Co-ownership Exit Strategy: Plan, Protect, Maximize Returns
Why plan a co-ownership exit strategy? Co-ownership eventually ends through sale, transfer, or death. Here’s how to avoid conflicts and protect your investment.
Why you need an exit strategy
Co-investing in a home may be one of the largest investments you make.
As a co-owner, you can lose more than just your original investment and your home equity. Your home, relationships, credit, and peace of mind are also at risk. But that's the bet that 61 million US co-owners take.
There are many unknowns, but here's what we do know:
- We all die.
- 100% of co-ownership arrangements will end through sale, transfer, or death.
- Property and tax laws don't provide co-owners the same protections as married couple homeowners.
Many co-owners never consider developing an exit strategy, and few actually take action.
Perhaps it's because humans aren't great at accurately assessing personal risk: we tend to underestimate risks like death1 and financial loss2. The World Economic Forum asserts Americans' "comprehension of financial risk is particularly low".3
And yet, risks exist whether we ignore them or miscalculate.
Remember…
The day before you die, you're alive.
The day before your lover leaves you, they haven't.
The day before financial catastrophe strikes, it hasn't.
Co-owners who avoid mapping out how to unwind co-ownership are walking a tightrope. Co-ownership always ends.
The real question is, what can you do about it?
When things gets real: 5 ways co-ownership ends
Below we explore some real-life scenarios and share preventative steps you can take to avoid disaster.
1. Co-owners break up
If almost 50% of marriages in the US end in divorce, imagine the break up among partners who are not married.
According to attorney David Matthews, a partner at Weinberg Wheeler Hudgins Gunn & Dial, "...with unmarried couples, you could never force the other side to buy you out. If one party wants to be really obstinate and not sell, the other party has a problem."
Attorney Lynn Strober, co-chair of the Matrimonial and Family Law practice at Mandelbaum Salsburg adds, "Unlike married couples, if there is a buyout between unmarried partners, tax issues may arise, as the transfer may be a taxable event."
💡 Caution! Transferring ownership interest can trigger a due on sale clause, which means the mortgage lender can demand immediate repayment of the outstanding loan balance.
Prevention: Don't wait until a split happens. Discuss, agree, and codify how you'd deal with this sort of situation. Then record it in your Co-ownership Agreement and update it as necessary.
2. Co-owners face an unexpected sale
Imagine that one co-owner suddenly decides they want out, intending to sell their share without discussing it with the rest. This could cause a lot of tension, and potentially a legal dispute, as the remaining co-owners scramble to buy out the exiting party or face a stranger owning part of their home.
Prevention: Define boundaries and stipulate an order of operations for handling different life events that could lead to an unexpected sale. Be sure to outline each party's rights in each scenario.
3. Dispute between co-owners
Even strong relationships crumble under the weight of money and ownership. A disagreement over home improvements or maintenance costs can escalate quickly into a full-blown conflict. A conflict that can't be resolved amicably may lead to litigation and even a forced sale of the property.
Prevention: Strong communication and clear guidelines on decision-making processes can help mitigate this risk. Invest the time to understand differences of opinion, then address issues before they become problems.
4. Death of a co-owner
A co-owner's sudden death can throw the entire co-ownership arrangement into chaos. Without a clear plan, the deceased's share of the property may pass to a relative (or friend) with no interest in co-owning, or worse, create legal and financial headaches for the surviving co-owners.
Prevention: A well-planned exit strategy—including a Co-ownership Agreement, Wills, and estate planning documentation—can provide structure and help avoid probate, unnecessary taxes, and added stress during a tough time.
5. Bankruptcy of a co-owner
If one of the co-owners falls into financial difficulty and files for bankruptcy, their creditors could come after all of their assets—and your co-owned home. That could lead to a forced sale of the entire property, leaving you and any other co-owners without a home and financially distressed.
Prevention: A strong co-ownership agreement can include mechanisms to protect the property and all co-owners in such situations.
Choose prevention over cure
When it comes to an exit plan, co-owners often:
- Wing it and hope for the best
- Use a templated legal document from the internet and believe they are "covered"
- Look for a remedy instead of taking precautions
The earlier in your co-ownership you can plan for your exit, the better. The best thing you can do is to get a plan together for how you'll unwind co-ownership before sh** hits the fan!
Ask and answer the right questions, build consensus with your co-owners, and ensure everyone involved is heard.
Record your decisions. If it is not in writing, it doesn't exist! Memories fade. Don't forget to revisit your exit plans over time. It's best practice to set a rhythm for reviewing and updating your agreements as life changes. At a bare minimum, an annual review makes sense.
We built Co-ownerOS™ to sanitize decision-making and collaboration. You and your co-owner(s) are empowered to make informed decisions and build consensus on how to handle different exit scenarios. You remove guesswork, mute drama, and gain peace of mind.
Co-create your exit plan as part of your Co-ownership Agreement. Revisit and update your plan as often as you and your co-owners like.
Provisioning for your exit will reduce the likelihood of many of the risks associated with an ending—planned or otherwise.
Why wing it?
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Sources
1 Andersson, H., Lundborg, P. Perception of own death risk. J Risk Uncertainty34, 67–84 (2007).
2 Stössel, Remo and Meier, Anna, Framing Effects and Risk Perception: Testing Graphical Representations of Risk for the KIID (May 15, 2015).
3 World Economic Forum (April 24, 2024).
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