Two similar forms of property ownership you may come across are joint tenants and tenants in common. Despite the use of the word tenants, neither has to involve renting or renters. Both are ways for a pair or a group of people to own a property together, but the terms, conditions, rights, and responsibilities in each form of partnership are different.
So what Is “Tenants In Common”? Tenants in common is a form of property ownership where two or more people own a piece of real estate together. There is no limit to the number of joint owners, and they do not necessarily own equal shares in the property. If one person in a “tenants in common” agreement dies, their share of ownership passes to their estate.
This definition gives you the bare bones of a tenants in common arrangement, which is also sometimes referred to as a tenancy in common. However, if you are about to take your first steps into the world of property investment, there is a great deal more you need to know about this type of ownership.
What Is Tenants In Common?
We’ve covered the short and snappy definition of Tenants in Common so now let’s take a look at the details.
When two or more people decide to buy a property together, they may do so by purchasing as Tenants in Common. In this form of ownership, the property is divided into equal shares, but each member of the group may own an equal or a differing percentage of those shares.
Imagine three people, Sam, Jess, and Jake, buy a property together using a tenancy in common ownership agreement. Sam puts up half the money and so has 50% of the ownership while Jess and Jake each put up a quarter of the money and therefore acquire 25% of the ownership each. This is an important point. The division is in ownership and not in the property itself. So Sam does not own 50% of the property. Sam has 50% ownership.
Even though the people in this example do not have equal percentages of ownership, they all have an equal right to use the entire property. None of the tenants can exclude one or more of the others.
In addition to the equal rights of use, there are also equal responsibilities, including for taxes and other debts. So, for example, all tenants in common are responsible for the whole of the property tax bill and not just for the proportion of the bill equal to the proportion of their ownership.
Therefore, using the example above once again, Sam, with 50% ownership and Jess and Jake, each with 25% ownership are all legally liable for 100% of the tax bill. If Sam pays 50%, Jess pays 25% and Jake cannot or will not pay their share, Sam and Jess can both be held responsible for the unpaid portion.
Is Tenants In Common The Same As Joint Tenancy?
There are two main differences between a joint tenancy and a tenancy in common.
- If one person wishes to leave a joint tenancy agreement, the other property owners cannot merely buy that persons share. Instead, technically speaking, the property must be sold, the proceeds distributed among all of the owners and the joint tenancy agreement dissolved.
On the other hand, with a tenants in common agreement, portions of the ownership can be bought and sold at any time. So, with our three tenants in common from the example above, Sam can decide to sell up, Jake may choose to buy half of Sams ownership taking Jakes total share to 50%. Meanwhile, Sam could sell the remaining 25% to someone new.
The make-up of the ownership group and the percentages of the ownership they own can change without the tenancy in common being dissolved.
- When someone who is part of a joint tenancy agreement dies, their portion of the tenancy is shared between the surviving members of the agreement. This happens whether they are related or in any other way, connected or not.
Therefore, for example, when a couple purchases a house as a joint tenancy when one half of the duo dies, the other automatically inherits and owns the entire property.
This is not the same as tenants in common. If that same couple purchases a property together and uses a tenancy in common when one dies their portion of the property goes to their estate, to be distributed according to their will or the executor of the estate.
Advantages Of Tenants In Common
There are several advantages to buying a property with friends, relatives, or other investors as a tenancy in common, including:
- You can purchase a more expensive property than you might otherwise be able to afford as an individual. This is why many people are turning to a tenants in common form of ownership. Not only does it allow you to buy more than you could as an individual, but it also allows you to share the ongoing ownership costs of a home.
- You can buy and sell pieces of ownership at any time. When you have an ownership interest in a property through tenants in common you can buy an additional interest from any of your fellow owners who wish to sell, and you can sell any or all of your interest. As long as a seller can find a buyer for their interest, and the other owners agree, the tenants in common can continue indefinitely.
