WALL STREET JOURNAL
December 2, 2008
Putting Your House to Work
How some homeowners are trying to turn their homes into profit centers, despite falling values
By DIANA RANSOM
Faced with rising expenses -- and declining home values -- homeowners are finding creative ways to squeeze money out of their houses.
Some are renting their place out to boarders, or to film crews who want to shoot commercials and movies on location. Others are cultivating crops in their backyard to peddle at farmers' markets, while some are installing solar panels on their roof and then selling the renewable-energy credits they get from the government.
No matter which course they choose, "rising costs have sent many homeowners scrambling for ways to stay afloat," says Marilyn Sullivan, a real-estate attorney in Arroyo Grande, Calif., who often counsels troubled homeowners.
Here's a look at four strategies homeowners are using to make ends meet.
Renting Out the House
The rental market has been flying high these days. As foreclosures mount, displaced homeowners are looking for someplace else to live -- and potential buyers are getting gun-shy about leaping into ownership.
Some cash-strapped homeowners are trying to use the situation to their advantage. Eric Thompson, a 39-year-old insurance salesman, recently moved out of his Richmond, Va., home and rented it to a couple of twentysomethings for $1,500 a month.
"I had to do something," Mr. Thompson says. "I have other bills to pay, and I can't afford them."
Mr. Thompson bought the 1906 Victorian row house for $365,000 in 2005. He moved to the area to start an ice-cream franchise with his brother and sister-in-law. Two years later, he got a job offer in California and was ready to leave -- but found he couldn't unload his home.
"It was on the market for six months and did not get one offer," Mr. Thompson says. He even tried reducing the price well below what he paid, but that didn't work, either. "In my neighborhood, it's been four months since the last home sold," he says.
So, Mr. Thompson found lodgers and moved back in with his parents in Santa Maria, Calif. They agreed to let him come home, as his situation appeared bleak.
Mr. Thompson continues to worry about his bills, particularly his five-year adjustable-rate mortgage, which he says could cause his monthly payment to skyrocket if the interest rate on his loan adjusts upward in two years.
Location, Location, Location
Frank Sanford also knows a thing or two about contending with a pricey house payment. The 50-year-old London transplant pays about $9,000 a month to live in a 4,300-square-foot colonial clapboard house in Los Angeles, which comes equipped with four bedrooms and a tennis court.
To make his mortgage more affordable, Mr. Sanford rents out his home between 30 and 40 days a year to film studios. The house has shown up in commercials for the likes of Wal-Mart Stores Inc., Microsoft Corp. and Verizon Communications Inc., as well as the movie "Transformers."
Mr. Sanford usually charges about $995 a day, although the price can shoot up as high as $5,000. All told, he says, he pulls in about $25,000 a year from the fees.
Of course, not every homeowner -- or every home, for that matter -- is cut out for the movie business. "It's a big house, and I'm just one guy," he says. But, more important, "I'm not the kind of person that feels that my home is my castle."
For the setup to work, Mr. Sanford says, you have to be willing to see people traipsing in and out of your home, alarming the neighbors, leaving scuff marks on the floor or chipping away at the paint.
Now he's thinking of getting out of the business -- but not because of those hassles. When he started renting his house, at the recommendation of friends in the film business, Mr. Sanford was also running a press agency at home. That helped him save on office space and allowed him to write off part of his mortgage.
But he recently sold the business, so he's looking to sell his home, too. "I think I'll get less than I could have gotten last year," Mr. Sanford says. "But it doesn't make sense to hold onto this house without the offices in it."
Back to the Land
Martin Barrett, a Scottish native living in Portland, Ore., didn't know the first thing about growing crops when he and his friend Dan Bravin discovered spin farming. The practice -- short for small plot intensive farming -- involves growing produce in nontraditional urban or suburban settings, and then selling it.
Despite their lack of experience, the two were tilling soil and planting seeds in Mr. Barrett's 9,000-square-foot backyard in no time. Then they started to move beyond those confines, cultivating crops on other people's property and giving them fresh produce in return for the use of the space.
Now Messrs. Barrett, 42, and Bravin, 38, sell people annual subscriptions to their produce for $350 a pop. Their business, City Garden Farms LLC, also peddles produce at farmers' markets throughout the city.
"Before March 2008, I had never grown a vegetable in my life," says Mr. Barrett. "After six months, we grew in excess of 5,000 items for people."
