Home Equity Share - Real Estate Co-Ownership Emerges Online

Online Marketplace for Real Estate Co-Ownership Emerges…Intriguing Implications for Investors

August 15th, 2007 | by JP Moses | in General, Commentary

Today my inbox gifted me an intriguing piece of news from Springwise (a guilty pleasure for my daily fix of entrepreneurial ideas).

It was a brief bulletin reviewing an innovative, new marketplace for real estate co-ownership that’s just been born on the net. And after taking a little closer look, I’m struck by some interesting implications and possibilities for some home buyers and real estate investors.

Home Equity Share is a match-up service, conceived by attorney and real estate broker Marilyn Sullivan, that brings together potential home buyers and investors - specifically investors who want to put some money into a deal with minimal hassles and no monthly payments to make.

An 80% Loan With Only 3% Down? (No, Not Like You Think)…

For potential buyers, the service matches them with “real estate partners” who put up the majority of the down payment in return for a portion of ownership. The primary buyer retains most of the ongoing ownership responsibilities, but both parties co-own the property and enjoy the benefits.

According to the website, an average transaction involves a buyer qualifying for an 80% loan, who can clearly afford the monthly payments but not necessarily the 20% down payment. So the investor “partner” typically pays around 17% of the purchase price down, leaving only the remaining 3% plus closing costs to come out of the buyer’s pocket.

Not a bad deal for the buyer to be sure.

One of the investor-partner’s greatest benefits is co-owning a property with another who cares for and often improves the property and pays its expenses. No tenant hassles, maintenance concerns or holding costs.

Another potential investor benefit is the idea of integrating this concept into your list of possible “exit strategies” for a given property you’re trying to flip. More on that in a minute…

No Second Mortgage?

To be clear, the investor in these transactions does not own a second mortgage against the property. Second mortgages can tend to have a pretty high default rate and are often considered by many investors to be little more than “throw away paper”.

Here’s how it works…

If “Bob Buyer” wants to buy a house and can afford monthly payments, but not the 20% down, he’s matched up with “Ike Investor”, who is looking to put some money into real estate but doesn’t want to jump into flipping, make any monthly payments or deal with tenants and toilets.

So Bob and Ike sign a preliminary joint venture agreement and Bob gets pre-approved for a loan.

Next Bob finds a property he likes that also meets Ike’s criteria, and makes an offer to buy it. Ike then puts up most of the down payment and Bob gets the mortgage, lives in and maintains the property. Bob lives in the entire property, but only owns a part of it.

Hmmmmmm…..(insert best Mr. Spock voice here)……fascinating…

At the end of the agreement term, Bob can either buy out Ike’s interest in the property or they can sell and share the appreciation in value. Before splitting the property’s appreciation, each of them gets back the capital contributions they have made (down payment, and cost of improvement).

How To Sell 83% of Your House (And Rent Out the Rest)…

Here’s an intriguing bit I found nestled inside the company’s FAQ page…

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.

Now as a real estate entrepreneur, just consider for a moment how you might be able to integrate this approach into your exit strategy for any given property. It’s got some interesting possibilities, doesn’t it?

Now Bob lives in the entire property but only owns part. So (and this is really interesting) the IRS requires Bob to rent Ike’s interest in the property. So Bob pays a small portion of the expenses earmarked as rent into an Investor Account.

Here’s another one I found fascinating…

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.

Now I find the whole concept here to be as “outside the box” as heck for residential real estate. Granted, co-ownership and equity sharing transactions aren’t anything brand new, having been taught to creative real estate investors for years by the likes of Jack Miller, John Schuab and Pete Fortunato.

But with the soft-launch of Home Equity Share online, I think we’re witnessing the possible mainstreaming of a concept that until now has been seldom considered, much less used, except in the inner circles of the creative real estate investing world.

And I find that more than a little interesting, don’t you?