This makes tenants in common a particularly good bet for investors. Why? Because they have greater ownership flexibility and do not have the time, trouble, and cost of dissolving one ownership in order to sell-up and start again in the way they would with a joint tenancy.
- You can decide who gets your share when you die. Having the other owner(s) of a property inherit your share is fine if you are buying with someone you have a personal relationship with, but when it is a business arrangement – not so much. You do not want to have your valuable assets acquired by your fellow owners, no matter how much you like them.
Tenants in common allows you to leave your share of the ownership to whoever you wish.
Disadvantages Of Tenants In Common
Tenants in common is not right for everyone, or for every situation. While it is an excellent way for people to begin investing in property, there are some potential problems to be aware of.
- One person can force the sale of the property. Although it is possible for the participants in tenants in common to buy and sell their interests at any time, a seller cannot always find a person who is looking for an interest in a property.
In this case, if one member wants to exit the tenancy in common but cannot find a buyer, that member can apply to the courts for what is called a partition action. This effectively forces the sale of the property and distributes the proceeds between the owners.
- Everyone is equally liable. There are two ways in which equal liability can cause a problem with tenants in common.
The first is if one of the owners finds themselves in financial difficulty. Through no fault of their own, that owner may become unable to fulfill their obligations, and the other owners find themselves in a position where they must find the extra money, sell the property, or risk losing their investment.
The second is if one of the owners just decides to stop meeting their responsibilities. In this case, the remaining owners are left in the same “pay the difference, sell, or lose the property” situation.
- Mortgages can be a problem. If one of the owners of a property owned by tenants in common requires a mortgage, the lender will require all owners to sign the loan agreement. They do this to ensure that if the borrower defaults on their payments, the bank can force the sale of the entire property and recoup the monies owed.
- If one owner dies, there can be issues. While the ability to bequeath your ownership is an advantage, the other owners being able to leave their ownership to who they like can be a problem.
Firstly the person who inherits the ownership is often uninterested in holding a portion of a property, as well as being responsible for the ongoing costs. In this case, the person who has been left the ownership may offer the other owners the chance to buy them out. If this does not happen, or the remaining owners cannot afford to purchase the inheritor often applies for a partition action and a sale of the property is forced.
Secondly, the new owner may be happy to retain their ownership but may have a personality or a business approach which directly conflicts with the original owners. In some cases, this can be managed, but in others, it can make continuing the tenants in common a miserable experience.
Ending Tenants In Common
As well as using a partition action tenants in common can be terminated anytime the owners agree, simply by selling the property and dispursing any proceeds.
Do Many People Use Tenants In Common?
While tenants in common was previously used predominately for business partnerships and investment properties, it is becoming more widely used for personal use.
For example, tenants in common has become the default form of joint property purchase in the state of California. Unless the people involved state otherwise when two or more people buy a property together in California, the form of ownership is assumed to be tenancy in common.
Tenants in common is also becoming a popular form of ownership for property developers, especially those who are building structures which would previously be sold as condos.
Tenants in common is a form of ownership where two or more people can share the costs of buying and owning a property. Each owner may purchase a different size slice of ownership but, regardless of the size of their slice all owners have equal rights to use the entire property and cannot exclude one or more of the others.
The equal rights of use come with equal responsibilities for all costs and debts incurred as a result of ownership.
Owners can buy and sell any all of their ownership interest at any time, and the tenants in common can exist indefinitely if nobody wishes to bring it to an end. If one owner does want to end the tenants in common, they apply to the court for a partition action to force the sale of the property and have the proceeds distributed among the owners.
Unlike a joint tenancy, if one owner in tenants in common dies, their share is not divided between the remaining owners. Instead, each owner can leave they ownership to anyone they wish via a will, or, if they die without a will, the ownership will go to the deceased estate and will be dealt with by the executor.
All in all, Tenants in common is an excellent and flexible way of investing in property, especially as it allows you to own much more than if you were to invest in property alone.
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.