Million-dollar thought experiment

I was talking with some friends recently and the topic of housing came up. Even with the recent declines, housing in the Seattle area is still ridiculously expensive. According to the bubble blogs, prices are back down to where they were in May 2006, but things were overpriced back then too, so it doesn't help as much as it might.

During the conversation the idea of group-purchasing and sharing costs came up. It piqued my interest, so I decided to run the numbers and do a thought experiment.

Imagine a group of three friends who want to buy a house together. Let's say they are looking for something in the range of $1 million. How well would it work?

If each person can put down $100,000 as a down payment, the total mortgage on the house would be $700,000, or $233,333 per person. As far as I can tell from reading Wikipedia's "co-tenancy" page, it looks like each person would have a separate mortgage on their portion of the house. So each person would get a $233K mortgage, which at current 30-year fixed rates, would come out to about $1350 per month.

This $1350 number surprised me. It's a bit more than I currently pay in rent, but it's nearly the same.  Since it's fixed, it wouldn't go up either, unlike apartment rent. I am sure that in a couple of years my rent will easily be more than $1350 and continue to increase.

Of course, there are additional costs associated with owning instead of renting, such as property taxes. But by my quick calculations, it looks like those would be roughly compensated for by the income tax deductions for mortgage interest (yay for the "ownership society").

So if I could pay what I'm already paying and use it to build up equity rather than throwing it down the drain, it certainly seems like a good idea.

What kind of house could you get for a million dollars? This is where it gets interesting. I did a search for houses nearby where I live with at least 3 beds/baths in the approximate range of $1 million. Here are a couple representative houses:

House #1: http://www.redfin.com/WA/Redmond/13524-157th-Ct-NE-98052/home/450085

$1,075,000

This is a pretty decent house, with 4,000 square feet, 3-car garage, 4 bedrooms, 3.5 bathrooms, and a half-acre of woodlands.

House #2: http://www.redfin.com/WA/Redmond/17304-NE-144-St-98052/home/450854

$989,000

This house is a bit older and smaller, but a bit less expensive as well. It also has the requisite 4 bedrooms, 3 baths, 3-car garage, as well as a rather large back yard for the horses to run around in.

Both houses are vastly better than my current apartment, but I could still live in one of them and pay about what I'm paying now. Something seems impossible here - what's the catch?

As best I have been able to figure out, the catch is probably the fact that you would have to live with two roommates, and it would be significantly more complicated than a regular apartment since you would all own the same house. As soon as one person wants to move out, get married, or make improvements it becomes a huge hassle for everyone. In the worst case scenario the house might suddenly need to be sold out from under you because your roommate went bankrupt or got deported.

Still, having to have 2 roommates does not seem that bad, compared to the greatly increased quality of living and the financial benefits of ownership. Am I missing something obvious?