Equity Share 201
Okay, so we know that Equity Sharing is a proven and very effective way of both buying and selling real estate. Instead of just having a bank and a buyer and/or seller involved in the transaction, we will introduce an “investor” into the mix. In doing so the responsibilities are “shared” thus opening the door to possibilities that didn’t exist before. But who are the people, and in what circumstances, that will benefit most from Equity Sharing? Here are some of the groups, and the reasoning behind utilizing Equity Sharing for each of them.
First time home buyer with no down payment Let’s face it, the median price of a home in San Diego is nearing $400,000. That means that if a first time home buyer wants to buy with a fixed rate in the traditional manner, they would have to have 20% down payment or $80,000. Practically no first time buyer has that kind of cash for a down payment And that leads to attempting to purchase the home with zero down. Once that path is chosen, then the zero down payment option leads to loan packages with adjustable rates, teaser rates, prepayment penalties, and let’s not forget, another $100,000 of actual loan to pay for each and every month. This is a recipe for enormous risk, and it seems to me that the enormous increase in the value of homes during the past 5 years has only exacerbated this.
Divorced and forced to sell your home. Often in a divorce the husband and wife are forced to sell the home so that the equity in the home can be split. Let’s say, for example, that a couples’ home is worth $500,000, and that they bought the home for $200,000 about 10 years ago. The husband is leaving, and he wants his share (50%) of the value of the equity in the home ($300,000). Where then, does the wife get the 50% or $150,000 to pay to him, and is there any way to do it so that the wife and perhaps the children don’t have to be displaced from the home, their friends and their school? With Equity Sharing the answer is “yes.” An outside investor is found who is willing to help refinance the home, pay the husband his $150,000, and become a partner with the occupier (wife and children in this example). Generally the wife will continue payments, and after a prescribed period of time of lets say 5-7 years, the investor and the occupier have a written agreement that allows the occupier to buy the home.
Co-ownership. Sometimes it just makes sense to “go in with a friend.” This can be a very attractive situation for buyers who have “almost enough money”, but not quite enough. Rather than enter into an agreement haphazardly, Equity Sharing creates an occupancy agreement, crafted by attorneys, that outlines ALL the legal and financial aspects of a purchase so that both parties can occupy and enjoy the benefits of home ownership. Additionally, there are times when even well heeled buyers may wish to participate in purchasing vacation property with others. Here again Equity Sharing is THE way to go.
Investors. What Equity Sharing provides is a proven, risk reduced method of investing in the highly tax advantaged real estate market. When you participate in an Equity Sharing agreement with an occupier as above your investment buys you a willing and committed partner, reduced cash flow constraints, and most of the tax benefits that accrue to investment property ownership. And the Equity Sharing agreement gives you the best opportunity to insure that in all market conditions your investment will produce an ROI that is planned out from the very beginning.
Sellers. Do you want to sell and move now, and realize that with all the homes for sale now, many of which are troubled with financial difficulties, that your home may not even be seen? Do you have equity in your home that you want to use either for the purchase of another home, retirement or other purposes? If so, then with Equity Sharing you can potentially sell right now for the price you want, access much of the equity you would from a standard sale, and also maintain an interest in your current property that fully protects you, is taxed advantaged, and from which you will derive further income from later.
These are but a few of the scenarios in which Equity Sharing benefits buyers and sellers. But in our next Equity Sharing 301 session, I’ll explain why this methodology not only benefits, it also outshines and outperforms the way we have come to believe is the only way to buy and sell.