How Homedebtors Could Avoid Foreclosure - IR's Post

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<p>I see. So this equity partner, (the one not living in the home), is willing to incur a negative cash flow of $48,000 per year? Please introduce me to this equity partner, because I have a great deal for them.</p>

<p> </p>

<p>So, this home has "a market rent of $4,500", and payments without maintenence and upkeep are $8,000?</p>
 
<p>ISB: <em>"What I mean is, if the bank's potential upside is to own the equity appreciation, is that really feasible?"</em></p>

<p>ISB, I am not sure the Big Banks would be <strong>direct</strong> participants in the equity sharing game, if it were to catch on (just like they stayed out of the sub-prime game for the most part). I would venture a guess that they would probably lend to intermediaries (like NCT "back in the day") called "equity sharing investors".</p>
 
Awgee....I read about equity partners, this one is backed by AIG, and typically it works this way. Once you have a house picked out you bring the equity partner in. According to them they have "sophisticated tools" that let them appraise the house. Once an appraisal is completed, typically a three step process, they will give you anywhere from 10% to 16% of the home value. Once the contract is signed they are now entitled to 50% of the home's profits once it's sold. If sold between 1 to 5 yrs then their is a penalty ranging from 25% to 5% respectively. If it is sold for a loss then it is split between the two.





It's only a "negative" cash flow if the investment is not returned plus the cost of funds. Click on the following link:





http://www.rex-inc.com/<strong>





FYI.....I think this is a totally bogus product, however I think firms like AIG have so much cash laying around they have nothing else better to do with it.</strong>
 
<p>mino - Since the owner who is living in the home is making only half the payment, there is a negative cash flow. Yes, the idea is to pick up the "appreciation" at the time of sale, but until the sale, the equity partner is incurring a negative cash flow, and in the amount of $48,000 minimum. The home has to appreciate at an annual rate of 8% for the equity partner to break even and that is not even accounting for cost of funds until the time of sale.</p>

<p>Do you really think that AIG or anyone would take this type of risk for the hopes that this property will appreciate at a rate greater than 8%, and even then, the equity partner only gets half of the appreciation.</p>

<p>No one who has, or can qualify for $1.1 mil is this stupid. If they are, please get me in contact with them, as I have a great deal for them.</p>
 
<p>I checked out rex-inc.com, looks like you can only extract existing equity in the house rather than future equity, or am I wrong on that little detail? If rex-inc allows one to extract future equity, how do they compute the future equity anyway? </p>

<p>After reading nirvinerealtor's post, I checked with one of my friends, she is a real estate lawyer for a large investment fund. According to her, it is very unlikely for a bank or anyone to make a loan that is based equity sharing. There are complicated rules that would prevent this from happening, not just lending rules, but also investment rules. Reporting the result at the end of the quarter will also be very complicatd since with each new loan, the bank's holding is changing. In addition, she doubts anyone on WS will be crazy enough to buy this kind of loan under the current housing condition. Equity sharing has one nasty thing is that the loan can be called in.</p>

<p>Most likely, the loan is a shared apprecation loan, in which case banks are cleared to make this type of loans. Essentially, the lender will make a very low interest loan in exchange for part of the future appreciation, and the buyer is still responsible for the entire principle. Several disadvantes</p>

<p>1. borrower takes all the risk. If the market goes down, the borrower is still responsible for the entire loan. If the market goes up, the lender will take a big chunk of the gain.</p>

<p>2. Tax advantage is reduced. Because the interest is so low, the tax advantage, one of the main reason to own rather than rent, is gone. </p>

<p>3. Is it me or is this feels like a very very long term lease? </p>
 
Awgee....I am sorry I didn't make it clearer but the above scenario is working on the assumption that if you go through an Equity Partner that you put those funds to work as a down payment to reduce your monthly mortgage. The equity partner does not pay for a portion of the mortgage....it's more like a HELOC than anything. In fact, the homeowner does not even have to use it to reduce their payment, it can be used for college loans, vacations, or other investments. If you don't believe me click the link and read for youself....I don't make things up!!!!!!





Secondly, and I pardon your sarcasm, AIG and others do see a marketplace for this type of financing, no I don't agree with it's theory either. However, considering that American Corporations are generating and reporting record profits they have to be put to use some way. In AIG's case they have chosen, for one reason or another, that this is the best way to use their money and get a decent return on their investment.....it you want to contact them the link is above and I am sure they will love to loan you money.





Now how the investment is setup could be anyone's guess....corporate bonds, pure cash, or even an LC where this company is paying them a coupon rate for all funds outstanding....I don't know. On AIG's book I am sure it is not a negative cashflow and on Rex & Co I am sure they are showing it as an asset or a contra-liability acct.
 
<p>tourbillon (cool name by the way, like the type of watch): "<em>3. Is it me or is this feels like a very very long term lease?"</em></p>

<p>My point exactly.</p>

<p>Why would anyone take 100% risk, a burden of a 30 year lease (or 5 years with an option to renew if you take the hefty lease break penalty of 5-25% into account)? One could easily get into a "luxurious" house like this by simply renting it from a FB and getting roommates to help foot the rental bill and just renew the lease from year to year? Unless of course that they are still delusional about property values skyrocketing in the not too distant future wherein even though you are giving up a piece of that equity, you are still hoping to make a bundle. Ahhh the good ol' days!</p>
 
mino - No. I apologize. I should have been more clear. I don't doubt for a second that folks are equity sharers, but in the same vein, I have no doubt that no one of means is going to equity share in the type of deal that nir has laid out; specifically where the non-live in partner pays half the monthly cost. Unless the non-live in is a parent, in which case all this is irrelevant, because it then becomes a gift and not equity sharing.



