Equity Sharing – The New Real Estate Alternative to Short Sales, Bankruptcy and Foreclosure
Due to the recent decline in home values across the country, millions of homeowners appear to be in quite a bind. Selling a house that’s worth less than the mortgage balance forces home sellers to make tough choices. Do they sell at market rates and pay the difference in cash to the lender? Is a short sale or bankruptcy a cure or a make it worse? And what about leaving home and debt? What are the chances of getting another home?
For some, hearing a real estate agent suggest using personal funds to sell a home at a loss is like hearing fingernails scratching at a chalkboard. No home seller wants to hear that. Many try to negotiate a short sale with their lender; meaning the property sells for less than what is owed with the bank’s approval instead of a foreclosure scenario. It sounds good on paper, but most lenders don’t approve of short sales, and even if they do, a short sale can negatively affect an otherwise good credit score. And with bankruptcy or leaving, credit is definitely destroyed along with the ability to qualify for a home loan for years to come.
Any home seller who is upside down with their mortgage faces numerous challenges; or so they believe. What they don’t realize is that there is a very simple solution that has been around for hundreds of years during times of easy credit or no credit. Allowing someone to assume a mortgage payment has always been a valuable option for home sellers and buyers in the past because it easily solves the problem of transferring title when money is tight and the economy is down.
But because home values have fallen so dramatically over the past five years, some homebuyers may not want to inherit a mortgage that weighs so heavily on a home’s value. From a home seller’s perspective, selling a home to a complete stranger where the credit balance is unattractive, the worry of the new home owner leaving when things get tough is a very real possibility. The home seller may be forced to foreclose on the new owner while ruining their own credit in the process for late mortgage payments.
A different “pay-as-you-go” approach can be used to mitigate each of the aforementioned concerns. Sharing equity can bring relief and security to both the home seller and home buyer. It must be remembered that real estate values are cyclical. They go down, but they always come back up during the good times. If property values are low today, we will surely experience a boom tomorrow. Equity sharing can weather the storm until residential real estate values return the property to a viable investment.
This is how stocks can deliver huge results in any economy.
1. The home seller places their title in a special escrow-like account with no transfer to the home buyer.
2. Using a very special “Co-Beneficiary” agreement, the home seller and home buyer treat the property as a real estate business venture, both becoming equity “partners.”
3. The homebuyer makes a mutually agreed upon monetary “contribution” to this agreement and, as an occupant, is treated as a property manager living in it, with all the rights of home ownership and financial rewards and responsibilities assumed by a true homeowner, only on a “rent to own” basis.
4. Over time, as the property increases in value and when the property is sold, the home seller and home buyer can share the equitable proceeds from the profitable sale of the property, or the live-in property manager can buy the property at fair market value less its equity.
Time is the great healer in a bad real estate market, and an equity agreement is the perfect remedy when recovery time is needed. If it takes more time to raise the value of the property above the mortgage balance, so be it. Equity sharing is a great tool for a homeowner because they can find someone to take over the payment even if the loan is owed more than the value of the house. It’s also a great way for someone with a good job but bad credit to get their dream home without having to qualify. Equity sharing is safe for all parties and is an ideal solution for moving real estate in a sluggish economy.
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