From his property alone, Mr. Barrett estimates, the business has sold about $2,000 of produce collected over the 20- to 25-week harvest season from June to October. However, between buying seeds, farming tools and a refrigeration unit for his garage, Mr. Barrett says he and Mr. Bravin have just broken even.
Next year will likely be more profitable, Mr. Barrett predicts. "We will probably double the number of subscriptions we sell," he says.
Living Off the Grid
When Monica Ball and her husband, Bill, decided to hitch a 9,900-watt solar-panel system to their 4,000-square-foot home three years ago, they had some reservations. Even though the Sergeantsville, N.J., couple got a generous 70% subsidy from the state, they had to borrow $19,000 from their retirement savings to pay the balance.
In retrospect, however, "it was the best decision I ever made," says Ms. Ball, 43. Not only does the power from the panels help lower the family's utility bills, which Ms. Ball estimates used to total about $500 each month, the Balls also earn between $6,000 and $7,000 annually from the panels.
Here's how it works. Each year, the state of New Jersey provides the Balls with Solar Renewable Energy Certificates, which represent the cost of offsetting pollution-generating energy. The Balls then sell the certificates for about $500 to $700 on the open market to brokers or electricity suppliers who are required to invest in solar energy under New Jersey's Renewable Portfolio Standards.
Having this added income is especially helpful as the Balls' home, which is situated on seven-acre lot, costs a whopping $13,000 a year in property taxes, Ms. Ball says.
"To me, that $19,000 investment on the roof is the equivalent of having a rental property, except you don't have a tenant," Ms. Ball says.
Write to Diana Ransom at email@example.com
WALL STREET JOURNAL
For first-time home buyers coming up a little
short, here's one option: Share the wealth
By DIANA RANSOM
While most people want to own a home, young singles and couples
often find it impossible to scratch together enough cash to make
the purchase. More established folks, too, sometimes discover that
the down payment for their dream house is just too big a nut to
It doesn't have to be that way. Simple financial strategies exist
that allow disadvantaged buyers to split the cost of a house by
sharing the wealth.
"We can do more when we join with other people's money,"
says Marilyn Sullivan, a real-estate
attorney in Arroyo Grande, Calif. Using a form of co-ownership known
as equity-sharing, at least two people or entities can own one piece
of real estate, and the second party -- often a family member or
friend -- doesn't have to be a resident. Nor does the second party
have to wait until the property is sold in order to benefit from
the investment. Indeed, co-owners who itemize can use the arrangement
to claim deductions on their income-tax returns. Here's how to get
by with a little help from a friend:
Basic Equity Sharing
In a traditional equity-share arrangement, one party occupies
the property and pays for all of the expenses, while a nonresident
investor -- typically a family member, real-estate investor or the
property's seller -- supplies all or a portion of the up-front cash.
Mom and Dad might agree to bankroll the down payment in return for
a proportional share of the home's appreciation when it is sold.
In some cases, the sellers may be willing to take on the investor
role if they haven't been able to recoup the full value of their
Whoever the investor is, he or she will want to be named on the
title along with the occupant. But the investor may not want to
be named on the loan. Being on the loan, says Andy Sirkin, a real-estate
attorney in San Francisco, may hamper future investments if the
investor has other loans, since lenders generally consider excessive
debt to be risky.
Once the overall financing is taken care of, there is the matter
of rent -- and those promised tax benefits.
In equity-sharing, the occupant is required by the Internal Revenue
Service to pay rent to the investor for the portion of the property
that the investor owns. The amount depends first on what the property
could rent for in the open market. Say the fair-market rental value
is $2,000 and the investor's ownership stake is 20%. That means
$400 a month is owed to the investor.
SHOULD YOU LEARN TO SHARE?
Here are some questions you should ask yourself if you're considering
FOR BUYERS FOR INVESTORS
Am I willing to stay in one particular home for five years?
Most equity shares have five-year terms, and require that the occupier
remain in the arrangement for the full term. You forfeit some of
your equity as damages if you end the equity share early.
Can I afford to tie up money for five years? Although investors
are permitted to sell their equity-sharing interests, finding a
buyer may be difficult.
Are my business and personal circumstances stable? Life changes
such as a job loss can lead to default and loss of investment if,
say, you can no longer afford the household payments. o Would I
feel comfortable delegating control? The everyday management of
the equity-share property will be in the hands of the occupier.
