With our many years of experience in the real estate market, we have recently noticed an ever-increasing interest in information regarding co-ownership. As a result of our perception of this market demand, we organized a public lecture on the topic in the autumn of 2019. Due to its popularity and success, we soon decided to hold another one. For your convenience, we would like to offer you a summary of the relevant information regarding this recent trend.
From the perspective of property in the field of real-estate, co-ownership usually results through one of the following avenues: property being returned in the course of restitution to more than one descendant of the original owner(s), property left to more than one inheritor in the original owners’ Last Testament, more than one descendant having a legal claim to the property, through donation, or through purchase of a share of a co-owned property. Another common and specific form of co-ownership is between spouses, in the form of Joint Tenancy or Community Property.
It can be said that co-ownership works well when all owners can be said to be pulling on the same proverbial rope by agreeing on a common strategy, keeping disputes to a minimum, and enjoying high yields: when co-owners are functioning as one organism there is no reason to try to change the co-ownership set-up. This kind of idyllic situation, however, often ends when one of the co-owners sells their share, dies, or enters into a marital relationship. It stands to reason that the smaller the number of co-owners, the greater the chance of harmony; two to three people tend to function as co-owner better than larger groups do, but of course every case is unique.
People often say: "My great-grandfather would turn over in his grave if he knew we were selling." Our response is that above all, grandfather wouldn't want the family to argue. Nothing lasts forever. In the past, perhaps, the property in question was a family treasure, but time changes everything, and today the situation may be altogether different. Gone are the days when each family had one designated heir, usually the eldest son, taking all. Today, owning property isn’t only an advantage –property management also carries with it many responsibilities, both in terms of time and finances. Does your sibling want to buy your share? Are you afraid you’ll end up losing in the transaction? Not necessarily; selling your share can allow you to invest money in other endeavours more in line with your personal interests.
The most straightforward option if you find yourself in the situation of being a co-owner is to change nothing at all about the current set-up. But every property requires care, and if you are not able to negotiate and make the right decisions that are sooner or later inevitable, the yield and/or value of the property itself will go down. One solution may be to divide the property, perhaps into individual housing units, with each co-owner managing their share as they see fit.
Or maybe you might benefit from an additional owner…do you own an apartment building? You might consider, for example, selling the loft at a bargain price on the condition that the new investor renovate the facade and roof. This way you can delegate both work and worries, but this will only be satisfying if you are willing to accept the cost of another party entering the game; in the case that you are indeed considering dividing or further subdividing a property, it must make reasonable sense to do so. If you are the co-owner of a studio, for example, it is difficult to convert it into two apartments. One reasonable change in a co-ownership setup is for one owner to buy the shares of another.
In case you decide you would like to sell the property, there’s an advantage to selling the entire building as a whole: not only is easier to find a buyer, and you can also afford to set a higher purchase price. The relative value of a square meter of a co-ownership share relative to the value of a square meter of the entire property usually moves in the range of 50-80%; it’s always more advantageous financially to sell the entire property. So ideally you can convince your co-owners to sell too.
Let’s look at the first strategy of managing a co-ownership: changing nothing. Two co-owners of an unrenovated building in Holešovice, usable area of 917 m2, with a total of 13 residential units and 2 vacant lots available for additional construction (278 m2) were not able to come to an agreement regarding possible changes. Changes could have guaranteed an annual rent of CZK 1,650,600, but their real annual rental income was only CZK 453,000. This income corresponds to that expected for an average 2+kk apartment; they could made up to 360 % more in rental income. Half of the building was sold, but the value of a square meter of the share was only 67% of the market value had the building been sold as a whole.
Let’s look at another example where the owners agreed on the sale of the property as a whole. The multi-purpose property in Nové Město had usable area of 1,440 m2, 5 residential units, 3 offices, 1 shop, 1 studio and a vacant lot of 300 m2. The annual rental income was CZK 1,972,068, but could have been up to 165% higher, i.e. CZK 3,243,960. One owner, investing his ¼ of the total sale into another property immediately increased his income by more than 50%.
Of course, in some instances co-ownership can also work very well; one such example is the case of an apartment building situated on a very busy street in Liben, where the two co-owners communicate very well and have an effective management approach. The building has 14 residential units totalling 496 m2 of usable area, and brings in an annual rental profit of 2,018,640 CZK.
The average time a piece of real estate is in the possession of a given family is 30 years. Sooner or later, the owner decides to sell, or ownership passes to descendants or designated inheritors upon their death, who aren’t sure how to put inherited real estate to best use. One option is to protect the ‘family treasure’ and hold on to the property, but in this case, it is extremely important to be able to agree on an effective property-management strategy with the remaining co-owners. If agreement is not possible, the best general advice is to sell. Naturally the property can be sold share by share, but selling as a whole will always be financially more advantageous.
There are several factors that affect the price of a co-ownership fare, but as with all real estate, first and foremost comes location. Although it isn’t in your power as a co-owner to move the property elsewhere, you can nonetheless weigh the future potential of the property’s setting: is development underway or being planned? New construction in the area can make the location more attractive by providing job opportunities and services, but it can also lead to disadvantages such as impaired views of the surroundings, increased noise levels, and less parking space. The condition of the property itself, and whether it has been reconstructed/renovated, also can play a big role. In addition, the higher the number of co-owners of the property, the less attractive the share is to a potential buyer: everyone knows that it’s easier to come to agreement with two additional co-owners than with ten; it is also more tempting to buy half of a property than a tenth of it, where the new owner risks having almost no decisive say in the property’s future management. In practice, however, one unreasonable co-owner can create more trouble than ten acting in the property’s and group’s best interests.
We can also consider co-ownership from a different perspective. If you decide to invest in real estate, the easiest way is to buy it as a whole. However, if you gradually buy a property up in shares, the sum of the total purchase price will most likely end up being substantially lower than if you had bought it in one piece; as we have mentioned earlier, the price of individual shares are never as high as when the owners decide to sell the property as a whole. If you choose this strategy, you can, in the end, payed a smaller total sum for your investment: handy investors are usually able to negotiate more favourable purchase conditions, as their co-owners know that it is more difficult to find an interested 3rd party than to sell to their own co-owner; in addition, they are usually resigned to the fact that they may need to be willing to compromise and sell for a lower than ideal price if they wish to sell their share.
The company already has more than 730 branches in 33 countries around the world, and our Prague branch has been operating for the last 12 years. When we started out, our branch specialized in the sale of apartment buildings, and co-ownership issues needed to be resolved on a daily basis. Today, we are also very active in the sale and lease of residential real estate, rental of office space, and, more recently, in the sale of agricultural land. If you have any questions regarding either co-ownership or otherwise, our team of real estate specialists is happy to be at your full disposal in person on Janáčkovo nábřeží by the river in Prague 5, or feel free to call anytime. Do you own property in Prague? We will be happy to prepare a free market estimate for you, as we said, with no obligation on your part. You thus have an opportunity to see how we work, and our reward comes when satisfied customers return to contact us again in the future.
Source: Dipl. Ing. Andreas von Schlik, CEO, & Ing. Lukáš Křenek, Team Leader for Commercial Sales
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