Home Buyer Frequently Asked Questions
Below are the most frequently asked questions from people thinking of entering the equity sharing relationship as a home buyer. The home buyer is the partner who actually lives in the property, sometimes referred to as the occupier.
Home Equity Share registered real estate agents use the Home Equity Share Toolkit™ to facilitate equity sharing transactions. The toolkit includes: the Equity Share Calculator™ and model legal agreements (the Preliminary Commitment and Equity Share Agreement) . Real estate agents registered with Home Equity Share have access to these tools and you can use them for free. When you create your profile, make sure to check "YES, I want to work with an agent registered with Home Equity Share".
Q: I noticed that you're not charging me a fee for this, and you don't have a bunch of advertisements on your website. How does your company make money?
A: We rely on referral commissions from agents. About 60% of our clients ask us to refer them to an agent. When that agent gets a commission for helping the client buy a house, we get 30% of that commission as a "thank you" for generating a deal for the agent. This is standard practice in the real estate industry. About 40% of our clients already have an agent. In these cases, we can offer our package of tools and services to the client (you!) for free once the agent joins our Agent Network, i.e. the agent commits to the 30% referral fee. Either way, it helps agents do deals and earn commissions that otherwise would not have happened. Keep in mind that these commissions are always paid by the seller of the house.
Q: How is the down payment split by the parties?
A: In the investor-occupier transaction, the typical split is investor pays 17% of the purchase price while the occupier pays 3%. The loan is 80%.
Q: What are the home buyer’s responsibilities and benefits?
A: The home buyer is responsible for taxes, mortgage, capital improvements and any expenses associated with operating the home. The key benefit for the home buyer is the down payment. The home buyer receives most of the down payment from an investor which makes high-priced real estate more affordable.
Q: Does the home buyer have to live in the home during the equity share?
A: Yes, but if a situation arises where the home buyer can not, the model Equity Sharing Agreement allows it to be rented with the investor’s consent.
Q: What if I have an investor already – a family member, friend or someone else? Can I still take advantage of your tools?
A: Yes, just allow us to refer you to one of our affiliate agents and all our tools are yours. If you've already got a agent, that's great, just ask him or her to join our Agent Network
Q: I’m open to sharing a home with another occupier. Do you match me up with a co-occupier?
A: Yes, we do. Just indicate this preference on your profile, and utilize our special calculator for co-occupiers. Co-occupier equity sharing is the ideal answer for cohabitating couples and friends who want to buy but cannot afford a home alone. It’s also ideal for people who want to share a vacation home.
Q: What is the loan qualification process?
A: While the down payment is shared by the co-owners, the home buyer qualifies for the entire loan. If you use one of the national lenders we recommend, the investor may not even have to sign on the loan, which makes this transaction far more attractive to your partner.
Q: Who pays the closing costs?
A: Since the home buyer receives full occupancy of the home, the home buyer pays the closing costs and is not reimbursed. The home buyer also pays them at sale if he or she decides to move instead of buying out the investor.
Q: Can I see what my transaction will look like?
A: Yes, the Equity Share Calculator™ lets you project all financial details so you can see what a typical transaction looks like from beginning to end, including tax deductions.
Q: The Equity Share Calculator™ asks for the property appreciation rate. How do I know this?
A: Ask your agent how much properties in the area have appreciated in the past several years. Use the average and be conservative.
Q: The Equity Share Calculator™ asks for Investor Return per year. What is this and how should I fill this in without an investor partner yet?
A: Most investors are projecting a 15 to 17% annual return. But there are no guarantees and it all depends on your individual situation, b.
Q: What is in the Equity Sharing Agreement?
A: The Equity Sharing Agreement contains the basic details of the agreement between the partners regarding the property including the length of agreement, the payments to be made by the home buyer, the procedure for making improvements to the property, how the proceeds will be shared, what happens if there is a default and more. You can get access to the Equity Share Agreement for free when you use a real estate agent registered with Home Equity Share.
Q: Why do my co-owner and I need an Equity Sharing Agreement?
A: In a standard purchase, all ownership rights and obligations are transferred to one person or married couple. With co-ownership, an agreement must be created to allocate these rights and duties between more than one owner and set up procedures for circumstances that may arise. The model Equity Sharing Agreement unifies your goals and gives you and your partner the confidence and security you need to own an expensive asset like real estate together.
Q: Is the model Equity Sharing Agreement thorough?
A: Yes, the model agreement has been created by the foremost expert on co-ownership and has been used for thousands of transactions. It is highly detailed and attempts to address the most common situations that occur in co-ownership transactions. However, it is still only a model and you should have it reviewed by your own attorney before finalizing your transaction
Q: Can the home buyer make improvements to the property?
