Common Equity Sharing Arrangement

By: vknarayana

The common equity sharing arrangement involves one party income in the property and the other putting up cash and/or financing. Both the inhabitant and the non-occupant take pleasure in tax benefits and share the profit, as described later in this chapter. First time home buyers make the best occupant partners while family members, sellers and real estate investors plug the non-resident partner role.

Buyer without cash

A lot of possible homebuyers have the income to succeed for a mortgage loan, but only with a considerable down payment. With a small down payment, the monthly loan payments might be too high. A potential homebuyer can borrow the money for the down payment, but no one but a fool (or a parent) will lend $25,000 or more unsecured. Furthermore, loan regulations usually do not allow the use of borrowed money as a down payment.

An equity-sharing partner can put up the money in swap for an interest in the property. The resident partner will get the loan, live in the property, make the monthly loan payments, and uphold the property. The non-resident partner that puts up the down-payment money is free from organization headaches and negative cash flow. After a number of years the property is sold, the mortgage loan balance is paid in full, and the profits are split among the parties. Obviously, the strategy works finest in a rising real estate market.

Buyer without credit

The second equity-sharing scenario will be a buyer with cash, but incapability to qualify for institutional financing. The resident partner will put up the down payment; the non-resident partner will get the loan. After a number of years, the property is sold, the mortgage loan balance is paid in full, and the profits are dividing between the parties.

Drawbacks

A joint ownership agreement could be difficult if the resident does not maintain the property or build the mortgage, insurance or property taxes payments. Furthermore, the property might not go up in value, so the non-resident party who put up his credit or cash may not become conscious any profits. Like any real estate investment, the shared equity arrangement must be approached with profit, not just financing in mind. In other words, make certain you buy the property at a high-quality price and/or in the right locality at the right time.

Substitutes

For the non-resident investor, there are numerous alternatives to the equity sharing arrangement. The first is the lease/option, an arrangement by which the non-resident owner is on heading and the resident proprietor is a tenant. This arrangement does not permit the tenant to harvest the tax deduction, but does permit him to share in future admiration by having a fixed option price. The second is an agreement for deed that does permit the resident to claim the interest payments, but does not permit the non-resident to share in future appreciation.

Real Estate
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 

» More on Real Estate
 



Share this article :
Click to see more related articles