An Equity Partnership is an agreement between a homeowner and an investor. The investor provides the cash that the homeowner needs in exchange for a portion of the homeowners equity. Why consider a Equity Partnership? The benefits to the homeowner are the much needed cash to bring payments current. This allows the homeowner to stay in the home. The benefits to the investor are a share of the future appreciation of the home.
Example #1.
Bob is 10 months behind on his mortgage payments. The bank has filed a Notice of Default with the Public Trustee and the foreclosure sale date is scheduled.
10 payments X $1,500 = $15,000
Attorney fees $2,500
Sale date 6 weeks
Additional payment due before sale 1 X $1,500
Balance due in cash $16,500
Now Bob is sweating bullets. He has some equity in the home, but does not qualify for a modification or a refinance because he was out of work for the past year due to COVID. He did okay on unemployment especially when he didn't have to pay the mortgage. The truth is right now Bob has $4,000 in his checking account. What are his options? What would Bob offer in exchange for the $16,500 cash he needs quick.
Joe the investors stops by and talks to Bob. Joe likes the neighborhood, likes Bob and wants to help. So Joe pays the past due amount to the bank and enters into an agreement with Bob. The agreement gives Joe a $20,000 equity stake in the property payable monthly or lump sum when the property is sold or refinanced. Joe has one demand. He needs his cash back within 5 years.
That's a lot of equity to give away, but it gets Bob out of a tough situation. He doesn't have to move. He can make the payments moving forward now that he's back at work. He didn't qualify for the modification or refinance. If he put the house on the market he could get all of his cash, but the real estate broker takes his 6% commission and then he would have to move.
Example #2
Tom is 8 months behind on his payments. His hours got cut because of COVID. He was doing okay with the supplemental unemployment, but he didn't qualify for the "Bonus" because he still had a job. Tom did the "right" thing and entered into a Forbearance Agreement with his bank. The deadline has passed and Tom still hasn't taken care of it. Lucky for him that the Foreclosure Moratorium stopped his house from going to foreclosure sale last month. On top of everything else the furnace broke a few months ago. $7,000 for replacement! Tom can live without AC, but he needs heat this Winter.
8 payments X $1,750 = $14,000
Attorneys Fees $2,500
Repairs $7,000
Total due $23,500
Tom doesn't sleep well. He wakes up in the middle of the night with constant worry. If he had the money he would pay it. The monthly payments are a stretch, but its the repairs that are the real problem. In addition to the furnace the house needs paint and new windows. Things he put off a while ago now stare at him daily.
Mike the investor stops by one day and talks to Tom. Tom has reached the end of his rope and just wants out. Tom would move tomorrow and forget the whole thing, but he doesn't have enough money to move. He stopped by a new apartment complex the other day just to "look". The apartments are small, there is no garage, but the kids can each have their own bedroom and its Brand New. Because of his missed payments Tom's credit is not very good and the apartment wants a big deposit.
Mike is interested and offers to help. He's been looking for a rehab in the area and likes Tom's corner lot. Mike offers Tom some money to move. Its not as much as he would get from selling the home with a broker, but its enough to move into that new apartment. And he doesn't have to worry about any more repairs. Mike plans to bring the loan current and rehab the property. Once the rehab is complete he will look for a tenant to pay a high rent. Tom's credit improves because the loan is still in his name and its now current and being paid on time. Tom knows he will be able to buy another home in a few years because of his strong credit. Mike rents the house for 3 years and then sells out. Tom's loan is paid off with a great credit rating over the past 3 years. Tom and Mike both win.