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This is Chapter Three from The New Home Buying Strategy.
This information is copyrighted. Duplication or use other than for
personal reference is prohibited.
Here is the Equity Share Checklist for your use in developing your
own traditional equity share transaction (meaning Occupier occupiers
the property while Investor provides down payment funds). There
is a separate checklist for each of the three types of co-owners
-- Occupier, Seller-Investor, and outside Investor - as well as
one for the property itself. The equity share checklist steps you
through your transaction -- from marketing and research to funding
and signing the documents. It's a proven formula for success of
your equity share, no matter which role you play.
1. Submit loan documents to be pre-approved or pre-qualify for
a loan through your loan broker or bank.
Your equity sharing choices become more meaningful if you know from
the start the maximum loan for which you qualify. These preliminary
loan approval processes will define the value of the equity share
property you can afford and how much Investor participation you
need.
As was mentioned in the last chapter, even if you cannot pre-qualify,
you will know where you come up short - so you can intelligently
address your shortcoming with your potential Investor. By identifying
where your financial profile is weak, you can concentrate on strengthening
or correcting the problem. Sometimes it only takes clearing up a
few lingering items on your credit report. You may be able to correct
these items and submit an amended package for pre-qualification
after all.
2. Go to advertised open houses; investigate the residential real
estate market and properties available.
3. Research the internet for properties for sale (www.realtor.com)
to get an idea of properties for sale that are appealing to you.
4. Talk intelligently with your close circle of influence offering
them participation as an Investor in your real estate investment.
Make a meaningful presentation with visual aids to each. Show them
how a minimal contribution can earn them a far better return than
they would make through any other investment. Remember, that there
is no good reason why you cannot assemble family, friends and peers
as your down payment investor team.
5. Advertise for an equity share seller if step 3 does not result
in all necessary down payment funds. You can combine investor types
so if your close group has some down payment funds, but not all,
offer the rest of your investor investment to the seller or a third
party investor.
6. Advertise for an outside Investor.
7. Give a copy of this book to all prospective team members.
8. Find an attorney who is well-versed in preparing Equity Sharing
Agreements or hire the author. If you use the form agreement available
on line at www.msullivan.com, and you are in a state that utilizes
escrow companies, we suggest that you hire an attorney or the author,
at least to review your documents.
9. Enter into the equity share Preliminary Commitment (see Chapter
Five) with the Investor you select.
10. Locate a suitable property if you have not already done so.
11. Make an offer on a property.
If no Investor has been located, make an offer contingent upon
the seller's participation as Investor.
12. Retry the same sources for an Investor.
If the equity share participation offer has been rejected and
you have not found an Investor, retry the same sources. Now that
you have a specific property in mind, you will have an additional
selling point - the property itself. Use the approach that appeals
to potential Investors - work up past appreciation figures on the
property and present your statistics in business format.
13. Retry advertising.
If you still haven't located an Investor, advertise again. This
time, feature your intended investment - the equity share property.
You may want to include a projected annual return to the Investor
- but be careful to stress that there are no guarantees.
14. Open escrow with an attorney or escrow company, depending upon
which state you are located in, after the offer is accepted.
15. Fund the loan.
Once the offer is accepted and the Investor is located, go back
to your loan broker or lender and request that the purchase be funded.
Advise your loan consultant that the purchase will be a co-ownership
and the Investor will also sign on the loan. Submit Investor loan
applications. (If the Investor does not want to be on the loan and
you can qualify for the loan on your own, use Washington Mutual's
loan that does not require all parties on title to be on the loan.)
Keep it simple with the lender. Don't get them involved in the equity
share aspect of your transaction. (See Chapter Four for more on
dealing with the lender.)
16. Contact your attorney for preparation of the equity share documents
or review of the form documents you have prepared.
The ideal time to have the equity sharing documents prepared or
reviewed is shortly after the offer to purchase has been accepted.
At the very latest, this step should take place after the loan contingency
is released. The Equity Sharing documents are not signed at closing
since the equity share phase of the transaction is separate from
the purchase of the property from the seller. Instead, the equity
sharing documents are signed in advance of closing since they involve
the agreements you and your co-purchaser have agreed to in purchasing
the property from the seller.
17. Contact your accountant.
Submit the equity share Agreement to your accountant for allocation
and confirmation of tax deductions and other tax-related issues.
When not using a real estate agent:
1. In the real estate classifieds advertise the property for sale,
offering equity sharing participation.
2. Post a sign outside advertising the property for sale and offering
seller equity sharing participation.
3. Advise relatives, friends, and co-workers of your willingness
to sell by equity sharing.
4. Attend real estate networking groups to market your property
and the equity share feature.
If selling through a real estate agent:
If the above methods do not produce results, you will most likely
choose to hire a real estate agent to market your property for sale.
5. Hire a real estate agent.
Advise your agent of your willingness to sell by equity sharing.
Be sure to select an agent who understands equity sharing. If they
do not, give them a copy of this book.
6. Have your agent list the property as "Seller willing to
co-own with qualified buyer who will occupy and pay expenses."