Would I feel comfortable discussing future financial troubles with
my investor? The best way to avoid dispute and loss is to discuss
trouble early and develop a strategy. o Am I willing to consider
investment decisions from a homeowner's standpoint? For the occupier,
the equity-share property is both a home and an investment, and
his primary motivation may not be investment return. For the equity
share to run smoothly, you will need to compromise on occasions
when quality-of-life concerns clash with investment concerns
Can I share control of my home? You will need to consult with your
investor on major decisions. Source: The Equity Sharing Manual by
Then, if the investor pays for expenses such as insurance, maintenance,
association dues and property taxes, the rent can just be considered
reimbursement for those costs.
The investor can deduct those expenses from his or her taxable income
in an amount equal to -- and in some cases exceeding -- the rental
income. If the deductible expenses, which are considered "passive"
investment losses, add up to more than the rent, the excess may
be carried over to future years or taken as a deduction against
other passive investment gains such as those arising from other
rental income or the eventual sale of the property.
The success of co-ownership arrangements hinges on having a well-crafted
equity-sharing agreement, which spells out various contingencies.
The agreement "is critical for managing the tax complexities,"
says Matthew I. Berger, a real-estate attorney in Santa Barbara,
There are potential downsides for investors: If the value of the
property has declined at the time of the sale, the investor must
share the loss. In addition, "they are parking their money
and aren't seeing any immediate profits," since the rental
income is used to fund property expenses, says Mr. Berger.
Many equity-share or tenancy-in-common agreements, as they're also
called, specify that the home has to reach a certain value before
it can be sold. But the agreements can specify in some cases what
both parties' responsibilities are if the occupant gets a job transfer.
At HomeEquityShare.com, a Web site that matches prospective home
buyers with real-estate investors, individuals making successful
connections receive a free equity-share agreement. Custom-made agreements
prepared by an attorney can cost around $1,000.
A second kind of strategy is known as a co-occupier arrangement,
in which at least two parties fund a down payment, pay subsequent
homeownership costs, occupy the property together and split the
gains or losses from the sale of the home.
One caveat: Co-occupancy loans are typically shared, meaning if
one owner skips town, the other is liable for the full loan.
"When you buy something with an unrelated person you are considered
to be tenants in common," says Alexander Laufer, a real-estate
attorney in Fairfax, Va. In this way of holding property, you can
each sell your interest individually and designate who will inherit
your interest if you die -- otherwise your share of the property
would pass to the other owner.
Avoid Personal Loans
Parents might consider making the down payment themselves, thus
avoiding the complication of sharing equity. But a parent can't
give a child more than $12,000 a year without incurring gift tax.
Parents also might think about making the down payment a loan.
But this is a bad idea for several reasons.
The interest payments on the loan -- especially if it's from Mom
or Dad -- won't be tax deductible unless the loan is legally secured
by collateral. Moreover, if a mortgage lender is already lined up
for the purchase, that lender may see the additional loan as increasing
the borrower's risk level, and so increase its rate.
And finally, the ability to claim deductions and avoid taxes in
the event of a property exchange requires being co-owners of the
property. Just lending the money, says Marc J. Minker, an accountant
and financial adviser in New York, is "squandering a tax deduction."
By Broderick Perkins
Federal legislative relief for the nation's housing crisis contains
a provision that could turn a rarely used home-financing option
equity sharing into a key steppingstone on the path of homeownership.
Along with other provisions, the law would create a Federal Housing
Administration-sponsored equity-sharing program to refinance loans
at a discount for homeowners facing foreclosure. In return, homeowners
would share future equity gains with the FHA.
"The feds are about to take equity sharing to the next level,"
says Jeff Langholz, founder and CEO of HomeEquityShare.com, an online
network that matches equity- sharing partners.
Not only would the government effort save an estimated 400,000
homes from foreclosure, federal backing could raise the profile
of this unconventional creative financing tool and push it into
the mainstream of housing finance.
"Every transition in life comes with intermediate stages.
Before you are married you get engaged, before you get your driver's
license you get a learner's permit. Before you get to homeownership,
what intermediate transition is there?" Langholz asks.
He is banking on the equity-sharing provision in the federal relief
package. That may be a safe bet.
