How to Use Other People's Money to Buy a Home

pie-chart-small.jpgSFGate.com ran an article back in July that talked about a concept that we’re seeing again called equity sharing. I had a few clients ask me about it, so I approached Monica Di Perna to get some more information on the topic. Here’s what she had to say:

Equity shariing was very popular when I first started in the business 12 years ago. In 1994, when I was going to business school during the evening, my old boss, Rob McNab taught me how to underwrite, process, and originate loan files. He was a REALTOR®, Asset Manager, CFP/Financial Planner and Tax Preparer. He had about 500 clients that he serviced all their financial needs. He was the one that taught me about the concept of Trust Deeds.

Basically, when he had a client that wanted to buy a house but didn’t have the down payment, he would send out a notice to all of Rob’s clients. We would alert our clients as to opportunities of making 8/9/10% returns on money that would be collateralized against properties or by partnering up to benefit from future appreciation. Many clients would call and of course, want these high returns/appreciation. If they didn’t have the cash, they most likely had the equity in their home. At that point, we would do a quick cash-out refinance. Then with that money, we would use that as a down payment on a property for our other client.

This would create a situation where we would have two sets of clients basically owning one property.

Scenario 1: Client A, who didn’t have the down payment, would own, say, 80% of the property and Client B who was providing the equity/down payment would own 20%.

Or Scenario 2: Client A, would own the entire property, and pay Client B, the interest for borrowing the money.

In Scenario 1, we have Equity Sharing and in Scenario 2, we have a purely interest investment with a Trust Deed attached to the Property. In either case, Equity Sharing provided the opportunity to purchase for Client A and the opportunity to diversify Client B’s Equity. Client B, is able to make his equity grow in 2 properties, not one. We would produce the Trust Deeds between the clients, and I would personally go down to the Recorders office in downtown San Jose and record the transaction. In the early to mid ’90’s, real estate had been hit, and so lenders were more restrictive, similar to our new mortgage environment today.

As it stands, zero down loans are very difficult, lenders are threatening to take away No Doc loans and stated income loans, and it is simply becoming a far more restrictive and tightening market. I believe Equity Sharing, may be a creative way to not only attract more opportunities for buyers, but to enable owners to take advantage of investing in the subtle real estate opportunities that exist today. Today, down payments are a BIG opportunity.

By placing this spin on these possible joint ventures, we could really create more real estate opportunities by circumventing lender guidelines.

There is an in-depth manual on equity sharing written by TIC and co-owndership guru (and attorney) Andy Sirkin. If you would like to get evern more information on equity sharing, or would like to find a partner to help you purchase a home, give me a call. I’m happy to talk to you about it.

Luba