An equity share is a joint purchase of property and is an offshoot of the joint venture. In an equity share, one party, called the Occupier, occupies the property. The other party, called the Investor, provides the down payment funds.
The Occupier has exclusive occupancy rights and assumes all the obligations of property ownership. Depending upon the agreement, either the Investor or the Occupier (or both together) obtain a mortgage for the property. The Occupier usually makes all the payments on the mortgage.
Both parties agree to a termination date for the equity share. The norm is from three to ten years. Before the termination date, the parties either sell the property and share the profit, or the Occupier exercises the right to refinance the property and buy out the Investor’s interest.
When the Occupier wants to buy out the Investor, a professional appraisal of the property usually establishes the buy-out price. The Investor gets reimbursed for any cash invested, and the Occupier gets credit for any cash spent refurbishing the property.
Any remaining equity (or value) over the mortgage amount is shared between the Occupier and the Investor according to their agreement.
Win/Win: Everyone benefits
As with a joint venture, both parties benefit. The Occupier becomes a home owner without needing any cash or, in many cases, credit. And the Investor makes a superior return on the investment. Just as with joint ventures, you’ll need to find an Investor–either family, friends, or an outside source.
A motivated seller may also agree to sell on an equity share agreement, especially in a slow-moving market. The seller would become the Investor and acquire the opportunity to share in any future appreciation in the property.
Both parties share the tax benefits
In an equity share, both the Investor and the Occupier are entitled to the tax benefits of real estate ownership. However, in order to comply with IRS regulations, the equity share agreement must be drafted with special care so the Investor is not seen as a lender under the tax laws.
A lender does not receive the tax and tax deferral benefits of ownership, and if certain provisions are not worded properly, the Investor could lose those benefits.
Likewise, a renter is not entitled to the tax benefits of ownership. Therefore, the agreement must be written so the IRS does not see the Occupier as a renter or mere tenant.
Use a real estate attorney for safety
An equity share can be an excellent way to acquire real estate with little or no money. However, unless you are an attorney and understand tax law, do not draft your own equity share agreement.
This is a specialized area where even very experienced investors should use a real estate attorney who understands equity share agreements.