Co-Ownership of Vacation Properties and Second Homes
Vacation properties and second homes are very familiar to me. I used to live in Gold Canyon, a small town in Pinal County east of Phoenix, Arizona. Gold Canyon has a significant number of “winter visitors” (also called “snowbirds”). I was one of the rare full-time residents. My Mom and Dad are snowbirds, following the sun between southeastern Wisconsin and southwestern Florida’s Gulf Coast. They recently sold their home and moved to a brand new no-maintenance condo. This condo project is packed full of lively retirees all winter and is blissfully quiet and peaceful in the off-season.
Potential buyers have approached me for advice about buying vacation properties with others. For example, a family pools their money to buy a vacation home. Two or more couples vacation together and decide they want their own home. I’ve also talked with corporate representatives about buying a shared corporate retreat. Generally, each owner has a certain share of the property and is a party to the mortgage.
Usage rights are generally divided one of two ways.
- Assignment. Each owner has exclusive use of the property for a specific number of days. Each owner may occupy the property exclusively during these days or may rent the property during this time. (When renting, that owner keeps the rent but is responsible for upkeep, cleaning, and repairs after the tenant leaves.)
- Pay to Play. Each owner pays a pre-determined fee for each day/week/month of use. The fee and any rental income is used to pay expenses and mortgage payments.
Unfortunately, a lot of these excellent ideas fall apart with bad feelings or worse because business is done with a handshake. It is absolutely vital to create a formal operating agreement. At minimum, any operating agreement should consider these six things:
- Mortgage
- Who is on the mortgage note?
- Who is responsible for physically paying the mortgage (i.e. mailing the check or depositing payments into an account)? Should there be a back-up in case of illness?
- How and when does the person who pays the mortgage get paid by other owners?
- How will emergencies be handled someone does not pay their share of the mortgage? What penalties should apply for non-payment?
- Vision
- Is there a shared vision for the property? If so, this should be noted. (For example, one owner envisioning using a home on the shore for fishing may not co-exist well with another owner who wants a party house.)
- Expenses and Budget
- How will cleaning, standard maintenance, furnishings, repairs, and improvements be addressed?
- What money should be budgeted for emergencies?
- Are there municipal, county, or state licensing fees to be paid?
- How will things like special property tax assessments, property tax increases, and insurance increases be addressed?
- How will financial shortfalls be addressed at bill-paying time?
- Dissolution
- What happens if one owner wants to sell? May they sell their portion of ownership to the other owners? Will there be a right of first refusal?
- How will bringing new owners into the group be addressed?
- How will the death of an owner be addressed?
- How will any sale of the property occur, and how will expenses and profits from the sale be divided?
- Use
- How will the owners decide who has use of the property at what time?
- How will off-season vs. on-season be considered? (For example, January is very different than July!)
- Ownership and Tax Consequences
- How will the property be owned? Tenants-in-common or Joint Tenancy? Through a Trust? LLC? Corporation or S-Corp?
- If the property gets rented, how will depreciation be divided?
- Should a CPA or tax preparer be involved?
Operating agreements are more complex than people think! The most successful partnerships are backed by a solid operating agreement created by a real estate lawyer. Given the costs involved with owning a vacation home, the money paid to an attorney to draft an agreement is a minimal but sound investment.
Do you have any questions about vacation properties and second homes? Even if it’s outside of Wisconsin, I keep in contact with other competent real estate brokers around the country and even internationally. I can also help to answer your questions about the process. Please don’t hesitate to contact me; I’m happy to help!