Both the U.S. House of Representatives (H.R. 3221 by Rep. Nancy
Pelosi, D-Calif.) and the U.S. Senate (the unnumbered bill known
as the "Federal Housing Finance Regulatory Reform Act of 2008"
by Sen. Chris Dodd, D-Conn.) this summer passed versions of the
same relief package. Both contain the equity-sharing provision.
This month, federal legislators were reconciling differences for
final approval, which is expected "certainly before the August
[congressional] break," says Pelosi spokesman Brendan Daly.
Equity sharing is a symbiotic relationship as well as a legal agreement
between two or more parties holding title to one home. Two or more
parties share title in order to share the risk, thereby also reducing
the risk. Inevitably, however, home price appreciation is the bottom
line. The property must grow in value over the term of the deal
for it to really pay off.
Parties in the mutually beneficial relationship, and their roles
The seller. The seller can use equity sharing as a way to quickly
sell in a slow market. The seller can also become the investor and
retain a stake in the property.
The occupying homeowner. Often savings-poor, but income-rich, one
person, with little or no money down, becomes the buyer-occupant.
The home's occupant pays the mortgage and other costs associated
with owning and operating a home, including taxes, insurance, maintenance
and the like.
He or she gets to deduct a share of the mortgage interest and property
taxes, along with other tax breaks that come with home ownership.
With enough equity growth, the occupant can eventually cash out,
buy out the investor, keep the home or use the equity gain to buy
The investor. Typically a non-resident, the second owner provides
the initial financial leverage in the form of a down payment or
larger stake. He or she can be a family member, trusted friend or
professional investor. The investor also gets tax deductions for
his or her share. With time, provided equity grows, the investor
likewise enjoys a joint venture-like return on the investment.
Title to the home can be held in a variety of ways joint tenancy
with right of survivorship, tenancy in common, partnership or as
a living trust.
Like its creative-financing cousins seller financing and lease
options equity sharing often makes the news as an alternative financing
tool that buyers and sellers turn to in tough, cash- or credit-tight
markets. That's because equity sharing lessens the upfront costs
buyers face in any market. When buyers can buy, sellers can sell.
However, a tight market isn't mandatory:
Equity sharing can be strictly business an investment purely for
financial gain, provided the investor and buyer are willing to assume
the risk. Their hope is to realize enough appreciation to make the
deal pay off.
The federal legislation points to equity sharing as a tool to help
stave off foreclosure. Even without federal backing, a defaulting
homeowner can privately bring in an equity-share investor to buy
a lump sum stake in the property or subsidize monthly payments over
time; that is, pay some or all of the monthly mortgage for some
period. Again, for the effort, the investor gets an equity stake.
Equity sharing can be used by a financially secure seller who doesn't
need to drop his or her home price, but wants to move. With an investor
buying an 80 percent stake, the seller could retain 20 percent ownership
and get another home. Then, say five years down the road, the seller
and investor sell the home, each taking an appropriate share of
the equity. Again, and always, appreciation must be sufficient for
the deal to pay off.
Some local governments offer equity-sharing deals. The City of
San Jose, for example, offers an equity-sharing, deferred-payment
loan program for qualified, first-time, low- and moderate-income
households. The program provides housing from select, targeted properties
in new housing developments.
Qualified buyer-occupants pay zero. They live mortgage-payment
free. There's no down payment, no monthly payment and no interest
payment, until it's time to sell or the loan is due in 45 years.
However, when the home is sold, the sale price goes to the city,
which has been picking up the monthly mortgage tab. The city (in
exchange for also paying the interest) and occupant share any equity
gain on a pro-rated basis based on the terms of the mortgage. If
the gain is sufficient, the occupant can use it to buy his or her
The occupant can also stay put for the 45-year term of the mortgage
again, cost free. However, the loan is due at the end of the term,
and again, any proceeds go to the city. If the occupant remains
until the end of the term, the city relinquishes any and all claims
on equity gains.
Either during a sale before the end of the term or at the end of
the term, the occupant is not obligated to use the equity to buy
a new home, but can choose to use that gain as he or she wishes.
In the past several years, San Jose has housed hundreds of families
with variations of its equity-sharing program.
The devil's in the details
Equity deals are not silver bullets.
They are most often short-term contracts of five, seven, 10 years
or so to make sure the period of risk exposure is short. At the
end of the term, the net proceeds from the sale are split and doled
out according to contract.
