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July 1 2007

Owning a vacation home with others?

By Neil L. Kimball For those who are considering purchasing or inheriting a cottage or other vacation property with other people, there are plenty of issues to consider. The practical and legal issues involved can be somewhat daunting when you stop long enough to consider them all. And, you need to determine how far you want or need to go in a legal document to address them. Part of this determination depends upon the parties involved. They may 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. undefined
Should a limited liability company be formed to own the cottage to limit the liability exposure of the owners? How will each owner share in the use of the property? 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 decisions be made on items such as decorating, maintenance, repairs, replacements, and other improvements? 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? What mechanisms or procedures are to be in place to pay for all of the expenses, taxes, utilities, association dues and insurance? Monthly or bi-annual contributions to a household account? What should happen if an owner fails to contribute his or her fair share? Should someone be elected to manage the cottage (arrange for maintenance, repairs, payment of bills, and collection of money from owners)? Should they be paid or otherwise rewarded for their service? If they do not do a good job, how are they removed as manager? How much authority will the manager have without having to seek approval from the owners (e.g., agree on a dollar limit)? Are certain weekends reserved as "work weekends" when all owners get together to work on the cottage to "open it for the season," perform maintenance and do repairs? If disputes arise among owners, how are they to be resolved? Can an agreeable neutral person serve as an arbitrator? Should you adopt a list of "House Rules" that all owners are expected to live up to (e.g., cleaning the house after your use, restocking the basics before the next owners use the cottage, etc.)? If an owner wants to sell his or her interest, what is the procedure? How is the price determined (appraisal or go by tax assessor.s valuation)? Should the payment be all in cash at the closing or can the price by paid over time? Can an owner simply give his or her interest to a child, spouse or other family member – or must the transferring owner offer the interest for sale to the other owners first? 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? Should they suffer a discount on the sale price based on how soon after their purchase that they want to sell? Selling one's interest early can be a financial hardship on the remaining owners. 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 might 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.
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 document. However, there is never any substitute for common sense and consideration of the feelings of your co-owners when trying to avoid conflict. If we can help you work through these issues and draft an appropriate agreement, please contact us.