Buying a fractional ownership home with a group of friends or family can be a great way to save money and build equity. However, the mortgage process for a group is a bit different from the process for an individual.
- The loan will likely be structured as a commercial loan to your LLC. You want this, because it helps cement the liability protections that come with being an LLC. The group will be jointly and severally liable for the loan. This means that if one member of the group defaults on the loan, the other members will be responsible for making the payments.
- The interest rate on an LLC loan will typically be higher than the interest rate on a traditional mortgage. This is because LLC loans are considered to be riskier for lenders. As a rule of thumb, take whatever you see on BankRate.com and add 1.5 points.
- Plum builds protections into the SHARE Operating Agreement for co-owners. First, our SHARE (Shared Homeowner Agreement for Real Equity) operating agreement stipulates that a member who defaults will lose their right to vote on LLC decisions, lose use of the property, and lose the right to distributions until the deficit is covered. Second, the agreement calls for a 3% reserve fund that is funded at closing. This reserve fund can be used to cover unexpected repair costs or to make payments if a member defaults on their loan.
Once the loan is approved, the group will need to close on the property. At closing, the group will sign the mortgage documents and pay the closing costs. The reserve fund will also be funded at closing.
Some additional tips for fractional ownership groups:
- Make sure that all members of the group are financially stable. The lender will want to see that all members have good credit scores and a history of making timely payments. At Plum, we use our PlumCertified process to make sure that all members pass background checks, have credit scores that exceed 740 (“very good” or “excellent” in the US credit industry), and that they’ve show proof of liquid assets to cover the participation in a co-owned vacation home.
- Have a clear understanding of the LLC operating agreement. This document will outline the responsibilities of each member and the process for handling defaults. We’ve found that groups that know what questions to ask, discuss them and agree to a shared set of guidelines, and most important write them down in an operating agreement over-index for happiness. Our SHARE Operating Agreement makes this easy.
- Be prepared to pay a higher interest rate. As mentioned earlier, LLC loans typically have higher interest rates than traditional mortgages.
With careful planning and execution, getting a mortgage for a group can be a great way to achieve your homeownership goals. If you’d like to chat with a PlumConcierge about the lending process, or get in touch with one of our PlumCertified Lenders for a consultation, feel free to drop us a line!