Because the deal relies upon appreciation within a short term,
equity sharing can be a tough sell in a depreciating market. They
are perhaps better suited for a bottom market or market already
on the rise. The current market also makes the deals dicey because,
as of yet, there's no federal backing.
Equity sharing is also a two-sided coin when it comes to the lender.
Risk-averse lenders have put a squeeze on all credit and may not
look favorably on all but the most "plain vanilla" mortgages.
On the other hand, if the investors has cash for his, say, 80 percent
stake and the buyer-occupant needs a mortgage of only 20 percent
of the value of the home, the lender might bite.
"Obviously if you are only going to borrow, say, a 30 percent
loan [because the investor antes up 70 percent] and there are two
people, you have a better chance. You are always better off if you
have another person, but lenders are really spooked," says
David Hofmann, a San Jose real estate attorney with Hoge Fenton
Jones & Appel, Inc.
"Even people who recently qualified are having a tough time.
Lenders don't want to see anyone on any loan with any credit issues.
Most lenders faced with a default will just take the property back,
" Hofmann adds.
Equity sharing also remains obscure because the deals can be complicated.
They must be legal and binding contracts designed to provide an
equitable means to an end. It must include provisions for any disputes
or disagreements that might arise during the term. The contracts
typically don't allow extracting any returns until the term is up,
unless there's an escape clause. Escape clauses come with provisions
that include stiff cash penalties for early outs and other resolutions.
Finally, even if the equity-sharing deal is designed to create
a homeowner, its underlying investment approach triggers a different
set of underwriting and tax rules, compared to a conventional home
Buyers will almost always need an equity sharing-experienced team
real estate agent, attorney and tax professional to set up the transaction's
"These deals can give some new lenders heartburn, but there
is surprising interest from senior lenders who were around when
shared appreciation mortgages (SAMs) were around in the 1980s,"
Here's a list of equity-sharing resources:
The HomeEquityShare.com network for home equity matchups between
sellers, buyers and investors, based in Monterey
Larkspur-based Marilyn D. Sullivan's
The New Home Buying Strategy (Venture 2000, $25.95) equity-sharing
San Francisco-based Andy Sirkin, of Sirkin Paul Associates, offers
the Basic Equity Sharing Structure manual and other materials at
In San Jose, real estate attorney David Hofmann with the Real Estate
Group at Hoge Fenton Jones & Appel, Inc., HogeFenton.com
The San Marcos-based BuyHalfAHouse.com team of Don Reedy (real
estate agent), Howard Schwartz (loan officer) and Richard Borkowski
Broderick Perkins owns and operates DeadlineNews.Com, a San Jose-based
real estate and consumer news service. Contact him at firstname.lastname@example.org
Brian Collins of our office was the source
for this article.
Helping Others Buy a Home Can Be Beneficial
Share the wealth.
By RAY A. SMITH
Staff Reporter of THE WALL STREET JOURNAL
Through shared-equity agreements, individual real-estate investors
can do just that to help a family member or friend buy a home --
and reap some profit and tax benefits in the process.
Some accountants and financial advisers are recommending that
their clients, especially those with adult children, consider these
investment vehicles as home prices have skyrocketed.
The pacts are co-ownership agreements between two parties, an investor-owner
and an occupier-owner. The investor-owner puts up cash for either
some or all of the down payment for a house that a family member
or friend wants to buy. Once the property is purchased, both parties
have an ownership interest in the property.
The family member or friend becomes the property's occupier-owner.
For tax reasons, under the Internal Revenue Code (Section 280A),
the investor-owner must charge the occupier-owner fair rent for
the right to occupy the property if he or she wants to take any
tax deductions related to the property. The investor-owner can then
use that rent to cover the expenses, including mortgage payments,
homeowners insurance, and property taxes.
"I almost always recommend that the investor-owner charge rents
so [he or she] can maximize tax benefits," says Brian Collins,
an attorney in Ross, Calif.
The agreement has a finite life, often varying from three to 10
years, after which the occupier-owner can buy the investor-owner
out or vice versa; the property can be sold with the proceeds being
divided between the parties; or the term can be extended.
These agreements can be advantageous for both parties. For instance,
if the property is sold at the end of the deal's term, the investor-owner
gets back the original down payment plus a share of the proceeds
from the sale. Also, the investor-owner can get a tax write-off
on expenses and could receive tax deductions for depreciation.
