Investor Frequently Asked Questions
Below are the most frequently asked questions from investors thinking of entering an equity share relationship.
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 anything for this, and you don't have a bunch of advertisements on your website. How does your company make money?
A: Referral commissions from agents. About 60% of our home buyer ("occupier") 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. About 40% of our clients already have an agent. In these cases, we can offer our package of tools and services to the client 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 the home buyer ("occupier") gets to pick the agent when partners are buying a house, but the Investor partner (you) selects the agent when liquidating the property. This is fairer than having one party pick the agent both times.
Q: What are the Investor’s greatest benefits in this type of transaction?
A: The Investors greatest benefit is owning a property with a co-owner who cares for and often improves the property and pays its expenses. No more tenant hassles, maintenance concerns or paying holding expenses.
Q: I want to buy a house in a hot real estate market in another state, far from where I live now. Is this for me?
A: Yes, our system is particularly well suited to you. Your local partner can handle as much of the logistics as you and s/he arrange. This can include the entire process, from screening and purchasing a property, to managing, improving, and selling it. This is the least effort method we know for shifting your money to the hottest real estate markets. You can be as hands-on or hands-off as you like, and need not be in the same city, state, region, or country as the property. Now you can own property in a hot market no matter where you live. You can also invest overseas with a local partner from our database – just pick a country.
Q: I belong to a real estate investment club that buys property as its own stand-alone legal entity. Can our club be the investor partner?
A: Yes. In fact, our system is especially well suited to investor groups who seek a mid-risk potentially high return investment strategy.
Q: Should I set up my own LLC to co-own this property?
A . Many investors decide to own their investment properties in an LLC to shield their personal assets from liability. See the attorney resource on our home page for getting your own LLC set up.
Q: I hear that I can use my retirement account funds to purchase real estate, including co-owned real estate. Is this true?
A: Yes, as long as you do it through a self-directed retirement account custodian. It costs about the same as your stock broker.
Q: I am a seller who can’t sell my property. Should I sign up as an investor?
A: Yes. You will cash out for the amount of the loan (about 80% of value) and convert the interest you retain to your investment property. This way you get out from under the payments and are able to move on. But still you will have an investment in your property. Seller investors think of this as the best of both worlds.
Q: If I want to sell my home but I have excess gain, can equity sharing solve my problem?
A: Yes. A home seller confronted with capital gains exceeding the principal residence exclusion can solve his tax problem by an equity share sale. He reduces his sale price and his tax basis so it conforms to a tax-free sale. He converts the rest of the property to his investment property and becomes the Investor in the equity share. This format of equity sharing can be the ideal way to shelter excess gain.
Q: I’d like to invest with other investors? How does that work?
A: We call this a joint venture where all owners are investors. Just sign up as an investor seeking another investor. When you come together with more than one, you can buy more and have help with management. It makes it all much easier.
Q: How is the down payment split by the parties?
A: The typical split is investor pays 17% of the purchase price while the home buyer pays 3%. The loan is 80%. In the other transaction types, the parties usually evenly split down payments and expenses.
Q: How is ownership of the property split between the co-owners?
A: The Equity Share Calculator™ does this for you. One of the variables important to the investor is how much return on investment the investor wants to project. This factor is considered when setting the co-owners’ ownership interests. Take a run through the Equity Share Calculator™ to see how this works.
Q: Can the home buyer make improvements to the property?
A: If a capital improvement is required (i.e., new roof), the home buyer must make it and pay for it. The written consent of the investor is required for other improvements.
Q: Will the home buyer get the cost of improvements back at the end?
A: Yes, before the property’s appreciation is split, capital contributions such as down payment and improvement contributions are returned. You will have agreed to any improvement and its cost in advance.
Q: What if I want to make improvements to the property to increase its value? Can I do this and will I get the money back?
A: Yes, you can make improvements with the consent of your co-owner. You too will receive credit for the amount you pay as a capital contribution before the property’s appreciation is split between you and your co-owner.
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 your transaction will look like from beginning to end. Run calculations until you find the best fit for you and your partner.
Q: The Equity Share Calculator™ asks for the property appreciation rate. How do I know this?
A: Ask your agent how much properties in this area have appreciated over the past five years, then over the past year. Use the average and be conservative.
Q: The Equity Share Calculator™ asks for investor return per year. What is this?
A: This is a bargaining point for the investor and home buyer. The investor projects the return he or she would like to see on investment. This projected return is used by the calculator in assigning ownership percentages. Most equity share investors joining with a home buyer project a 15 to 17% annual return. Remember, this is not guaranteed; it is projected. If the property appreciates more than is projected, returns will be higher and vice versa.