With or without an agent:
7. Consider the following criteria to determine Occupier suitability:
· The maximum loan for which he pre-qualifies. He should
be able to qualify for the loan on his own or with minimal assistance
from you.
He should have:
· A good credit rating and history.
· A good five-year rental history.
· A good employment history for the past five years.
· A history of reliability and pride, especially when it
comes to taking care of the contemplated equity sharing property.
8. Accept the offer subject to the parties' entering into a mutually
agreeable Equity sharing Agreement within the next 30 days.
At this point it is also wise to enter into the equity share Preliminary
Commitment (see Chapter Five), establishing the primary terms that
will be incorporated into the formal Equity Sharing Agreement. The
commitment should be attached to the offer as an addendum.
9. If a real estate agent is involved, determine how the agent's
commission will be paid.
Through equity sharing participation, the seller may not always
cash out with enough to pay the agent's commission. Payment of the
real estate commission can be the major obstacle to an equity share
by the seller. Thus, the seller should make sure he will be able
to pay the commission, either alone or with participation by the
Occupier, before he seriously explores equity sharing sale through
his agent. If the seller is depending upon contribution to commission
payment by the Occupier, he should discuss this with the intended
Occupier at the beginning.
Since the entire property is not being sold, the commission should
be based on the agreed upon value of the property less the equity
seller is retaining in the property.
10. Fund the loan.
Once the offer is accepted, the seller and her purchasing co-owner
should begin loan application. The seller may also want to refinance
the loan prior to advertising it for sale, allowing his new loan
to remain in place during the later co-ownership. If this is the
seller's choice, he must close on the loan before marketing the
property for sale.
If the seller does not want to be on the new loan, lender choices
will be limited since as of this writing the author is only aware
of one nationwide lender, Washington Mutual, providing a loan allowing
less than all parties on title to be on the loan. (See Chapter Four
for more on the loan and the lender.)
11. Contact your attorney for preparation of the equity share documents
or review of the form documents you have prepared.
The ideal time to have the equity sharing documents prepared or
reviewed is shortly after the offer to purchase has been accepted.
At the very latest, this step should take place after the loan contingency
is released. The Equity Sharing documents are not signed at closing
since the equity share phase of the transaction is separate from
the purchase of the property from the seller. Instead, the equity
sharing documents are signed in advance of closing since they involve
the agreements you and your co-purchaser have agreed to in co-owning
the property together.
12. Contact your accountant.
Submit the equity share Agreement to your accountant for allocation
and confirmation of tax deductions and other tax-related issues.
1. Advertise in the real estate classifieds offering to participate
as Investor in a residential equity share with a qualified Occupier.
2. Advise relatives, friends, and co-workers of your willingness
to equity sharing invest.
3. Advise real estate agents of your willingness to equity sharing
invest.
4. Attend real estate networking groups to announce your willingness
to jointly own properties.
5. When you locate a potential Occupier, determine suitability
by the following criteria:
· The maximum loan for which he pre-qualifies. He should
be able to qualify for the loan on his own or with minimal assistance
from you. He should have:
· A good credit rating and history.
· A good five-year rental history.
· A good employment history for the past five years.
· A history of reliability and pride, especially when it
comes to taking care of the contemplated equity sharing property.
6. Once you locate a suitable Occupier candidate, have her obtain
loan pre-approval or at least pre-qualification.
7. Enter into an equity share Preliminary Commitment with the Occupier
you select (see Chapter Five).
8. Search for an equity share property.
When you have selected the Occupier, you and/or the Occupier should
search for a suitable equity sharing property based on the criteria
listed in the Equity Share Property Checklist that follows.
9. Jointly make an offer on the property desired.
10. Fund the loan.
Once the offer is accepted, go back to the loan broker or lender
who pre-approved or pre-qualified the Occupier and request that
the purchase be funded.
11. Contact your attorney for preparation of the equity share documents
or review of the form documents you have prepared.
The ideal time to have the equity sharing documents prepared or
reviewed is shortly after the offer to purchase has been accepted.
At the very latest, this step should take place after the loan contingency
is released. The Equity Sharing documents are not signed at closing
since the equity share phase of the transaction is separate from
the purchase of the property from the seller. Instead, the equity
sharing documents are signed in advance of closing since they involve
the agreements you and your co-purchaser have agreed to in co-owning
the property together.
12. Contact your accountant.
Submit the equity share Agreement to your accountant for allocation
and confirmation of tax deductions and other tax issues.
The equity share team should look for a property with the following
characteristics:
· Price at or below fair market value.
· Past appreciation shows upward consistent trend.
· Geographical area expecting good appreciation in the
next five years.
· General desirable physical property traits.
· With fixer-upper potential if the co-owners want to spend
time and money improving. In this situation, the Investor may want
to seek a sweat equity occupier willing to contribute labor.
· With good resale characteristics and value.
If you've followed the recommendations of this chapter, equity
sharing is nearly a reality. You've found a co-owner and property
-- or are clearly on your way. Chapter Four guides you through the
next step -- choosing your team of professionals.
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