|Owning Real Property
as a Line Family
One major issue of property ownership is the problem of power balance. If one person
or a married couple owns the property that the line family is living on, they have
legal exposure that other non-owners don't have. The owner's credit rating is on the
line. The owners have the financial risk. The owners have the liability risks.
(Liability tends to be an overblown concern, but you have to talk to a lawyer about that.)
As a result, the owners will feel the right – and responsibility – to have final say
on how the property is used. This makes sense, but when you are trying to form a line
family with egalitarian values you can run into problems. Perhaps you have a carpenter
as a family member. If her services are needed to enlarge or add a room or remove a
wall so that you have a bigger dining area, she will want to get paid for her professional
services if she has no vested interest in the property. Who will pay her? The remodel
was needed to accommodate the family, not the owners. Yet the property value has probably
increased by the addition of a room. Issues will come up when all the family members don't
share an interest in the property.
Options exist for owning real property. Just to make sure we are all talking about
the same thing let’s look at the definition of “real property” that we use in this website.
Real property is raw land and improvements including permanent structures, plants
in the ground, fencing with below ground support and landscaping like rockeries
and artificial ponds buried to ground level. Affixed plumbing fixtures in the permanent
structures like sinks and toilets are also real property.
Note: Appliances like refrigerators and stoves are not part of real property but
usually are treated as part of the sale in residential transactions. Above ground
pools, free standing fences and movable machinery and equipment are not considered
We are going to look at 4 options for owning real property. They are:
Ownership in Severalty:
Ownership of real property by a single person or single legal entity. A legal entity
is: people over the age of 18, LLCs, Corporations, Sole Proprietorships, General
Partnerships and other organizations able to enter into contacts, sue and be sued
and a host of other fascinating topics. We will explore this in more detail below.
In French Law the term mortgage literally means “death contract.” It provides
for the real property to be foreclosed on in the case of default by the purchaser
or for the debt pledge to die when the obligation is paid off. That pretty much
sums it up for US mortgages too.
Banks make money by collecting interest on the loan that is usually paid in monthly
installments. Monthly payments go toward the interest owned and a reduction of the
principal (the actual amount of money owed).
The monthly payment can also pay into reserve accounts used for paying
real estate taxes, property insurance, mortgage insurance and any other costs associated
with holding title to real property. Mortgage payments do not include maintenance
or utility costs. In a typical mortgage, the real property is the collateral for the loan.
One member of the line-family.info staff was party to a purchase of raw land where
there were 4 individuals on mortgage, three of whom were unrelated. This automatically
put them into a "Tenancy in Common" type of ownership.We are still
investigating the largest number of individuals that banks would be likely to agree
to have on a mortgage. This type of multiparty mortgage has some real advantages.
If one person falls on hard times, the others can pick up the slack until things
improve. Lenders evaluate everyone’s credit history. A less than stellar credit
score will be offset by the other borrowers if their scores are good. The lender
will give more weight to the primary borrower’s credit score. A primary borrower
is the person who makes the most money out of the group of borrowers.
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Lenders can determine the amount that can be loaned to your group by multiplying
the primary borrower’s annual income by 3 and adding half of the other individual’s
annual income. Otherwise the lender might simply add all the annual incomes together
and multiply by 2 ½. However they do it, you will get a larger potential loan amount
than any single borrower would. Another advantage of multiple borrowers is the
possibility of making a larger down payment. Larger down payments generally
result in lower interest rates and can eliminate a mortgage insurance payment.
Co-Ownership or Tenancy in Common
Building on the previous section… If you have joined with other people who are
not related by marriage to purchase real property, by default, you have a tenancy
in common or a co-ownership. Tenancy in common refers to the owners all living
on the property while co-owners might have one or more owners living elsewhere.
Otherwise we can find little difference between the two terms.
There are some things to consider about co-ownership and tenancy in common:
1. Each co-owner has an undivided/fractional interest in the entire property.
Normally – but not always – divided equally.
2. All co-owners can be legally forced, if need be, to pay their percentage share
of the costs of owning the property. Expenses (in addition to any mortgage payments)
are taxes, liens or other judgments against the property.
3. You think your bedroom is yours - wrong. All the co-owners have full access rights
to the property. If one owner feels restricted from access to the property, they
have the right to take it to court. If the court agrees, the other owners could
be forced to pay rental for the period of the denied access to the “wronged” party.
4. Each co-owner has an equal share in any profits or income generated by the property.
If one of the owners sells herbs from the garden at a local famer’s market, any
net proceeds must be shared equally amongst the owners – whether or not they contributed
to the effort of growing or selling the herbs.
5. No “right of survivorship” exists in this form of ownership. Each party may
sell, rent or further mortgage their interest in the property. In this way a nonfamily
member could buy their way into the line family property.
