Who Pays, Gets What : Here’s How an Equity Sharing Deal Is Used

Here’s how Bob and Wendy Rafkin used an equity-sharing agreement to buy a $179,000 home in Huntington Beach with just $5,800 of their own cash:

The purchase price of the three-bedroom home with pool was $179,000. Two investors, arranged by Costa Mesa-based CoEquity Corp., put up a total of $23,700--a 10% down payment of $17,900 and $5,800 for half of the closing costs. The Rafkins put up the other half of the closing costs.

The carefully worded contract gave the investors a 50% interest in the property, and the Rafkins got the other 50%. The added financial strength of the investors made it easy to obtain a loan from an institutional lender for the remaining $161,100 in needed financing.

The Rafkins are responsible for making the $1,233 monthly mortgage payment--about $100 a month more than their old rent payment--directly to the savings and loan that financed the deal. The couple also pays the two investors a total of $237 a month, reflecting 12% interest on the investors’ $23,700 investment.

At the end of seven years, the Rafkins will order one appraisal of the property and the investors will order another. If one appraisal is higher than the other, the midpoint of the two will be considered the value of the property.

The Rafkins will then have the option of buying the investors out. If the home has appreciated at a 7% annual rate, it’ll be worth about $287,000. Subtracting the $153,000 or so still owed to the bank, the Rafkins and their investors would have a combined equity in the property of $134,000.

Since the Rafkins paid $5,800 in closing costs and their monthly payments would have reduced the principal amount of their loan by about $8,000, they would be automatically entitled to $13,800 of the $134,000 equity in the property. The investors would be entitled to $23,700, representing their initial outlays.

The remaining $96,500 in equity would be split, 50-50, between the Rafkins and the investors. To buy the investors out, the Rafkins would have to come up with half the total equity--$48,250--plus the investors’ original $23,700 outlay. The couple could raise the money by refinancing or by taking out a new second mortgage on the home.

With the buy-out completed, the Rafkins would have full title to the house and $62,050 in equity--even though they began with just $5,800 and had been able to write off more than $115,000 in interest payments over the previous seven years.

If the couple wants to move seven years from now, the investors could buy out the Rafkins’ equity for $62,050, or the property could be sold on the open market and the profits split. Either way, the Rafkins would have plenty of cash to use as a down payment on their next home.