(NOTE: This popular article originally aired on February 15th, 2008, on our old blog site. We are posting it here so new readers can enjoy it, too)
One of the biggest concerns about equity sharing is the inherent complexity of the agreement (contract). There’s a good reason for the complexity, however. Sharing property between two or more people requires careful consideration of all of the possible outcomes. By planning ahead, you can ensure that you are well protected and receive a fair outcome no matter what happens with the property or your co-owner(s).
For example, you may agree to a five-year term. But what happens if after five years the property has not appreciated enough to provide a reasonable return on investment? A good equity sharing agreement (ESA) must allow for this possibility and specify the minimum appreciation required before the property may be sold. If the 'required appreciation' is not reached, you can extend the agreement yearly until it is. This number should not be so high as to cause the agreement to continue in perpetuity. It should just be a hedge against loss, something like 3 to 4% appreciation per year is common.
A good agreement also protects the investor in the unlikely event that the Occupier (person who lives in the house) misses mortgage payments or fails to maintain the property or meet their other obligations. One option is to allow the investor to buy out the Occupier at a discounted amount payable in installments, or to sell the property and discount the Occupier's equity as a penalty. In addition to writing these protections into the ESA, investors can also record a deed of trust that will allow them to foreclose at default.
Similar provisions can protect both parties’ interests in the event the other party becomes involved in a bankruptcy, probate or other court action. Here again, a well written ESA is the key to protecting everyone. With a good ESA, the difficulty posed by one party’s default is offset by a financial advantage afforded to the other party.
Sometimes the Occupier is forced to move due to unforeseen circumstances. Your ESA should allow for this possibility as well, as long as basic conditions are met. And if one party needs to terminate the agreement early, the ESA can and should define the terms and consequences.
While it is unlikely that you will encounter these problems during your co-ownership, it is critical that you develop an ESA that considers these worst-case scenarios in an intelligent, equitable way. Though complex, a good ESA is the protection that allows two strangers to come together, confident that each will abide by the rules or accept pre-defined consequences.
The HomeEquityShare Team
Friday, November 14, 2008
Can’t Sell Your House? Try “Equity Sharing”
(NOTE: We posted this article to our old blog on March 13th, 2008, and are now migrating it to this new blog so readers like you can access it.)
That’s right! Even in a tough market, there’s a way you can quickly attract multiple buyers and sell your property for the fair market value.
Using a little-known, but well developed practice called equity sharing, you can take equity out of your property immediately, and move on with your life.
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 Great 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.
For more information please visit us on the web or reach us by email. We look forward to speaking with you.
That’s right! Even in a tough market, there’s a way you can quickly attract multiple buyers and sell your property for the fair market value.
Using a little-known, but well developed practice called equity sharing, you can take equity out of your property immediately, and move on with your life.
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 Great 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.
For more information please visit us on the web or reach us by email. We look forward to speaking with you.
Have We Hit the Bottom Yet?
One of the most common questions we get is “Do you think the housing market has hit bottom?” In other words, are home values likely to continue dropping or will they start to rise again soon?
Now, we can understand why people ask this question. It’s natural to wonder if your new house will grow in value sooner rather than later. This is especially important given that successful “equity sharing” depends on real estate continuing its long-term path of steady price growth.
While no one can predict the future, we do have a crystal clear answer to the question: It doesn’t really matter.
Yes, you read that right. It simply does not matter if the market has hit bottom or not.
Our logic is simple. We believe the old adage that “there is no such thing as a national real estate market”. Instead,
In other words, when you see headlines stating that the real estate market “dropped X% over the past year,” don’t be fooled. They are talking about the nation as a whole, not individual markets.
Perhaps more importantly, good deals exist in every real estate market. Even in the most dire markets – ones that have seen the biggest price drops – we see savvy buyers picking up undervalued properties. These properties, often a result of foreclosures, can be purchased well below their market price. They are poised for substantial price appreciation.
The key is to do your homework. Closely analyze the property before committing. Consider the individual property as well as the local and regional market. And, of course, always consult your financial adviser and attorney before entering into any property transaction, be it equity sharing or something else.
And don’t forget, equity sharing comes with a safety net. If the property does not appreciate as much as the partners hoped, then the partners simply extend their agreement until they reach their target appreciation goal. Such automatic extensions are easily built into the Equity Sharing Agreement, protecting everyone’s financial interest.
During property booms, it’s hard for people to imagine the good times ever coming to an end. But they always end. And during real estate downturns (like the current one), it’s hard to imagine the market ever booming again. But it always bounces back. This one will, too.
So put away the crystal ball. Stop watching the national trends. Instead, pick the area where you want to buy, then find its hidden gems. And always remember that you are buying an individual property, not an entire zip code. Great deals abound no matter what the national market is doing. With a little homework, you can find them, too!
Best regards,
The Home Equity Share Team
Thursday, July 24, 2008
Welcome to the world of "equity sharing"
Welcome to the new Equity Sharing Blog! We are excited to offer this new forum for things related to real estate co-ownership, aka "equity sharing."
Have today's high prices and tightened lending standards put home ownership out of reach? Would you like to sell your existing home but can't? Are you an employer trying to recruit or retain the very best employees? Or maybe you're an investor who seeks a creative investment opportunity? Recently divorced? Interested in helping a family member with a down payment? Facing foreclosure?
Regardless of your situation, real estate "equity sharing" can help. This proven practice with a hundred-year history may be right for you.
We look forward to updating this blog with loads of articles, questions, answers, and other information. Our staff have helped thousands of people with equity sharing transactions over the past two decades. We can help you, too.
Please visit this blog frequently to learn more. Even better, click on the "subscribe" button to the right of this entry. When you're ready, go to HomeEquityShare.com and get started with an equity sharing transaction.
Sincerely,
The Home Equity Share Team
Have today's high prices and tightened lending standards put home ownership out of reach? Would you like to sell your existing home but can't? Are you an employer trying to recruit or retain the very best employees? Or maybe you're an investor who seeks a creative investment opportunity? Recently divorced? Interested in helping a family member with a down payment? Facing foreclosure?
Regardless of your situation, real estate "equity sharing" can help. This proven practice with a hundred-year history may be right for you.
We look forward to updating this blog with loads of articles, questions, answers, and other information. Our staff have helped thousands of people with equity sharing transactions over the past two decades. We can help you, too.
Please visit this blog frequently to learn more. Even better, click on the "subscribe" button to the right of this entry. When you're ready, go to HomeEquityShare.com and get started with an equity sharing transaction.
Sincerely,
The Home Equity Share Team
Subscribe to:
Posts (Atom)