Equity Participation (Equity Share)
Earl L. Huse, JD
December 29, 2008
Equity Participation financing teams a potential buyer with an investor so that both benefit from a real estate acquisition. This arrangement allows an investor – individual, corporation, mortgage lender, or even the former owner of the property to share an equity interest in a real estate purchase in exchange for assisting with the financing of the acquisition.
The investor may assist a buyer by providing all or a portion of the down payment, closing costs, and/or monthly payments in an equity participation agreement, these and other variables such as interest and equity position can be manipulated so that the terms are acceptable to all parties involved.
The typical equity participation structure is usually for a minimum of one year and one day to a maximum of five years. Usually any structure over five years is not beneficial to the buyer, and most investors do not want to tie up their investments for a greater period of time. The length of term, however, can be whatever the investor and buyer agree upon.
Should the appreciation not be sufficient for the buyer to refinance and pay back the investor, or if the equity build-up is not sufficient in the event of a sale to satisfy the investor and buyer, the agreement can be extended by mutual agreement. If the agreement is extended, it is recommended that a new agreement be drawn using an addendum to the original agreement.
Not every property will qualify for equity participation, and not every seller will be willing to accept an equity position in lieu of a second or third trust deed. Some sellers will not understand the concept of equity participation so it will be up to you to have the basic understanding so you can present it to a seller, of, if you are a seller, so you can present it to a potential buyer.
How does Equity Participation work?
Buyer has no down payment or needs additional down payment to make their monthly payment affordable. Typically applies to first-time buyers, divorced buyers, relocating buyers, credit-challenged buyers, move-up buyers.
Equity Share Program contributes either a 10% down payment or down payment assistance of up to 20% of the total monthly payment. Buyer qualifies for a more affordable loan program and can buy more home or a better neighborhood, or just have lower payments for the same purchase price.
Equity Share Realty must act as buyer's agent in finding home to purchase for legal reasons. There is no additional cost to buyer. There is no additional time added to the home-buying process.
Buyer moves into home and has all normal rights, responsibilities and tax benefits of home ownership. No monthly payments are required on the investor contribution. Investor is NOT a landlord.
At end of term buyer typically gets cash-out refinance and repays the initial investment, plus a share of the appreciation. Buyer then assumes sole ownership of home and retains all future equity growth.
Who benefits with equity participation?
This financing vehicle can boost the residential market for the following groups:
1. People who desire the benefits of home ownership but who cannot afford it under existing market condition.
2. Investors who desire high performance, low risk investments.
3. Communities that are feeling the effects of a sluggish economy.
4. Builders and developers who employ large numbers of workers.
5. Lenders who wish to provide funds at profitable rates for reasonable terms.
6. Who are the investors:
A. Investor with cash available for down payment and closing costs and are seeking a good, sound investment with low risks.
B. Buyer/tenant by maintaining their equity position in the property by making mortgage payments on time and keeping up the general maintenance of the home and want future cash from the sale of the property. Buyer/tenant who has purchased property with no money down.
C. Seller of his or her own home by maintaining a portion of the equity who want to gain additional profits in the future and who do not need the cash from the sale at this time.
One way to equity participate is the buyer/tenant is written on the property deed as tenants-in-common, or as co-owners, the interest of each party must be clearly delineated. This agreement can be flexible or as restrictive as you wish it to be.
Some benefits of owning a home are:
Pride of ownership
A) Tax write offs
B) Appreciation
C) Leverage
D) Equity for the future (growing equity)
What are some of the disadvantages of owning a home for investment purposes?
A) Negative cash flow.
B) Vacancy
C) Management
D) Maintenance
Having 20% of equity of your home as Equity Participation of your $100,000.00 home for 5 years, and assuming appreciation to be 12%:
Value of home: $100,000.00
12% appreciation for 5 years: $176,234.00
Gross appreciation: $ 76,234.00
Less cost of sale: $ 6,611.97
50% appreciation to homeowner: $ 38,116.99
Gross return: $ 31,505.02
Less long-term capital gain: $ 5,040.76
Return to you, the homeowner: $ 26,464.26
Plus 20% original equity return: $ 20,000.00
Total return: $ 46,464.26
Using equity participation, the seller is also on title and usually the seller is better protected with equity participation then with some other types of creative financing. Remember, equity participation is, after all, a high leverage real estate acquisition creative financing transaction, and all parties have to be protected, the investor (or seller who can be the investor) and the buyer.
Always, however, consult an attorney to insure the accuracy and legitimacy of any legal binding contract. Each state has different laws governing a real estate purchase transaction.
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