Owner-occupiers can benefit by deducting mortgage-interest payments
and property taxes on their income-tax returns. What's more, if
and when the property is sold, they qualify for exemption from capital
gains -- as much as $250,000 for individuals and $500,000 for couples,
as long as they lived in the property for at least two out of the
previous five years.
There are some risks, though. For one, the occupier-owner might
fall behind in payments and even default on the mortgage, which
could force the investor-owner to foreclose on the property -- a
lengthy and costly process. The investor-owner would have to pay
out of pocket for the foreclosure process.
In some cases, there's also the possibility of the property depreciating
so the investor-owner either would get less or just the down payment
back. In addition, the occupier-owner also could neglect upkeep
of the property, which means it wouldn't be attractive to a buyer
when the agreement ends.
Sandra West, a Frederick, Md.-based certified public accountant,
points out that it's important for investors to consult with a real-estate
attorney familiar with the jurisdiction in which they're investing.
"Each state has different rules regarding real-estate titling,"
she says. The names of all participants in the agreements must be
on the property title.
AGREEING TO SHARE
Shared-equity financing agreements can be used to create a tax benefit
for a parent or other person helping an adult child or other loved
one to purchase a residence. Here is how such an arrangement can
The arrangement provides that the investor:
o Furnishes the down payment of 20% toward the purchase price
of the home
o At the end of five years, the home is sold and the investor receives
back the original down payment plus/minus 50% of the profit/loss
on the home (which is treated as long-term capital gain/loss)
o Is not a co-signor on the mortgage but may take over the home
and mortgage if the buyer defaults
o Is subject to the risk of loss if the property sells for less
than the purchase price, but is not liable for any losses in excess
of the original down payment
The arrangement provides that the buyer:
o Selects the home and must qualify for the mortgage
o Pays the mortgage and gets tax deduction on interest
o Is responsible for all repairs and maintenance
o Must sell the home when any "triggering event" occurs
such as change in marital status, the ceasing of the use of the
home as the principal residence, or insolvency. In general, must
sell at the end of five years, unless there is agreement to buy
out the investor based on qualified appraisals
o Keeps half of the profit on the home when sold
Jose Mercury News
SATURDAY, MAY 11, 2002
San Jose Mercury News serves the heart of the Silicon Valley.
It's a win-win. The only
loser is the IRS, and don't you just love that?
EQUITY SHARING PUTS PEOPLE INTO HOUSES WHILE
GIVING INVESTORS A CHANCE FOR PROFITS
By Julie Clairmont
Special to the Mercury News
The down payment, for some, is a seemingly
insurmountable brick wall between them and the American Dream
of owning their own home.
This is especially true in expensive California real estate
markets like Santa Clara County, where the median price of
a single-family home hovers around $475,000, meaning a home
buyer would need $95,000 for a 20 percent down payment.
The ironic thing, says Larkspur attorney and real estate broker
Marilyn Sullivan, is
that it doesn't have to be like that.
Sullivan is a nationally recognized
expert on equity sharing, an arrangement in which
investors supply the down payment and the buyer-occupant lives
in the house and pays the mortgage. At the end of a specified
term -- Sullivan recommends
seven years -- the home is sold. The investors and occupant
split the equity, usually 50-50, and go their separate ways.
The sale could be to a third party, or the occupant could
refinance the property and buy out the investor.
``The goal is for the occupant to have a tax deduction, realize
some appreciation and, when it's over, be able to get rid
of the investor,'' says Sullivan,
author of a book on the subject, ``The New Home Buying Strategy.''
If the investor and occupant choose a property that is a solid
investment, both parties benefit, says Sullivan.
The occupant becomes a homeowner without a down payment, and
the investor makes a return on their investment. On top of
that, both parties receive tax benefits from owning the home.
Darren Story, a San Francisco options broker, and his brother,
Eric Story, a Safeway manager, used equity sharing recently
to buy a $680,000 home in the Crocker-Amazon area of San Francisco,
near the Cow Palace. Their father, Stephen Story of Catalina
Island, was the investor, coming up with 15 percent of the
20 percent down payment for the mortgage loan.
Darren, 30, and Eric Story, 25, are typical of many Bay Area
residents: well-paid with good jobs and strong credit, but
finding it difficult to come up with the large down payment
needed to purchase a home here.