A: Yes, the home buyer can make improvements to the property with the written consent of the investor.
Q: Will the home buyer get the cost of improvements back?
A: Yes, before the property’s appreciation is split, capital contributions such as improvements in the house are returned.
Q: Does the home buyer pay all the expenses of the property?
A: Yes, the home buyer gets exclusive occupancy of the property and pays all its expenses.
Q: What is rental reimbursement?
A: It is a shifting of some expenses from the home buyer to the investor. Since the home buyer lives in the entire property but only owns part, the IRS requires the home buyer to rent back the investor’s interest in the property. This has no material impact on your transaction. You still pay the property’s expenses and no more. But, a small portion of the expenses are paid into an Investor Account then paid out of the Investor Account to property expenses. We call this rental reimbursement. All of this is provided for in the model agreement.
Q: Does the home buyer receive all the tax deductions?
A: Yes, except for the small amount called rental reimbursement described above. The Equity Share Calculator™ approximates each partner’s tax deductions.
Q: How is ownership of the property split between the co-owners?
A: The Equity Share Calculator™ is a one-of-a-kind tool which helps to calculate the ownership split based upon the term on the partnership, the estimated yearly appreciation and the projected return the investor wants to see on his investment. You input these numbers and the ownership split is calculated for you.
Q: How long can our equity sharing agreement last?
A: The equity sharing partnership should last at least three years and not much longer than seven. It can go on longer than this, but 3 to 7 years is the typical timeframe. At the end, you and your partner can extend the agreement if you like, or upgrade and co-own the next property together too.
Q: How does co-ownership end?
A: The co-ownership ends at the end of the term agreed to in the Equity Share Agreement. The home buyer can buy out the investor, the investor can buy out the home buyer, or the property can be sold.
Q: Are my co-owner and I committed to co-own the property for the entire term?
A: Yes, all co-owners are in the investment for the term of the agreement. But, if something unexpected happens and either party needs out, they should discuss the best solution which sometimes is early buy out described in the agreement.
Q: Can the home buyer continue to live in the home after the equity sharing period is over?
A: Yes, the home buyer has the first option to buy out the investor. This can be done by refinancing the property.
Q: How is the property valued at the end of the partnership?
A: By a formal appraisal on buy out, or by the market in the case of a sale.
Q: How are the proceeds split?
A: Before splitting the property’s appreciation, each partner gets back the capital contributions they have made (down payment, and cost of improvements). After the loan is paid off, the remaining equity is split according to the terms of the Equity Sharing Agreement.
Q: Once the term of the partnership is reached does the home buyer get credit for the amount of money initially put into the down payment before the appreciation is split?
A: Yes, the home buyer gets full credit for the amount put into the down payment. After the home buyer and investor get their down payments and improvement costs back, they split the appreciation in the property according to the ownership percentages.
Q: Why are two legal agreements necessary: the Preliminary Commitment and the Equity Sharing Agreement?
A: The Preliminary Commitment allows the partners to have the confidence in one another to move forward and make an offer on a property. The Equity Sharing Agreement is signed once the property is found and the details about the property and the type of loan are known.
Q: What about tax benefits?
A: The home buyer gets the same benefits he or she would get from a solely owned principal residence. You claim the deductible payments you make (except for a small portion the investor claims) and you receive the exemption you would at sale as it applies to your ownership portion of the sale price.
Q: Should we have our transaction reviewed by an attorney and a tax professional?
A: Yes. We provide you with our tools with your commitment that you will have your transaction reviewed by an attorney and a tax professional. The tax laws that pertain to equity sharing apply nationwide but it is still important to review your transaction with your tax professional. Your attorney should also put their stamp of approval on your agreement because laws differ across the country, and the world.
Q: When do we receive The Equity Share Toolkit™ consisting of the Equity Share Calculator™ and model legal agreements (the Preliminary Commitment™ and Equity Share Agreement™)?
A: When you are referred to a real estate agent in the Home Equity Share network.
Q: What if I have my own real estate agent?
A: We will soon open our Agent Network for online registration for new agents, so your agent can become a Home Equity Share registered agent. For now, let us refer you to another agent in your area, or ask your agent to e-mail us and we’ll do our best to get them in our network. Once your agent joins our Agent Network, you get our stuff for free
Q: What if I have more questions?
A: Marilyn Sullivan’s book, The New Home Buying Strategy, is available through Amazon. More information can also be found at www.equityshareblog.com and by contacting any of the resources on our home page.
