Buy a Home with Other People's Money

By
Real Estate Agent with Zephyr Real Estate
pie-chart-small.jpgSFGate.com ran an article back in July that talked about a concept that we're seeing again called equity sharing. I had a few clients ask me about it, so I approached Monica Di Perna to get some more information on the topic. Here's what she had to say:

Equity shariing was very popular when I first started in the business 12 years ago. In 1994, when I was going to business school during the evening, my old boss, Rob McNab taught me how to underwrite, process, and originate loan files. He was a REALTOR®, Asset Manager, CFP/Financial Planner and Tax Preparer. He had about 500 clients that he serviced all their financial needs. He was the one that taught me about the concept of Trust Deeds.

Basically, when he had a client that wanted to buy a house but didn't have the down payment, he would send out a notice to all of Rob's clients. We would alert our clients as to opportunities of making 8/9/10% returns on money that would be collateralized against properties or by partnering up to benefit from future appreciation. Many clients would call and of course, want these high returns/appreciation. If they didn't have the cash, they most likely had the equity in their home. At that point, we would do a quick cash-out refinance. Then with that money, we would use that as a down payment on a property for our other client.

This would create a situation where we would have two sets of clients basically owning one property.

Scenario 1: Client A, who didn't have the down payment, would own, say, 80% of the property and Client B who was providing the equity/down payment would own 20%.

Or Scenario 2: Client A, would own the entire property, and pay Client B, the interest for borrowing the money.

In Scenario 1, we have Equity Sharing and in Scenario 2, we have a purely interest investment with a Trust Deed attached to the Property. In either case, Equity Sharing provided the opportunity to purchase for Client A and the opportunity to diversify Client B's Equity. Client B, is able to make his equity grow in 2 properties, not one. We would produce the Trust Deeds between the clients, and I would personally go down to the Recorders office in downtown San Jose and record the transaction. In the early to mid '90's, real estate had been hit, and so lenders were more restrictive, similar to our new mortgage environment today.

As it stands, zero down loans are very difficult, lenders are threatening to take away No Doc loans and stated income loans, and it is simply becoming a far more restrictive and tightening market. I believe Equity Sharing, may be a creative way to not only attract more opportunities for buyers, but to enable owners to take advantage of investing in the subtle real estate opportunities that exist today. Today, down payments are a BIG opportunity.

By placing this spin on these possible joint ventures, we could really create more real estate opportunities by circumventing lender guidelines.
There is an in-depth manual on equity sharing written by TIC and co-owndership guru (and attorney) Andy Sirkin. If you would like to get evern more information on equity sharing, or would like to find a partner to help you purchase a home, give me a call. I'm happy to talk to you about it.


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equity sharing

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Rainer
2,034
Lisa Mahoney
Worcester County Massachusetts Real Estate
Angel's Realty

Wow sounds like a great idea.  I will have to read the Manual to get more details. 

September 16, 2007 08:18 PM
Rainer
11,460
Luba Muzichenko
Realtor - San Francisco
Zephyr Real Estate
Lisa - It's not for everyone of course, there are some inherent risks involved depending on how the equity sharing agreement is structured.  But a good legal agreement should be able to address all of the potential pitfalls of the situation, including possible depreciation of a property.  This hasn't presented itself in the San Francisco market, but I know it's an issue all across the rest of the country. 
September 16, 2007 08:41 PM
Rainer
406,119
Sean Allen
International Financing Solutions
International Financing Solutions

Hey Luba,

How is that different that having a second mortgage from a regular lender? .....Other than it is hard to find lenders who will do a second mortgage, but this sounds like the similiar idea.

Sean Allen

September 16, 2007 08:41 PM
Rainer
11,460
Luba Muzichenko
Realtor - San Francisco
Zephyr Real Estate
Sean - It's similar in some ways.  Especially that there is usually a deed of trust held by the investor.  But depending on how the agreement is structured, the buyer typically doesn't need to pay this note back until the buyer sells.  Oftentimes, there is a set annual return that the seller will require, let's say 9% per year until the buyer refinances to pay the seller back, or the buyer sells.  Othertimes, the seller will want a percentage of the equity at the close of the sale.  Let's say the seller put down the 20% down payment to help the buyer make a purchase on a $1 million property.  In five years the buyer sells for $1.3 million.  The buyer will want 20% of the equity returned to him, or $260K - or a 30% return on their money.  The main reasons to do this is a lack of a down payment to purchase a place, but a strong enough income (and some reserves) to pay the monthly payment on the loan.  It can even be used to get a better down payment.  Say a buyer has 15% to put down, but they can get a better interest rate if they can pull together 20%.  Someone can come along and put down 5%, become an equity partner and get a decent return on their investment.  Does that make sense?
September 16, 2007 09:52 PM
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Rainer
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Luba Muzichenko

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Luba’s San Francisco Real Estate Blog is meant to inform you about a variety of good things and happenings around SF and its unique neighborhoods, about buying and selling homes in the City and about the real estate market in general.