Equity sharing (also known as housing equity partnership) is like a private reverse mortgage loan. It is most often used in the U.S. when a parent needs money and adult children have economic means.
With equity sharing, the person who owns the house receives money which can be a lump sum or an amount paid over time. The person with the money, the investor, receives a share of the equity(ownership) in the house. For instance, if the house is worth $100,000 and the investor puts up $25,000, he or she could reasonably expect to receive an ownership interest of twenty-five percent (25%) of the house.
There is no loan to repay. The investor receives his or her return when the person in the house dies - either by taking over the property or from the proceeds of a sale.
On the downside:
- With this type of arrangement, you rely on your family members or others to repay the loan. If they lose their job or face unexpected bills, you may not get the full balance of payments. If they cannot keep up with the payments, you could face foreclosure and have to move out. (They will receive a portion of the sale proceeds).
- Any difficulties with this type of arrangement can cause damage to family relationships. Also, people who loan you money could become critical of your lifestyle or spending habits.
If an equity sharing arrangement is of interest to you, you can learn more about it by reading: Shared Equity Ownership by John Emmeus Davis, Research Fellow, National Housing Institute. The document is available for free at: http://www.nhi.org/pdf/SharedEquityHome.pdf .
NOTE: Before executing a shared equity agreement, contact a lawyer who specilices in elder issues and/or real estate. Click here to learn how to find a lawyer. Click here for tips about choosing a lawyer.