Q: What about tax benefits?
A: Investors get the same tax benefits as a solely owned rental property, including depreciation on ownership interest and tax free gain by exchanging out at the end of the term.
Q: Does the IRS allow mixed tax treatment for one property?
A: Yes, the mixed tax treatment in the traditional equity share format is permitted by the IRS. Internal Revenue Code §280A allows the occupier to claim his interest in the property as his principal residence while the investor claims his as his investment property.
Q: What will my tax return look like?
A: Since the home buyer lives in the entire property but only owns part, the IRS requires the occupier to rent the investor’s interest in the property. What happens is the home buyer pays a small portion of the expenses earmarked as rent into an Investor Account. Then he pays an equal amount of property expenses out of this Investor Account. The net result is you have some rental income offset by deductible property expenses. This enables you to claim the property as your investment property and receive investment property tax treatment.
Q: Your site uses the term ‘partner’ repeatedly. I thought these investor-occupier transactions can’t be seen as partnership by the IRS?
A: This is true. We speak of partners in a general sense whereas the IRS speaks of the term in a legal sense. You and your home buyer partner are not partners as legally defined by the IRS.
Q: How long can our equity sharing agreement last?
A: It should be at least three years and not much longer than seven. It can go on longer than this, but these are typical timeframes. 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: 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 ‘default’ buy out described in the agreement.
Q: Can we refinance at any time?
A: Yes, with the consent of all parties.
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 cannot, the model Equity Sharing Agreement allows it to be rented with the Investor’s consent.
Q: Who pays the closing costs?
A: Since the home buyer receives full occupancy of the home, the home buyer pays them at purchase and is not reimbursed. The home buyer also pays them at sale if he makes the decision to move instead of buying out the investor.
Q: Does the home buyer pay all the expenses of the property?
A: Yes, the home buyer receives exclusive occupancy of the property and pays all its expenses.
Q: What about the loan? What is the 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.
Q: How can I be sure that my home buyer partner is making the payments on time?
A: The model Equity Sharing Agreement specifies that you will receive a copy of each payment made by your home buyer partner. This will help you identify any payment default and take corrective action immediately.
Q: What if my home buyer partner fails to make payments?
A: The investor gets to buy out the Defaulting Occupier at 70% of value and pays this amount over time. The model Equity Sharing Agreement makes home buyer default into a win for the investor.
Q: What if my home buyer partner is not taking good care of the property?
A: Our unique system creates a powerful financial incentive for your partner to take good care of the property. This person has a significant financial stake when the property sells, and therefore is motivated to take care of the property and to improve it. Just to be safe, the model Equity Sharing Agreement assigns maintenance obligations and necessary capital improvements to the home buyer. If, for some unusual reason, your partner does not take good care of the property, the model Equity Sharing Agreement considers this a default.
Q: What about other home buyer defaults?
A: The model Equity Sharing Agreement gives a significant financial benefit to the investor in the event of home buyer default. A performance deed of trust/mortgage or quitclaim deed signed by the home buyer in advance can and should be prepared (consult your attorney, or one from the home page) for better security.
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. In the co-ownership, an agreement must be created to allocate these rights and duties between more than one owner and to 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, you should consult your attorney before finalizing and signing your agreement.
Q: Why are there two legal agreements: 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 are the standard provisions of the model Equity Sharing Agreement?
A: Length of agreement, occupancy requirements, payments to be made by the home buyer, the procedure for making improvements, how the proceeds are shared at the end, what is done in the event of default, and more.
Q: How do I protect against losing my investment?
A: The model Equity Sharing Agreement includes a provision requiring the property to appreciate a certain percentage designated by the investor. If that appreciation is not reached at term, the co-ownership continues on until it does.
Q: How does the co-ownership end?
A: At the time specified in the agreement, either the home buyer buys out the investor, the investor buys out the home buyer, or if neither buys out the other, the property is sold.
Q: How is the property valued on buy out?
A: A formal appraisal.
Q: How are the proceeds split?
A: Before splitting the property’s appreciation, each party gets back the capital contributions they have made (down payment, and cost of improvement)
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 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 Agent 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 network, we can give you the free contract and other support
Q: What if I have more questions?
A: Marilyn Sullivan’s book, The New Home Buying Strategy, is available through Amazon and will soon be available on our site as an e-book. You can also learn more at the Equity Share Blog and from the resource partners on our home page.
