Is co-ownership a viable response to high housing prices?

Ontario’s Conservative government has revealed a new weapon in its battle against the province’s suffocating housing shortage: co-ownership. But as far as weapons to be deployed against formidable foes go, this one is the rough equivalent of parachuting into Libya with a picnic basket full of water balloons.

The Conservatives’ 16-page Co-Ownership Guide, released on December 11, paints a rosy picture of both co-ownership and co-habitation as ways to improve affordability, “maximize the space available in larger houses and heritage properties”, and “establish a community environment”.

While these goals are admirable, the guide is light on details, heavy on generalities, and devoid of any discussion around the conflicts that frequently plague such intimate financial relationships.

Few Ontarians are prepared for the unique challenges, both personal and legal, that accompany co-ownership. Encouraging them to pursue such a poorly understood and infrequently deployed strategy could be grossly irresponsible on the part of the government. It’s by no means the simple solution implied by the guide.

“Homeownership is difficult as is,” says Bosley Real Estate’s David Fleming. “Who’s going to help these people through the process of resolving conflicts and ultimately suing each other? Do they know what a shotgun clause is? None of these people are equipped to deal with the responsibility of co-ownership. How could they be? No one’s taught this in school. No one’s taught this in university.”

The Co-Ownership Guide does attempt to fill in some knowledge gaps. It defines a number of useful terms and touches briefly on what a co-ownership agreement should include, but there is no mention of conflict resolution or the severe financial pitfalls involved.

Implications for investors

Investors considering the co-ownership of a property must make ensure their intentions and goals are both fully aligned and unlikely to change. Cash flow investors, speculators and those more interested in long-term equity are all going to view the ideal use of a property differently. Before hopping in the car and heading out to view potential purchases, investors must agree on what that property will be used for.

Even then, conflicts are bound to arise.

“What if Person A likes a tenant and Person B doesn’t?” wonders Fleming.

Unforseen changes in attitude and situation must also be taken into consideration. One owner may see the value in short-term Airbnb-style rentals; the other may see it as a cancer on a city’s rental supply. If the market dips and one partner is better prepared financially to weather the storm than the other, who decides what the next move is?

“If two families own a house and one family gets transferred to Nunavut and they have to sell their house, what if the other family says, ‘No, I don’t want to’? Then what, you sue each other?” Fleming asks.

Then there is the issue of the shotgun clause.

A shotgun clause allows a co-owner the opportunity to either exit the agreement or consolidate ownership by setting a price for his share of the property. If the other owner cannot, or is unwilling to, meet the suggested price, the enactor of the clause then has the right to purchase the disputed share at the price he originally set.

In a worst-case scenario, perhaps where one partner is facing financial stress and has little cash on hand, the other could take advantage by setting a low price for the distressed co-owner’s half of the property, knowing full well that the price won’t be met and that his partner’s share will then be available for a criminally low price.

There is no mention of a shotgun clause anywhere in the Co-Ownership Guide.

“I’m all for thinking outside the box,” Fleming says. “I’m all for innovation. But I’m a realist, and this [plan] needs a dose of reality. If you have two people buying an [investment property] together, the odds that this ends up in dispute are extremely high. It’s human nature – especially when money’s involved.”

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