Equity sharing ``is a great opportunity for both parties,''
says Darren Story. ``It was a good way for my dad, who was
pretty hard-hit in the stock market, to balance out the risk
in his portfolio and, at the same time, help his kids out.''
There are different ways to structure an equity sharing deal,
and the tax benefits depend on the agreement. Using Sullivan's
formula, the investor would use rent paid by the occupant
to pay for homeowners insurance and homeowners dues (if any)
-- both of which are tax-deductible for the investor.
The investor and occupant both get to deduct the property
taxes; if the ownership agreement is 50-50, they would each
get to deduct half. The occupant also gets to deduct the mortgage
interest. The investor can also depreciate their share of
the rental property.
``It's a win-win,'' says Sullivan.
``The only loser is the IRS, and don't you just love that?''
How it works
Using a $400,000 home as an example,
Sullivan explains how one equity sharing model
An investor or investors supplies an $80,000 down payment
-- 20 percent -- and the occupant pays the $2,000 mortgage
payment each month plus rent to the investor.
The two parties agree to a 50-50
split in ownership and take title as tenants in common.
Assuming 10 percent annual appreciation, the house
would be worth $779,000 after seven years. Assuming a loan
balance of $295,000, equity in the home would equal $484,000.
The house is sold, the investor gets
the $80,000 down payment back, and the occupant receives the
$25,000 in mortgage principal they have paid. That leaves
$379,000 for the parties to split, without taking into account
realty agent commissions or other sales costs.
Additionally, the occupant-buyer has
been deducting mortgage interest over the seven years, and
both the occupant and investor have been deducting a portion
of the property taxes.
The investor could reinvest their share of the proceeds
in another rental property through a tax-deferred exchange,
In Sullivan's example,
the title is held as ``tenants in common,'' but title can
also be held in joint tenancy with the right of survivorship,
partnership, or a living trust. However, all parties must
If the property has not appreciated during the term of the
contract, the parties could agree to an extension. Some contracts
have a clause that provides for automatic extension if the
property has not gained in value.
Ken Gervais, owner of Triangle Realty in San Jose, says there
are few risks to equity sharing, if it is done thoughtfully.
``Anytime you have a someone buying something with very little
money invested, you run a higher risk that they will default,''
says Gervais, who has been in business for 10 years.
``But that's why we look for occupants with excellent credit.''
For the occupant, the time factor may be a problem, says Gervais,
who recommends a five-year equity sharing term. Through his
program, occupants can rent out the home if they need to.
In most cases he has seen, buyers have opted not to purchase
the home at the end of the contract. ``After five years most
people are ready to move on,'' he says.
Triangle Realty matches occupants and investors
for equity sharing and also will help would-be occupants find
Gervais says making offers on homes using equity sharing financing,
even in a seller's market, is not difficult. The trick, he
says, is for the occupant to get all of their financing in
place before they make an offer.
The biggest challenge of equity sharing may be finding an
investor or investors. Amy and Todd Mezullo of Sebastopol,
for example, feel they would be ideal occupants in an equity
sharing arrangement. ``We've got good credit and income, we're
upwardly mobile, we've been paying rent on our town home for
the past eight years,'' says Amy Mezullo.
The Mezullos, who would like to buy a home in Santa Rosa,
closer to Todd Mezullo's job, are hoping to find an investor
who will see them as a good risk. The couple has posted their
names on a bulletin board on Sullivan's Web site hoping to
hook up with an investor.
While Sullivan has overseen
about 1,000 equity-sharing deals over 17 years, she says it's
a home-buying tool that is most used within families, specifically
for parents helping children.
Sullivan suggests home
buyers interested in equity sharing consider approaching family
members and friends and asking them to invest $2,000 or $3,000
each until there is enough money for the down payment. She
also recommends they learn how to explain the benefits of
the investment, particularly the possible appreciation benefits
of investing in California real estate.
Would-be home buyers interested in equity sharing might also
try contacting realty agents, accountants, attorneys and other
professionals who might know an investor.
While equity sharing can be mutually beneficial for investors
and occupants, financial experts recommend using a real estate
attorney who understands equity sharing agreements. Do not
attempt to draft the contract yourself, they say.
Some tax professionals recommend against equity sharing agreements
with strangers, saying this tool works best for parents who
want to help their children get into a home.
