An equity sharing deal is typically struck to help sell a home, often in a tough market, but a tough market isn't a prerequisite. It also helps enable a home purchase when it might not otherwise be possible. And it is used to provide an investment with a financial return.
- Typically savings-poor, but income-rich, one person becomes the occupying homeowner with no or little money down.
- A second participant, the investor, provides the initial leverage usually in the form of a down payment stake. With time, he or she can enjoy a joint venture-like return on his or her money.
- The seller, in a slow market, can choose to become the investor or otherwise use the creative financing strategy to quickly seal a deal.
Deals vary, but in its simplest form, an equity sharing agreement works something like this:
- The buyer-occupant generally lives in the residence, pays the mortgage and other costs associated with owning and operating a home -- including taxes, insurance, maintenance and the like. He or she gets to deduct a portion of the mortgage interest, property taxes and others.
- The non-resident, often an investor, perhaps a family member, trusted friend or professional investor, provides all or part of the down payment, and in return gets tax deductions for her or his share of the mortgage interest and property taxes.
- Title to the home can be held in a variety of ways -- joint tenancy with right of survivorship, tenancy in common, partnership or as a living trust.
Equity sharing deals should be legal and binding contracts designed to provide an equitable means to an end. It should also include provisions for any disputes or disagreements that might arise during its term.
At the end of some specified period, five, seven, ten years or so, the net proceeds from the sale are split between the buyer and investor, again, based on contractual provisions.
Generally and theoretically, through appreciation, an equity deal is set so that the occupant eventually earns a share sufficient to allow him or her to buy a home without help and to give the supporting investor a shot at a profit. Other resolutions can be contracted.
The creative financing tool isn't perfect for every market. While tight money markets can make equity sharing a viable financial avenue to homeownership, a market with flat or reverse home prices requires a deftly drawn contract with a term long enough to allow the deal to gel.
As is the case with any major financial transaction, assistance from a professional experienced in equity sharing agreements is paramount. In addition to the transactional contractual considerations, tax implications abound.
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