6. When a partner dies, their interest in the property is part of their estate
and subject to wills and probate.
We don’t know about you, but this seems like a recipe for trouble. But we’re just
telling you what’s available. All the choices are yours. So let’s look at another choice.
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What is it? Is it habit forming? Who’s doing it? All fine questions. First let’s
take a look at what a joint tenancy consists of. Four conditions are required for
a joint tenancy to exist. No condition is any more important than any other condition
therefore, no importance is implied by the order listed here.
All joint tenants own the property under a single title.
Equal Interest or Share
All joint tenants have equal interest in the property. This means equity, income
and liabilities associated with the property. It doesn’t matter if one person puts
more money into the mortgage payment and pays for all the maintenance. All joint
tenants own equal shares.
All joint tenants have equal access to the property and use of the property.
All joint tenants estates have their interest in the property for life or until
the property is sold or one of the joint tenants die. If there were only two joint
tenants, the survivor then has full ownership of the property – no argument or
challenge. If two or more joint tenants survive the death of a single joint tenant
then the title, interest and rights are equally shared among the remaining joint tenants.
Note: We found one reference saying that all the joint tenants must be involved
in the initial purchase of the property to have equal vestment. This means that if you
own a house you can’t add a joint tenant after you have taken possession of the house.
We have sifted through a lot of information and found many references to adding
joint tenants to existing titles. At this time the only state we have found with
a restriction on adding other parties as a joint tenant is Alaska. It only allows
joint tenancy for married couples. We found just one reference regarding Alaska,
the book Make Your Own Living Trust by Denis Clifford. It was an
excerpt on the Internet. We have not read this book and, therefore, can not comment.
Depending on the state you live in there are two remarkably different scenarios that
can occur in a joint tenancy. One: You or any one of your joint tenants can take out
a loan against your undivided percentage of the property. You or any one of your joint
tenants can sell their undivided percentage of the property. You could suddenly find
yourself with new roommates.
Two: In some states it takes a unanimous decision by all joint tenants to take out a
loan against the joint property. Everyone becomes a responsible party to any loan.
It also takes a unanimous decision to sell the property. If one person wants to sell
and the other does not, the person who wants to sell can file a petition to partition.
If the court grants the petition, a sale of the property is usually forced. Each
former member of the joint tenancy shares in the profits (or losses) on the sale.
Scenario one or two? Pick your poison.
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Now you’ve gone and done it.
Let's say, for sake of discussion that you add a person as a joint tenant to your
property title. One day you were queen of your castle, sole proprietor of the income
from the herb garden and unchallenged in your decorating and color schemes. Next
day you add a joint tenant. Congratulations, you’ve just given away half of your
house, garden income and linen selection authority. We really hope that this
person is worth it – for the long haul.
What can possibly go wrong?
You could die (after a long and full life of course). In that case, your joint
tenant automatically gets the house and garden. But what if you forgot to update
your will that stated that the house would go to benefit the
Society for Wayward Cats? Too bad for the cats, nothing in your will can break the
joint tenancy. Nothing and no one else has standing (a legal right) to challenge
the ownership of your joint tenant.
That's not so bad. Could something else go wrong? Yes, you could live in South Carolina…
because S.C. Code Ann. § 27-7-40 requires your deed to state that the property
owners hold the property, “as joint tenants with rights of survivorship, and not
as tenants in common” instead of just using the initials “JT WROS.” It’s really
not a bad idea to spell it out even if you don’t live in South Carolina.
Is there any more? Sure, without a durable powers of attorney if one person is incapacitated
by injury or disease, the other owner’s ability to manage the property is limited.
If you live in a title theory state (see map below). It means that when a mortgage
is taken out, the mortgagee has the legal title of the property. Title is transferred
to the purchaser only when the debt is paid or “satisfied.” Should one of the joint
tenants take out a mortgage – on their own – it may terminate the joint tenancy. In
Georgia other rules apply. See a real estate professional. It’s too much to go into here.
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T = title theory / L = lien theory
All the other states are lien theory states. In those states a mortgage is simply
a lien on the property, ownership (i.e. title) rests with the purchaser. In this
case a joint tenant taking out a separate mortgage does not affect the joint tenancy.
Because of all the issues we brought up, a joint tenancy might be more trouble than
it’s worth. It is an easy and low cost technique for group ownership of real property,
but we think you should strongly consider other options before going ahead with a
joint tenancy with right of survivorship.
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On the face of it there is little difference between a land trust and any other
trust document. The same three entities are there;
Trusts were discussed in more detail in the FAMILY FINANCES section. A land trust
is a revocable trust that lets individuals control real property as the beneficiary
through the trustee. Other legal entities like a family controlled LLC (limited
liability company) can also be the beneficiary of a land trust.
