Wednesday, March 26, 2008

What is Equity Sharing?

What is Equity Sharing?

An equity share is an agreement between you (the seller) and the buyer to co-own the property. In an equity share, instead of selling 100% of the property, you agree to retain partial ownership. By giving up 20% of the sale price now, you could keep as much as 50% or more of the future equity.

For example, suppose your house is worth $600,000 but isn’t selling. A buyer comes along who is pre-approved for a $480,000 loan but has no down payment. To create an equity share with this buyer you sell for $600,000 but only take $480,000 in cash now. You “leave in” the remaining $120,000 as the down payment until the house is sold or refinanced by the buyer a few years later. Then, any equity is divided. Each owner is first repaid their contributions to principal (your $120,000, and the buyer’s principal payments) and each receives their percentage of any remaining equity.

Here’s the best part. As the “investor,” you are entitled to a larger share of the remaining equity than you might expect. For your 20% investment you might receive as much as 50% or more of the equity in the property.

A Solid Investment

So now you are an investor, but what kind of investment do you have? It is important to understand the specifics of an equity share investment before entering into an agreement.

Equity sharing is an attractive way to invest in real estate for many reasons. The buyer will live in and maintain the property, as well as pay all of the ongoing property expenses like taxes, insurance and mortgage payments. The agreement is also for a fixed term, usually 3-7 years, so you can simply wait while the property appreciates in value until the end date.

But the best thing about your investment is the leverage you get. You contributed 20% of the home’s value and received around 50% of the equity. At the end of the term the mortgage is paid off and each partner receives their (principal) investment back before splitting the remaining equity. Typical returns on equity sharing investments are between 10-20% per year. With annual property appreciation of 5% you could expect to make a 16% per year return on your investment. That can be an attractive result compared to the zero percent return earned by people who sell the usual way.

Is it Safe?

You may never have heard of equity sharing, but it has been around for a long time. It’s so common now, that the IRS has even developed special rules that allow equity sharing partners to each get the maximum possible tax benefits from their arrangement.

Your investment is secured by the property, and you already know everything there is to know about the property itself. There is always risk that the property won’t sufficiently increase in value before the end of the term, but there are provisions in the agreement to ensure you recognize a minimum return which you can specify.

About Home Equity Share

If you’re interested in equity sharing, there are several things you’ll need to ensure success. In addition to finding a suitable partner you need a lender familiar with equity sharing. You will also want to create and sign an “equity sharing agreement” (a contract) with your partner that protects everyone legally.

Home Equity Share can provide you with all of the tools and resources you’ll need to complete successful equity share. Through our network of independent agents, we provide services to home buyers and sellers free of charge in most cases. We can offer our highly detailed and time-tested Model Equity Sharing Agreement, and through our network of providers we can help you find whatever resources you may require to complete your transaction.

1 comment:

Anonymous said...

nice article.