You and your best friends regularly vacation together and the conversation on the porch often turns to the idea of going in to buy a place together. Or you've dreamed of owning a vacation home at the beach or in the mountains, but the price is just a little steep for one household's pocketbook. Maybe you and your family members are toying with the idea of buying a place together you can use sometimes and rent for the rest of the year.

Is buying a vacation place in partnership with friends or family a good idea? What are the things to look out for?

Photos by CHRISTOPHER OQUENDO / Special (ENLARGE)

The group that bought Seventh Heaven set up rules for use that govern expectations. Family members, for example, are allowed to bring pets, but guests are not.

(ENLARGE)

In 1996, a group of seven friends from metro Atlanta went in together on this four-bedroom, three-bath St. Simons beach cottage, which they dubbed Seventh Heaven.

Christopher Oquendo/Special (ENLARGE)

Friends get together to talk about their home at St. Simons. (l to r: Denise Bennett,Brent Bennett, Lee Haddock, Ginny Haddock, Dan Norris, Kathy Norris, Joanna Conyngham, Paul Conyngham, Coleen Montero and Hugh Allen.

Bob Craig has been selling real estate in North Georgia for 28 years. He says property partnerships used to be rare, but they've become more common. "We think one reason is because our area has many houses with full basements that make for separate living areas with their own kitchens and bedrooms. That makes it convenient for two or more families to vacation together. We've also had clients purchase a home as a corporate retreat for their two companies, having it for their own use but being able to use it for meetings and seminars, and have the tax advantages of that use."

Craig and his son, David, are with the Hiawassee/Lake Chatuge office of Prudential Georgia Realty. David says, "I've had clients who were interested in a home for themselves, but then they realize they can afford a lot nicer house if they buy with someone else."

James Scavo, partner in the law firm Weinstock & Scavo, says, "This form of ownership is becoming more popular, particularly in the area of high-end real estate. An expensive property becomes more affordable when I'm buying it with half a dozen of my good friends."

Scavo, who drafted the Georgia Timeshare Act, notes partnerships may be subject to the act and partners may need a public offering statement and other documents. "Whenever you create a multiple-use program for several people to use as a home or other accommodation, there's always the question of 'Are you flirting with it being a time share?' Consult an attorney familiar with this area of the law to be sure you're going about things correctly."

Paul Conyngham and his five partners own Seventh Heaven, a St. Simons cottage they bought in 1996.

"We've had a group of guys who played basketball every Sunday night forever," says Conyngham. "We started going to St. Simons to go hunting, then it turned into a golfing trip and finally we started talking about buying a place. When I realized we were serious, my wife Joanna and I went to St. Simons to do some scouting. Everybody that wanted in had to bring $5,000 for their share of the down payment, and our good friend Hap Smith, a lawyer who also played basketball with us, drew up the agreement. At the time, there were seven of us, and the house is on Seventh Street, so we call it Seventh Heaven. The agreement was so good that it held up in court, which we found out when one of our original partners went through a divorce."

The partners

The metro Atlanta group now includes Conyngham, Brent Bennett, Lee Haddock, Dan Norris and Hugh Allen. "The thing about our group is that we had two builders, a plumber, a dentist whose hobby was gardening — people who were able to do the things that needed to be done on the house so we didn't have to hire a lot of work out.

The house

"It's a classic beach cottage," says Conyngham. "The interior walls and ceiling are all cedar, the floors are heart pine. The main level features one bedroom and bath, a kitchen, dining room and big living room, and a porch made into a family room. Upstairs there's a master suite with dressing room and bath and its own screened porch, and two other bedrooms. In these old St. Simons houses there was a sink in every bedroom, and then those two bedrooms share a bath. The partners added a pool as well."

Owners' perks

An owner's closet provides a place for stashing things guests don't have access to and a backyard shed stores the partners' golf cart and bicycles.

The finances

"On Hap's advice, we formed an LLC, and then we found a bank on St. Simons willing to give us a mortgage. We took out an 80 percent loan, and each of the original seven partners came up with 1/7th of the 20 percent down payment. We rotate among the partners who will be the 'manager' for that year. The manager pays the mortgage and sets aside money for major expenditures. In return, he gets an extra week at the house. We also hired a bookkeeper who pays the bills, and we have a CPA who does the taxes at the end of the year," Conyngham says.

Dividing up the weeks

"We have a draw party in the fall at somebody's house, and we randomly draw for the 14 summertime weeks. Then we draw for the remainder of the year. We set aside two weeks for the partners to go to the house and work on things like painting or replacing windows. The house is used all the time. Some of the partners use it for business; if we can't go, we lend it to someone," he says.