- the donor (who gave the land to the trust)
- the trustee (who manages the trust account)
- the beneficiary(who controls the property and enjoys the benefits of the property).
Protection from liens against the property is one of the advantages of a land trust.
It is easier than you think to be sued by an associate in a volunteer organization
for slander or liable. In a line family of 20, it is not too unlikely that someone
will get in a motor vehicle accident. Even a seemingly small and uncomplicated
accident can be worked by an unscrupulous lawyer into tens of thousands of dollars
or more in claims. Without adequate insurance the property could be attached by a
lien for payment of the judgment.
Perhaps your family has a custom bicycle business building recumbent tandems bicycles.
What would happen if a customer crashed their bike and blamed it on alleged poor design
or construction? Medical costs are huge, not to mention the alleged “pain and suffering” of
the customer with the lousy bike handling skills. An attorney working on a contingent
basis (a percentage of any awards) finding that you do not own much in the way
of assets may not bother with the case or will settle for much less.
Members of the staff of line-family.info have personal knowledge of situations
similar to those described in the previous two paragraphs. Having your real property
in a land trust can protect your real property from financial attacks. This is
because legal matters affecting the beneficiaries of the trust should not pass
through to the family property. We have seen it mentioned that one added layer
of protection is to have an attorney – not a line family member – be the trustee
for your properties. That way anyone attempting to find out if you are the beneficiary
of any trusts would come up against attorney/client privilege. That leads directly
to another benefit of land trusts.
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Many people in polyamory relationships are not “out” in their professional lives.
Some have family issues they wish to avoid. In 2012 this is the world poly people
live in. Land trusts give you privacy in so much as your interest in, or ownership
of, any land that is in a trust will not be easily discovered. An internet search
of public records will only show the name of the trust the land is held in. That
is because the title to the property is held by the trustee and they get title
through a Deed To Trustee document. The Deed To Trustee is the only document that is
in the public record and it only names the trustee and the name of the trust. The
unrecorded document is the Land Trust Agreement. This agreement tells the trustee
what their duties and responsibilities are and identifies the beneficiaries. The
management, uses and profits of the property in the trust accrue to the beneficiaries.
Get thee to a real estate lawyer.
Sometimes we think that land trusts were designed with line families in mind. For
example, beneficial interest can be directly given to new family members. You don’t
have to redraw the title because it is in trust. People’s beneficiary status can
be changed as needed with no public record created.
Investment real estate
Maybe your line family portfolio includes investment property. We understand that
some real estate investors hold each individual property in separate trust accounts. Then in the
unlikely event that their beneficiary involvement in one property is discovered,
all the other properties are still protected. Land trusts also make loans assumable.
Sole beneficiary interest in a property can be sold. With no public record of the
transaction, the lender’s “due on sale” clause in the mortgage is not triggered.
The bank will notify you if the loan goes into arrears. Make sure an attorney writes
the sale document so that the trust's beneficiary status reverts to you in the event
of default so that you can protect your credit rating and regain control of the property.
Real estate is a large financial investment no matter who you are. A line family’s
real property needs to be protected. We are not saying that you should not pay
your legitimate and reasonable debts. It’s just that large sums of money are attractive
to con artists and opportunists like the auto accident “victim” we mentioned earlier.
It is not unreasonable to think that an established line family (like the one we talk about
in the CHILDREN section) with 15 people earning an income would represent a large amount
of money. Using the average US wage figure for 2010 from the Social Security Administration
of $41,674/year we could imagine an annual line family income of $625,000. However, we believe
that everyone should have their own private monies. So let’s reduce the number by
25% and say that the annual family income is $468,800 per year. If this family has
been investing in a diversified portfolio, they could have many millions of dollars
in assets. A line family will be a tempting financial target.
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Family business real estate ownership
UPA (Uniform Partnership Act) stipulates rules about general business partnerships including
the ownership of land. A revised UPA was established in 1994. Since this is a section on
property ownership we will not go into detailing differences between the two. As of 2012
37 states have adopted UPA or something substantially similar. The states are as follows:
Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District
of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland,
Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota,
Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Texas, U.S. Virgin Islands, Utah, Vermont,
Virginia, Washington, West Virginia, and Wyoming.
The information in this article is not intended as legal advice. We try to provide
general information only. Laws are different from state to state and change all
the time. We are not experts in land trusts. You should talk to knowledgeable professionals
like attorneys and tax experts prior to transferring property into a land trust.
We gratefully welcome corrections and suggestions from licensed professionals in
the areas of law, taxes and real estate. Please contact us at: email@example.com.