For more information about equity sharing in buying homes:
offers a free seminar on equity sharing on the first Tuesday
of every month, 6 to 7 p.m. at Bank of America, 1000 Fourth
St., San Rafael. Reservations by calling (415) 461-1444 or
going on the Web at www.msullivan.com
Sullivan has written
a book on the subject, ``The New Home Buying Strategy,'' that
is available at Amazon.com. ($24.95, McGraw Hill).
SUNDAY, JULY 29, 2001
can benefit investors, first-time buyers
Judy Richter - Real
It's no secret that buying your first house
in the Bay Area is difficult.
Even if you have a good income and can make hefty mortgage
payments, it's hard to save a 10 or 20 percent down payment
when starter houses are going for $400,000 or more.
One way around this quandary is an investor-occupant arrangement
called equity sharing. In such an arrangement, the investor
supplies the down payment but doesn't live in the house.
The occupant lives in the house, pays the mortgage and agrees
to give the investor an ownership interest - usually 50 percent
- in the house.
To satisfy Internal Revenue Service requirements, the occupant
also pays the investor rent in proportion to the investor's
ownership share, said Marilyn Sullivan,
a Larkspur attorney who specializes in equity sharing contracts.
In turn, the investor claims his share as rental property
and is entitle to the tax benefits that go with it.
Sullivan cited a theoretical $00,000 house for which the investor
supplies the $80,000 down payment and the occupant pays the
$2,00 monthly mortgage payment. They agree to a 50-50 split
in ownership and take title as tenants in common.
Using formulas and software that she has developed, Sullivan
said the occupant would pay the investor $640 a month in rent.
The investor uses that rent to pay expenses in this order:
homeowner insurance, which is tax-deductible for him but not
for the occupant; homeowner dues, if any, which also are tax-deductible
for him but not for the occupant; and whatever is left for
property taxes, which are deductible for both parties.
The investor also can depreciate his share of the house as
"In the long run, the occupant loses 1- to 15 percent
of the deductions" that he would get if he owned the
house alone, Sullivan
However, the investor has used the rent to pay expenses that
the occupant would ordinarily pay, and the occupant still
gets tax deductions that he wouldn't have had as a renter.
The arrangement usually continues for a set number of years,
after which either party has the right to buy out the other.
If neither one
wants it and they decide to sell the house, they split the
Again citing that $400,000 house, Sullivan assumed that it
appreciated 10 percent a year and sold for $779,000 after
She also assumed that the loan balance is $295,000, leaving
and equity of $484,000. From that amount the investor is entitled
to his $80,000 down payment. The occupant is entitled to the
$25,000 in mortgage principal he paid over the years, leaving
$379,000 for them so split equally. That's $189,000 each before
the sales costs are paid.
Besides walking away with that cash, the occupant has deducted
a total of $169,000 in mortgage interest over the seven years.
The investor has received $30,800 in rent but has applied
it to other costs, which he has deducted.
Furthermore, because his share was rental
property, the investor can reinvest in another rental property
called a tax-deferred exchange - and not pay taxes on his
share of the sales proceeds, Sullivan
Equity sharing can be an excellent real estate investment
because the occupant has an ownership stake and a strong incentive
to make the payments and maintain the property. Even if one
part reneges on the deal, the other can foreclose.
Sellers confronted with a slow market might offer to do an
equity-sharing arrangement to help sell their houses.
Many parents see equity sharing as a good way to help their
children buy a house. Moreover, they can gift a portion of
their investment to the child or children each year. "It's
a good estate reduction tool," Sullivan
However, equity sharing also can be done by
strangers. Some people put ads in the paper looking for investors
One of the most important factors in equity sharing is to
choose a house that has a good chance
of appreciating, Sullivan said.
It's also important to remember that this is a business deal
even when family members are involved. Therefore, it's crucial
to have a written contract that spells out all aspects of
the finances as well as contingencies such as death, bankruptcy
Sullivan has written two
books about equity sharing: "The Complete Guide to Equity
Sharing" and "The New Home Buying Strategy."
She also teaches a free seminar about equity sharing the first
Tuesday of every month from 6 to 7 p.m. at the Bank of America,
1000 Fourth Street, San Rafael. Reservations may be made at
415-461-2311 or www.msullivan.com.
E-mail Judy Richter at