Equity Sharing

Equity sharing is great way for someone to buy a home when they don’t qualify to purchase on their own. For example, a person who can afford a house payment but has not saved enough for a downpayment or has not established a credit history.

How it works

The buyer partners with someone (the "investor") who will loan the down payment and/or co-sign the loan. The buyer who lives in the property is known as the "occupier" and makes the monthly payments and is responsible for most maintenance and repair. The investor does not live in the property.

The investor later "cashes out" when the occupier purchases the investor’s portion of the property, or the occupier and investor together decide to sell the property. In either case, the amount owed to the investor is determined according to the ownership percentage.

How to start

First, determine what monthly payment the occupier can afford and how much down payment the investor will contribute. The occupier might rent out a room to help with the monthly payment.

Next, both parties sign an equity sharing agreement which specifies the price of the property, the down payment contribution, the ownership percentage, maintenance and repair obligations, and how and when each party receives their money back. There are other important terms that must be included, too.

Finally, a house is purchased and the title is recorded in both names.

Benefits

There are several significant benefits to this arrangement. The occupier is able to begin accumulating equity, benefit from the mortgage-interest tax deduction, enjoy the satisfaction of owning a home, establish credit, and share in the profit.

The investor has an "tenant" who is more likely to take care of the house, the investor has a security interest in the property, shares the profit, and, depending on the financial arrangement, enjoys a depreciation write-off without any negative cash flow.

Risks

The agreement usually specifies some restrictions on selling, for example, the property is to be owned for 5 years and the occupier has the first option to purchase. This means that the investor must be prepared to have their money tied up for that period of time. Also, at the end of that time, the occupier must be ready to buy out the investor or else the investor could require that the property be sold in order to get their investment back.

The investor is subject to cash flow risk should the occupier be unable to make the payments. Another risk is that the occupier might fail to maintain the property. Of course, real estate is cyclical and the property may decline in value, so there is profit risk, too.

TIC Tennants-in-Common

Please also see our info on TIC - Tenants in Common Ownership.

For more information

Please call Steve for details, including important tax and contract information.  Your tax/accounting counsel might be familiar with equity sharing, and local libraries also have books on the subject.

Important disclaimer: This is general information, not tax advice. Federal and state tax laws change frequently. We are not tax or legal advisors. Please consult a qualified tax or legal professional before acting on anything described here.