SFGate.com ran an article back in July that talked about a concept that we’re seeing again called equity sharing. I had a few clients ask me about it, so I approached Monica Di Perna to get some more information on the topic. Here’s what she had to say:
Equity shariing was very popular when I first started in the business 12 years ago. In 1994, when I was going to business school during the evening, my old boss, Rob McNab taught me how to underwrite, process, and originate loan files. He was a REALTOR®, Asset Manager, CFP/Financial Planner and Tax Preparer. He had about 500 clients that he serviced all their financial needs. He was the one that taught me about the concept of Trust Deeds.
Basically, when he had a client that wanted to buy a house but didn’t have the down payment, he would send out a notice to all of Rob’s clients. We would alert our clients as to opportunities of making 8/9/10% returns on money that would be collateralized against properties or by partnering up to benefit from future appreciation. Many clients would call and of course, want these high returns/appreciation. If they didn’t have the cash, they most likely had the equity in their home. At that point, we would do a quick cash-out refinance. Then with that money, we would use that as a down payment on a property for our other client.
This would create a situation where we would have two sets of clients basically owning one property.
Scenario 1: Client A, who didn’t have the down payment, would own, say, 80% of the property and Client B who was providing the equity/down payment would own 20%.
Or Scenario 2: Client A, would own the entire property, and pay Client B, the interest for borrowing the money.
In Scenario 1, we have Equity Sharing and in Scenario 2, we have a purely interest investment with a Trust Deed attached to the Property. In either case, Equity Sharing provided the opportunity to purchase for Client A and the opportunity to diversify Client B’s Equity. Client B, is able to make his equity grow in 2 properties, not one. We would produce the Trust Deeds between the clients, and I would personally go down to the Recorders office in downtown San Jose and record the transaction. In the early to mid ’90′s, real estate had been hit, and so lenders were more restrictive, similar to our new mortgage environment today.
As it stands, zero down loans are very difficult, lenders are threatening to take away No Doc loans and stated income loans, and it is simply becoming a far more restrictive and tightening market. I believe Equity Sharing, may be a creative way to not only attract more opportunities for buyers, but to enable owners to take advantage of investing in the subtle real estate opportunities that exist today. Today, down payments are a BIG opportunity.
By placing this spin on these possible joint ventures, we could really create more real estate opportunities by circumventing lender guidelines.
There is an in-depth manual on equity sharing written by TIC and co-owndership guru (and attorney) Andy Sirkin. If you would like to get evern more information on equity sharing, or would like to find a partner to help you purchase a home, give me a call. I’m happy to talk to you about it.
How is equity sharing different that getting a second mortgage from a regular lender?
It’s similar in some ways. Especially that there is usually a deed of trust held by the investor. But depending on how the agreement is structured, the buyer typically doesn’t need to pay this note back until the buyer sells. Oftentimes, there is a set annual return that the seller will require, let’s say 9% per year until the buyer refinances to pay the seller back, or the buyer sells. Othertimes, the seller will want a percentage of the equity at the close of the sale. Let’s say the seller put down the 20% down payment to help the buyer make a purchase on a $1 million property. In five years the buyer sells for $1.3 million. The buyer will want 20% of the equity returned to him, or $260K – or a 30% return on their money. The main reasons to do this is a lack of a down payment to purchase a place, but a strong enough income (and some reserves) to pay the monthly payment on the loan. It can even be used to get a better down payment. Say a buyer has 15% to put down, but they can get a better interest rate if they can pull together 20%. Someone can come along and put down 5%, become an equity partner and get a decent return on their investment. Does that make sense?
This is a great blog. I was reading this posting and wondered if this could possibly be a good situation for a senior and their younger working family members. (Disclaimer: I work for a company which deals solely with senior issues.) If say the senior had the funds for a down payment, but a younger family member could pay the mortgage.
Lara – I think it could be a great situation for a senior and their family members. Of course, each family dynamic is different and there may be other issues (both financial and personal) that may affect the potential outcome of such a financial arrangement. But the key, as I’ve mentioned before, would be to have a good legal agreement in place to avoid any miscommunications when the time comes to sell (or refinance) the property. And since every situation is different, it is imperative that all parties consult professionals before getting into such an agreement, and in this case, I would recommend a consultation with both a REALTOR® and an attorney to make sure that equity sharing is right for the particular parties involved.
Good Post. This article is quite interesting to read about using others money to buy a home or a property. I came across many important things while reading this blog.