Solano Real Estate Scene: Equity share options get people in homes
I witnessed and helped facilitate a few equity share purchase agreements in the 1980s in San Francisco and San Mateo County.
I moved to Vacaville in October 1988, and equity share agreements were not popular up here because of home affordability and financing availability.
Homes in neighborhoods like Woodcreek in Fairfield and the Meadowlands in Vacaville were selling for around $125,000 and many buyers were using FHA with 3.5 percent down or VA with zero down required. For those that couldn’t come up with the 3.5 percent down on FHA could get a gift from mom and dad for the $4,500 required to buy a home.
Conventional financing required a 5 percent contribution from the buyers own seasoned funds back then and if 100 percent of the down payment was coming from a gift, then the maximum loan a person could get was 80 percent of the purchase price. Not many moms and dads had that kind of money laying around to help their kid buy a house anywhere, especially down in the Bay Area where loan limits for FHA and VA were not high enough to buy.
Today in Solano County, gift funds are allowed for conventional loans up to 97 percent loan-to-value, and there are first-time home buyers programs available for folks to buy with no down payment.
Equity share agreements became popular when parents, rich uncles, grandparents and godparents told their kids, “hey son or daughter, I cannot gift you $60,000 to buy a house in San Mateo County but I would be willing to buy the house jointly with you as partners as an investment for me and a place to live for you.” There were also private investors that offered up the 20 percent down to very qualified unrelated buyers to purchase homes on equity share agreements with the investor claiming his 50 percent of ownership as a rental and the owner occupant claiming his or her 50 percent as owner-occupied.
The two partners would obtain a loan with the 20 percent down and be able to get owner-occupied financing, which offers better rates and terms than non-owner investor loans. The owner-occupant would pay market rent plus 50 percent of the negative cash flow if any or split the positive cash flow 50-50. Obviously, the owner occupant must pay more than the investor if they get to enjoy the occupancy.
Equity share agreements are also required or helpful when two plutonic friends or two brothers or sisters go 50-50 on a house to live in together.
Think about it, if two single people can each afford and qualify for a $250,000 house, it may be an interesting idea to go 50-50 on a $500,000 house and simply fight over the master bedroom rather than move to Fresno to find a nice home for $250,000.
Another thing I am seeing today is families going partners on property, combining resources to buy huge homes that can accommodate the senior citizen parents with their baby boomer or even younger children. We see homes nowadays that have two master bedrooms, one upstairs and one down, or homes on big lots or even acreage with two homes on the property.
I recently closed a loan for a family that combined resources and purchased a home on 10 acres with two beautiful separate homes on the property in Vacaville, allowing privacy and a kitchen for each cook. The two couples now enjoy a family compound for them and the numerous grandkids and relatives to come stay and play.
One thing for sure, if anyone ever buys real estate with someone other than a spouse, an equity share agreement or at least some type of partnership agreement and legal advice is suggested to avoid disputes and fights.