Knowledge is the Map to Greater Wealth,
Real Estate is the Easiest Path.
Equity Share
Sample Transaction - Investor/Occupant
Homeowner wanna be's A & B have good jobs, relatively good credit and a desire to own a home of their own. They have saved about $10,000 but have discovered that this is not enough money for the down payment and the closing costs on a home in the area where they live and work. They could qualify for a mortgage of about $240,000 comfortably but find the amount they need to spend on a house is more like $300,000 for a home in a good neighborhood, in good condition. For this sample, we'll call them Occupant A & B. They are currently renting and saving very slowly for a down payment.
Investor wanna be's C & D have great jobs and adequate savings with money they wish to invest for their future and/or retirement. They would love to invest in real estate but find that there are not many if any homes in acceptable neighborhoods which they can buy with their intended investment amount that would pay for themselves; they really aren't interested in either negative monthly cash flow or in extensive upkeep and hassles with owning a rental property. We'll call them Investor C & D.
Here's a perfect solution for both of them to achieve their goals while working together to make a very workable real estate transaction. For our example, Albert, a Realtor, finds a home in great condition in a good neighborhood at a price of $300,000. He then puts together the Equity Share Agreement as follows:
Investors C & D contribute the 20% down payment of $60,000. This is their entire investment. Occupants A & B get a mortgage on the home for $240,000 (they may or may not need the help of Investors C & D to obtain the mortgage, either scenario will work fine) and pay the closing costs of approximately $10,000 from their savings. Occupants A & B agree to pay all monthly payments including principle, interest, taxes and insurance on the mortgage, to live in the home and take care of all upkeep and repairs (unless it's major such as A/C, roof or structural) and to keep the house in excellent and beautiful condition. Investors C & D and Occupants A & B agree to split ownership of the house 50/50 and all names are on the deed. The Occupants have the exclusive right to use the house and the Investors receive tax benefits similar to the ones available in standard rental housing. We can cover all of the details and procedures at a later time. There is a formal agreement called the Equity Share Agreement which spells out the rights and duties of each party and what happens in which situation along the way. It also spells out how the proceeds are divided upon the dissolution of the Agreement. It is a very comprehensive agreement and the one we use is 37 pages of easy to read agreements.
Generally, the Occupant has the first right to purchase the home from the Investors after the Agreement period which is usually between 3 and 5 years. If they decline to purchase the home, then the Investors have the right to purchase the home. If neither of the parties wants to purchase the home, then Albert, the Realtor, will sell the home, the Investors receive their initial investment first, then the remaining proceeds are split 50/50.
This is the perfect world example. We can develop the agreement to cover any and all situations as agreed upon by the Equity Share participants. The splits can be anything mutually decided upon. We have recently done a 75/25 Agreement in order to accommodate special circumstances.
Either way it's designed, all parties are winning because of the shared ownership. The Occupants are able to accumulate funds for their own 100% home faster and are able to take advantage of tax benefits along the way that would not be available to them while renting. The Investors are placing their money in real estate which has proven to be a top rated and safe investment while avoiding the major pitfalls and expenses of being landlords with a standard rental property. The property uses both leverage and appreciation to create wealth for both parties. Everyone wins and that's why we love Equity Sharing and also why it works so well.
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This information is supplied by Great Condos, Inc. for educational purposes to introduce you to how this form of ownership may be used. All Deed and agreement documents will need to be written by an Attorney. It is also best to have your Tax Professional go over your specific Tax liabilities.