as everyone else.
Tenants in common has become ubiquitous with group expenses. As a result, each owner is expected to pay into a group bank account. With the help of a monthly assessment system, owners will pay everything from mortgages and utilities to property taxes and maintenance by contributing to a combined bank account. The amount each owner is expected to pay each month is determined by their equitable interest in the property. The bank account is then used to distribute all of the payments necessary to maintain ownership of the property.
Joint Tenants Vs. Tenants In Common
On the surface, it’s easy to confuse joint tenants with tenants in common. After all, both refer to the ownership of real estate by two or more parties. In reality, however, there are several ways for two or more parties to own a single piece of real estate; these are just two of the most popular.
Both strategies allow several parties to take ownership of a single property. However, each owner in a joint tenancy agreement must receive the same equitable interest as all other owners. For example, a joint tenancy consisting of two owners will require each party to control 50 percent of the property; if there were four owners, they would all be required to own 25 percent. On the other hand, tenants in common may own different equitable interests in the property; there’s no need to make sure ownership is even between each owner.
Since joint tenancy requires each owner to own the same amount of equitable interest, each owner must take the title of the property at the same time the deed is acquired. Those exercising a tenants in common agreement, however, can do so whenever they like. Since equitable interest is interchangeable, there’s no need to be present at the acquisition of a deed.
Tenants in common agreements are much more flexible than their joint tenants’ counterparts. In addition to the lack of equitable interest requirements and the freedom to execute an agreement whenever you like, tenants in common agreements are also easier to remove yourself from. More specifically, removing an owner from a tenants in common agreement does not break the agreement. However, owners involved in a joint tenancy must jump through more hoops if an agreement is broken. If an owner in a joint tenancy agreement wants out, the property must be sold for the proceeds to be distributed evenly amongst each owner.
A few more key difference include:
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The Death Of A Co-Tenant: When a co-owner dies in a tenants in common agreement, the equitable interest may be passed on through the deceased owner’s estate. A joint tenancy agreement, on the other hand, allows the equitable interest to pass to the surviving owner.
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Marriage Default: Individual states will default to either joint tenancy agreements or tenancy in common agreements for married couples.
Property Taxes With TIC Properties
More often than not, each owner in a TIC agreement is held responsible for the subject property’s tax obligations; that’s because TIC agreements don’t legally divide physical real estate assets. Additionally, most municipalities responsible for levying taxes on real estate won’t be burdened with separating tax bills based on individual ownership in a single property. Taxing jurisdictions aren’t equipped to bill each owner in a TIC agreement individually.
Each tenants in common agreement is traditionally levied with a single tax bill. As a result, all of the owners are held liable for paying the property taxes. Under the rules of “joint-and-several liability,” each owner is liable for paying taxes, regardless of the size of their equitable interest.
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Example Of Tenants In Common
Let’s say, for example, Patrick wants to buy a specific home that costs $400,000. However, Patrick cannot afford the home by himself; he can only afford about one-quarter (25%) of the monthly mortgage obligations. Instead of simply passing on the opportunity to buy the subject property, Patrick can enlist the help of subsequent buyers to cover the remaining three-quarters of the mortgage obligations. Provided he can find at least one other buyer to purchase with him, Patrick may enter into a tenancy in common agreement. Since the property represents a great opportunity, Patrick can find two additional buyers willing to enter into a tenants in common agreement: Ashley and Linda.
In addition to Patrick’s twenty-five percent contribution, Ashley is willing to match his contributions, and Linda will cover the rest. In this scenario, Patrick and Ashely agree to each pay 25.0% of the monthly mortgage obligations, and Linda will cover the remaining 50.0%. Consequently, Linda will retain a 50.0% equitable interest in the property while the others will own 25.0% each.
The equitable interest is determined by how much each owner is paying into the property. The equitable interest will also determine how much each owner pays in taxes and benefits from appreciation. If the home is sold, the proceeds will also be distributed based on the individual ownership percentages.
Pros Of Tenants In Common
In an increasingly expensive real estate market, the concept of a tenants in common agreement is more relevant than ever. In addition to facilitating the acquisition of more homes, buyers may enjoy the following benefits:
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Facilitates the purchase of a property that one owner would otherwise not be able to afford.
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Tenants in common grants a level of flexibility unseen on other concurrent real estate strategies.
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The number of tenants can change depending on the needs of current or prospective owners.
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Not every owner needs to acquire the same level of equitable interest in the property.
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Each tenant benefits from the asset’s appreciation.
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Tenants in common agreements can be created or amended at anytime.
Cons Of Tenants In Common
Tenancy in common has proven to be a valuable tool for many buyers, but concurrent real estate agreements aren’t for everyone. Here’s a quick look at why prospective buyers may want to avoid entering into a tenants in common agreement:
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Each owner is responsible for every party’s share of costs, debts and taxes.
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Tenants in common agreements offer less protection for owners than LLCs and LLPs.
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Individual owners do not need the consent of other others to sell the property.
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Owners are not granted automatic survivorship rights.
Summary
Concurrent real estate strategies have helped countless homeowners facilitate the purchase of real estate, which would have otherwise been too expensive. Any strategy that allows co-ownership of a physical real estate asset aids in the democratization of homeownership, and tenants in common agreements are no exception. With the ability to split ownership between several parties, the dream of owning a home can become a reality for more people than ever before.
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