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Equity Sharing Examples
Program #1 — the Individual Purchase
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There are endless ways to illustrate the power of Equity Sharing as it applies to residential real estate. In addition to its use for the purchase of a home, it can be employed to save a home. This is our Program #1.
Equity Sharing can be used by builders and developers to pre-sell units to prospective buyers that cannot buy anything else that is not offered simlarly, and, since the prospective buyer lacks cash, he does not have the power of cash to attack price. The developer plays the Investor role in this case. This is our Program #2.
Equity Sharing can be used by a municipality to create affordable housing in any price range, without creating the typical "affordable housing" stigma, and without creating future slum areas twenty years later. The Investor role is filled by a consortium of public and private funds, and the homes can be scattered seamlessly throughout the neighborhoods, one here, one there, and not merely in "projects". This is our Program #3.
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Example #1
Jack wants to sell his single family house, and has priced it at $500,000, on the advice of his listing agent and within the market value range shown by the Comparative Market Analysis (CMA) his agent provided him. While he feels it should appraise at that $500,000 figure, it has not drawn an offer yet.
Sarah wants to buy a single family home, but doesn’t have down payment funds sufficient to buy Jack’s property, although her income and credit scores would be sufficient. Without cash, Sarah is not a financially whole buyer.
If Jack and Sarah were to create an equity sharing partnership, Jack could leave in enough equity to make Sarah’s 20% down payment, while retaining a 50% co-ownership of the property and selling it to the partnership for $500,000. That means Jack would leave in $100,000 in equity, and use the remaining $400,000 proceeds to pay off his mortgage, selling closing costs, and partnership closing costs and adjustments, and pocket any remaining funds.
In this example, we are presuming that Sarah is contributing nothing in the way of funds, for a 100/0 start-up, but working her way to a 50/50 split of any net equity gain after faithfully and punctually paying all carrying costs for an agreed period of, let’s say, a 60 months term (flexible at the end, if it were to become necessary).
But, suppose Sarah actually can contribute 5 of the 20% down payment, or $25,000, leaving Jack with a contribution of $75,000 in equity, plus costs? Now we would have a 75/25 start-up partnership, and reach the 50/50 net equity split point in 45 months, rather than 60. The partnership could still go 60 months, or more, but once a 50/50 split has been earned by Sarah, she cannot gain a larger percentage because she cannot cut into Jack’s share. Obviously, there cannot be a 60/60 split. If the property loses value by resale time, the partners split the loss, as agreed.
In a search for a suitable Co-Investor partner, Jack could market his property to people who cannot purchase anything else not offered the same way. This means he can take a virtually unlimited supply of would-be home buyers who don’t have the funds to buy a home conventionally, and are probably renting right now with little hope of hitting the lottery. Without enough cash, these folks do not have the power to attack Jack’s price, and he gets to protect his market value at $500,000.
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Example #2
Sarah wants to buy a home, even though she does not have the cash. She hears about Equity Sharing, and wishes to have someone find her an Investor Partner. Since recruiting an investor is very much a specialty, she will need to hire such a specialist for this assignment. Once an investor candidate is found, assuming he and Sarah appear to be compatible, they could form an Equity Sharing Partnership for the purchase of Jack’s or anyone else’s property in the price range Sarah can afford to carry.
These days, Sarah needs a pre-purchase full-document and underwritten mortgage approval before she crosses a threshold, and probably before the investor signs the partnership binder. Once they binder the partnership . . . something the specialist can prepare for them . . . then Sarah can go shopping. Attorneys for the partners can draft the partnership contract, taking the terms and conditions from the partnership binder.
Putting together the partnership is the non-real estate transaction that must happen before the property is purchased, or we simply wouldn’t have a financially whole buyer yet. There are some modest fees involved in recruiting the investor and setting up the partnership, but once we have assembled the financially whole buyer, we can proceed promptly to a real estate purchase.
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Example #3
Don and Marge own a real estate agency in a difficult market where their listings aren’t selling as they once were, and they are looking for a creative way to not only get their clients’ properties sold, but to do it sooner, and at the top of their market value ranges. Also, if they had a unique marketing program that could get their listings sold to buyers that cannot buy anything else not similarly marketed, they could begin to corner the market in their area, and word would spread like wildfire.
If they can find such a program, they could pull in expireds and for-sale-by-owners, as well as bank owned properties. They might even be able to launch a program for potential short sale sellers to help them avoid the short sale morass, and get higher sales sooner if those sellers could play the investor role in an equity sharing transaction. Don and Marge feel there could be a huge supply of people desiring homes of their own that do have jobs and credit-worthiness, but are not in the market because of a shortage of cash for down payments.
At the same time, there are potential investors with funds to invest, afraid to go back into the markets that are declining, and waiting for the lagging economy to turn. What do they do now? If Don and Marge could recruit them now, these people could become Equity Sharing Investor clients, grab some properties while prices are down and interest rates are low, and sit out the turn-around while a Co-Investor Owner-Occupant carries the property they buy together, relieving the Investor of all of his major concerns.
By the time the economy turns, home prices, interest rates, and inflation will all be going up again, as they always have in the past, and the market’s biggest bargains will be history.
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