Law and Real Estate

Co-owning a vacation home raises legal questions

May 31, 2014
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Co-owning a vacation home raises legal questions
A beachfront home in Oscoda on Lake Huron. Photo via fb.com

For those who are considering purchasing or inheriting a cottage or other vacation property with other people, there are plenty of issues to consider.

Ownership

A legal document can help parties start off on solid ground and define the expectations of each owner.

  • Should a limited liability company be formed to own the cottage to limit the liability exposure of the owners?
  • Should the purchase price be paid in cash at the closing or paid over time?
  • What procedures should be in place to pay for all of the expenses, taxes, utilities, association dues and insurance?
  • Should these decisions require a vote by a majority of owners on all issues or unanimous vote on some issues like improvements over a certain dollar amount?

The practical and legal issues involved can be somewhat daunting when you consider them all. You need to determine how detailed the legal document needs to be in an attempt to address all the issues.

Part of this determination depends upon the parties involved. They might be family or friends. Either way, you will need to anticipate the kinds of issues that can arise and how they will best be resolved.

Logistics

Once the cottage or vacation property has been purchased, the practical and legal issues are not quite over. Schedules and possible duties around the use of the property may need to be described in the legal document.

  • How will you allocate weeks (or other units of time)?
  • How do you fairly divide up the prime times (e.g., Fourth of July weekend at the cottage)?
  • How will each owner share in the use of the property?
  • Should someone be elected to manage the cottage (arrange for maintenance, repairs, payment of bills and collection of money from owners)?
  • Should there be monthly or bi-annual contributions to a household account to pay for repairs?
  • What should happen if an owner fails to contribute his or her fair share?
  • Can an agreeable neutral person serve as an arbitrator?

Selling

Selling one's interest early can be a financial hardship on the remaining owners.

When people buy a cottage together, they usually expect to co-own the property for a long time. What if one of the owners wants out right away?

  • If an owner wants to sell his or her interest, what is the procedure?
  • How is the price determined (appraisal or tax assessment)?
  • Should the seller suffer a discount on the sale price based on how soon after their purchase they want to sell?
  • Can an owner simply give his or her interest to a child, spouse or other family member — or must the transferring owner first offer the interest for sale to the other owners?

Inheritance

When parents leave a cottage to children as an inheritance, they may assume that all of the children will want to own the cottage.

Usually, family cottages carry with them a great deal of sentimental value. This value is typically at its highest right after the death of the parents.

One way of getting through this more sensitive period is for the parents to leave the cottage in a trust for a period of time (e.g., three years), together with an amount of cash necessary to maintain the cottage. The trust may provide that at the end of the period, one or more of the children may buy the interest of other children who have found that they don't really use the cottage as much as they thought they would. This approach gives the family a little time to let the emotion work its way out of the decision of how the cottage will be owned for the long-term.

Rights

A legal agreement among the owners is important to spell out the rights and obligations of the owners, so that everyone realizes what will be expected of them. It also helps avoid disputes, because most of the issues will have been anticipated and addressed in the agreement.

However, there is never any substitute for common sense and consideration of the feelings of your co-owners when trying to avoid conflict.

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