Renting the house

The house rents for $2,300 per week in peak summer season. "If I rent my two summer weeks, it virtually pays for my share of the house. And there are certain tax advantages."

Buying out

"One of the partners had to get out, so we took on another partner at that point, and then several years later when a partner opted to move to St. Simons full time, we just bought him out. Now we have just six partners," Conyngham says.

It's been a success

"Our group has done wonderfully. Our wives don't have a vote, as the smaller number of people is easier to deal with. In the beginning we thought that if we had a major dispute, the guys would just settle it by arm wrestling. Those days are thankfully over. The wives have always had a lot of influence through their husbands in decisions. In addition, they are in complete control of the interior of the house and always have been. I've contemplated helping people create partnerships because it's worked so well for us. I have often thought that it would be neat to go in business organizing these types of groups because of our success. We could locate the property, negotiate loans, do the partnership structure and show people how it all comes together," says Conyngham.

Their attorney's story

Hansell L. (Hap) Smith of Smith, Eubank, Smith & Tumlin drew up the Seventh Heaven agreement. "Virtually every imaginable issue was debated. The first issue received immediate 100 percent agreement. Wives were not allowed a vote on any issue. The second was much more difficult. Pets or no pets? The pet issue was hotly contested.

"Most members didn't want to allow pets at all. But that was a problem for two members, whose wives would not allow them to make the purchase unless their dogs were welcome. One wife had a German shepherd and a golden retriever who were members of the family. 'She loves them more than me,' the partner said, and his friends nodded in agreement, knowing it was true.

"Fortunately, a compromise was reached. Pets in the immediate family of a partner were permitted. Extended family pets and those of guests were not.

"Next up: college students. Several members had college-age students. Could they use the beach house without a chaperone? All recalled their own college days and unanimously agreed that a 'responsible adult' would have to accompany all college students.

"Since the group agreed to obtain a mortgage, financial responsibilities in their agreement were important. Terms were agreed for defaulting members, including a mandatory buyout if a default was not cured.

"The buyout provisions were carefully considered. Buyout events included death, divorce, attachment by creditor, financial default, voluntary withdrawal and transfer of membership interest to a third party without the consent of the members. More compassionate terms were provided to widows than former spouses — especially if they married a younger man with money who was better looking," Smith joked.

"An excellent provision included a mandatory optional sale every five years, at which time any member could elect to be bought out or have the right to sell to a third party if the remaining members couldn't find a replacement member.

"The agreement included a damage provision assigning financial responsibility for a broken lamp or window and whether the cost would be shared equally by the group or assessed against the member who was using the property at the time of the accident, depending upon a number of issues.

"Ten years later, there have been only two changes in the original investors, both extremely cooperative by mutual agreement. No deaths. No defaults. No forced buyouts.

"All of the original members remain great friends, who now have mellowed, no longer worrying if the cart girl likes their golf outfit. Today, ironically, the wives play a much greater and welcome role in all decisions and are appreciated for their choices."

TAX ADVANTAGES?

Michael Colquitt, CPA, of Downs & Colquitt says a partnership for a vacation home is different from a partnership in an investment property like an apartment building. "If you're using the property for personal use, the rules are very complicated, and you really need to talk to a tax adviser, particularly if you're going to be mixing personal and rental use. It's conceivable there might be tax advantages. If a partner receives rental income, that's considered income for tax purposes, which might be offset by the taxes and interest on any loan. Remember that there are very specific rules for second homes."

Colquitt also says that the property would be considered a capital asset and when sold, any gain would be taxed at capital gain rates. "Using the property for a bona fide business purpose may also allow the partner to write off some of their costs, but entertainment is another area where the tax rules are very complicated."

Colquitt concludes by saying that while a partnership in a vacation home may be an excellent investment, it's probably not the tax consequences that should be the driving force.

TALKING POINTS

If you're buying into an established fractional ownership program like a timeshare, the decisions about the use of the property and its operation have already been made and codified in the form of covenants, conditions and restrictions. If creating your own partnership seems like a good idea, here are a few things to consider.

• How will you handle cash flow? Will it be a cash sale with the individual partners bringing their share to the closing or will the partnership hold a mortgage?

• If there's a mortgage, how often will partners contribute their share? What will you do if someone is in default of their portion?

• Who will handle the bills? Into what account will the money go?

• How will the year be divided? Will all weeks be open to any partner or will some weeks be reserved?

• What kinds of groups can use the house? Just partners and their families? Extended families? College-aged kids alone?

• Will rentals be allowed?

• Will pets be allowed?

• How will property damage and maintenance be handled? Who will clean the house? And who pays for it?

• How will the partnership handle parties leaving the arrangement?