by Bill Vaughn
Equity sharing is a little known and often misunderstood method of investing in real estate. It can be profitable for you, as either a home buyer, or as an investor. It can also be profitable for the family that will occupy the home (if not yourself) and pay the mortgage. It is a little tricky, so pay attention to details. Here we will focus on you being the home buyer.
This method can be used with you are the buyer or as the investor.
In an equity share (also known as equity participation), an investor (perhaps a relative or just someone looking to make a good investment) usually puts up the down payment, and the home buyer pays the mortgage payment, taxes and insurance. Both are usually required to sign for the mortgage, and the home is bought as a partnership. This reduces your need for great credit. In many instances the seller can be talked into being the investor, leaving enough of his sale price on the table to cover your down payment.
You and the investor/seller would enter into a legal partnership for the term of the agreement. However the agreement is worded, the agreement should terminate in 5 -7 years (though it could be longer) with the occupant buying out the investor at the end of the term by refinancing, or both of them agreeing to sell the home and cash out. The investor receives his down payment back plus a respectable interest OR if the two of you decide to sell, he would get his original investment back plus one-half of all the appreciation.
In this case you are in your own home without putting up a cash down payment and without really good credit.
The occupant (presumably you) would pay all mortgage principle and interest, plus taxes and insurance. The reason the investor pays none of these is simply because he does not get the benefit of living in the home.
It is best to keep the partnership simple. Assuming you are buying the property for $300,000 and the seller (or investor) is willing to put up $15,000 for the down payment you would need a mortgage for $285,000 using both your credit and the credit of the investor/seller. So, you offer the equity share partner the following: the agreement will be for 7 years, but you retain the right to buy him out at any point during that term. To buy him out you would refinance for enough to return his original $15,000 plus interest (the rate agreed between the both of you). You change the deed to remove him from it. You are now the sole owner. As an alternative, the two of you could sell the property, and the investor/seller would get his $15,000 back plus one-half of all appreciation,
Be sure that when the you refinance and buy out the investor, your partnership is legally dissolved and your he is removed from the mortgage and deed.
By the way, it would be wise if your equity share agreement includes a clause that states neither partner may cause any new liens or encumbrances without written permission to do so from the other partner. Your partnership agreement should state all the terms of the partnership, including what rights of survivorship there may be.
The reason you need a partnership agreement is because a PURCHASE AGREEMENT and all its terms and conditions will terminate at the end of closing. A partnership agreement survives closing.
Side Note: If the property you are buying has standing timber, an old barn or any personal property included, you can sell the timber and stumpage, or the dismantled barn boards which command a high price these days. If ou get a contract with a lumber company or other contractor to purchase those things upon closing, have him put the certified check into escrow. Upon closing, that check can go to the purchase, making your mortgage smaller, If you fail to close, the contractor gets his check back.
As a final note, an Equity Share agreement can be a "stand-alone" investment strategy. It can be used successfully on nearly any property.
