How does Equity Partnering Work?
Equity partnering involves selling a home that has equity (when the home is owned outright or is worth more than what is owed on it) to an “investor partner”. The investor partner then in turn resells the home (possibly as-is or possibly after renovating it) in exchange for agreeing to share some of the profits with the original owner. This can be a good program for a homeowner that wants to renovate their home, but does not have the cash to do so.
There are many variations to this – only limited by the creativity and experience of the investor partner.
Example of Equity Partnering:
- Home Value (after repairs): $200,000
- Renovation/repairs needed: $30,000
- Total of all loans/taxes owed: $110,000
- Purchase price to investor: $110,000
- The investor buys the property, completes the renovation, and resells the property on the retail market to an end buyer.
- Investor expenses (renovation): $30,000
- Sales price to end buyer: $200,000
- Costs of sale (commissions and closing costs): $15,000
- Total profit: $200,000 – $15,000 – $30,000 – $110,000 = $45,000
- Profit share paid back to original owner: $15,000 or more (typically 1/3)
Note: depending on the home, location, amount of renovation, etc. an investor may or may not be willing to do equity sharing on a home. Renovating homes is high-risk, and there must be enough profit to justify the transaction.
Other forms of equity partnering involve homes not needing renovation in which the investor partner finds a new buyer that is willing to pay the existing mortgage going forward, and then refinance the home in the future, at which time a profit is shared with the original seller and the investor partner.
All of these transactions are fairly deal specific and fairly complex. Hippie Hollow Homes has extensive experience buying and brokering homes using these types of creative financing strategies. Give us a call and we can discuss your specific situation..
Question About Equity Partnering
Can I do equity sharing on a home with no equity or that is behind on payments?
Equity sharing only makes sense on homes that have equity. If the amount owed PLUS the cost to sell a home (typically 7-8%) totals what the home is worth (or more), then the home has no equity, and there is no equity to share. If, on the other hand, the home has significant equity, but the payments are behind, there may be many ways the home can be sold. Give us a call to discuss!
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