Equity Sharing - Equity Sharing in The United States

Equity Sharing in The United States

Equity sharing has been around for some time now and has been put on the shelf in recent years given the loose financing programs. These partnerships were championed by economists Andrew Caplin, Sewin Chan, Joseph Tracy and Charles Freedman in the late 1990s and are very similar to shared-equity plans that have existed for decades in the UK, Europe and the U.S. They are also similar to an earlier proposal produced by Geltner, Miller and Snavely (1995) to develop Home Equity Investment Trusts (HEITs). There have been various spins on this concept from sharing on existing properties, alternatives to reverse mortgage, new purchases and now even investment properties. Originally, in a mutually beneficial way this type of strategy was used for buyers to acquire a property that they could either, not otherwise afford, lacked capital for a down payment, insufficient income to support loan payment, etc. These types of situations have commonly been factors that would lead to a beneficial equity sharing relationship. In summary, the traditional example of equity share for the purchase of a home provides the buyer with a 20% down-payment; they will have much lower payments, no PMI, better terms/rate and will save a great deal just in payments versus what it will cost them in equity at the eventual sale or refinancing of the property at some point in the future.

Particularly, in the case of investment properties there are some other factors to be taken into consideration, like cash flow from the property. If the total of the mortgage payments, taxes, insurance/association dues, and all other expenses must be less than the rent that the tenant pays on the property. If not, the investors will run into a negative cash flow situation, whereby they are paying more than they are getting from the property. This was very common in the era of high LTV (loan to value) loans on investment properties where in most cases they were viewed as risky by banks and therefore had high interest rates and even PMI (private mortgage insurance) in some cases. That being said, how does equity share help an investor and how does it work?

If the investor puts up the 20% for the down payment to purchase the property, then after the close enters into an agreement with the fund they give you up to 20% of the purchase price in consideration for a share of the future equity in the property, with no interest and no payments, ever. Now you have a situation where the investor has an 80% LTV loan with lower payments then they would otherwise have, which means greater cash flow potential and less capital expenditure’s. The additional benefit of the money (20% initially used for the purchase) that would otherwise be tied up in the property, illiquid, and inaccessible without the Fund, will instead be in your pocket. This will also allow individual investors to purchase multiple properties by using their initial capital for a down payment then entering into an Equity share agreement; get cash from the fund and use that cash to purchase more properties and get more cash from the fund.