Back to nir's original post, the property would rent for $4,500. No one in their right mind would enter an equity sharing deal where they get less for rent, ($4,000), as half owner, than they could get, ($4,500), as full owner without having to share in potential profits. They are still liable for the entire payment and they will still incur any potential entire loss. No matter what the agreement, how would they get the live-in half-owner to cough up their share of the loss? The live-in has nothing and the lender will go after both for the entire loss. And the loan would be recourse to the non-live-in partner.



My second property was an equity share, plain and simple. One of my roomates and I entered into a written agreement whereby I furninshed the entire down payment, we were each responsible for half the monthly, and we would split the profits/loss 75/25. I am not unfamiliar with equity sharing, and the deal as nir presented it is ludicrous, unless entered into with a parent, in which case it should be presented as such, because it does not make a case for normal equity sharing, or for the attractiveness of buying a home at this price.



A non-parent equity share partner is not going to provide half the monthly payment, which makes the deal as presented look attractive and a reason to buy a $1.1 mil home in this market, and presents a $1.1 mil price as reasonable and doable. It is neither. Nir presented this deal as a monthly cost of $4,000 total to the buyer. I knew something was up and therefore kept questioning until she admitted that the actual monthly was $8,000. I ask you without sarcasm, do you think someone would incur a negative cash flow of $48,000 yearly to split possible profits? Would you? Wouldn't you just buy the home yourself and rent it for $4,500 and have less neg and more profit? Even that deal is not attractive. I do not ask these questions to put you down. I just want others to look critically at the reasons given for buying a home. It doesn't matter how "creative" one is at purchasing a property one cannot afford, whether through equity sharing, 55% DTI, no doc, option ARM, dreaming big and making it happen, possibility thinking, 80/20, no down, foreclosure, whatever. The re market is trending down. Finding four homes that appreciated, when four hundred depreciated doesn't change the trend. And even if enough creative financing could change the trend, it would only prolong the inevitable.
 
Shared ownership/equity schemes and joint-mortgages have been popular in UK since property prices skyrocketed there. Examples:


http://www.direct.gov.uk/en/HomeAndCommunity/BuyingAndSellingYourHome/HomeBuyingSchemes/DG_066479


http://www.sharetobuy.com/


http://www.sharetobuy.com/casestudies.php#17





It's probably not as common here, though I do recall when I was house shopping in north Placentia back in 2001-2002, I meet 2 Hispanic families that was chipping in to buy a new 4 bed SFR together. Hope they got it and made a bundle on equity gains!





If you look at Craiglist, it's obvious that there are many people who bought new homes in South OC and trying to rent rooms out to subsidize their mortgage.
 
<p>I think NIR likes to be the pinata at the party. </p>

<p>She knows she has the most to gain if she makes it out of here with a straight face and gets a client or two out of this in the process, who are taken in with her fortitude and optimism in these trying times as a vote of confidence in her...</p>
 
<p>tourbillon,</p>

<p>I think your take on this equity sharing is correct. You are responsible for the loan 100%, paying at reduced cost (subsidized rate), and share equity gain when house is sold in the future. You have 100% possession of the home. So it is not the same as 2 parties buying 1 home together like mentioned by momopi's.</p>

<p>According to the guideline for qualification, your credit worthiness must be high (FICO > 700) and you must have certain amount of reserve to qualify for the loan, so there is less chance of default. The equity share institution makes money originating and selling loans. IMO, if buyer defaults, it's the investors that will get hurt, not the buyer nor the equity share institution.</p>

<p>The way it was explained to me by the equity share institution, buyer can get in at almost no cost, making payments lower than rent, and get the tax deduction. It's true that buyer is responsible for 100% of the loan; however, how is it different if you were buying a home without equity sharing? </p>

<p>It sounds like the equity share instituation has extra money to gamble on real estate gain.</p>
 
<p>nirvinerealtor</p>

<p>In that case, it is not a equity shared loan, but an apprecation shared loan. I am quite confused on two points. First, there should not be any/or significant tax advantage since the interest is low. Second, the investor won't really get hurt because as a lender, they will grab the house if you default but will get most of the gain if the price go up. So you, as the borrower, took all the risk while get only a little bit of the reward. If the rate is subsidized rather than low interest, the subsidized portion will be taxable (gift, etc), which actually make this deal even worse than rent. You get no tax advantage, get taxed on the money you don't see, and in the end, take all the risk. I don't see why this deal is hot?</p>
 
Now that I think about it, this almost sounds exactly like the land slave (peasent slave) in the ancient times. I believe one of the main reason for Chinese civil war was due to the large number of land slave in the country. I hope US don't head down the same route
 
tourbillon,





<em>"Now that I think about it, this almost sounds exactly like the land slave (peasent slave) in the ancient times."</em>





In the post I wrote, I compared it to living in Potterville from It's a Wonderful Life. The concept is the same, once the lenders have both the loan and the equity, what are "homeowners" other than renters?
 
I wish I had been around to share in this lively discussion today.





If an equity sharing arrangement were as simple as follows, I would do it:





<ol>

I will use a combined loan and equity for 50% of the cost of a house and make any loan payments.

Equity Sharing Partner puts up 50% of the cost of the house (or whatever share of the cost they wish -- the more the better).

I will promise not to take out any additional debt against the property - no HELOCs, 3rd mortgages, etc.

I will pay taxes, insurance, HOA, etc.

Investor cannot force sale or put debt on the property (they have to wait for their money until I am ready to sell).

Investor will receive 50% of net sale proceeds (net means after commissions and other costs) in an arms-length transaction (I can't sell it to a relative at below market value).




I will pay the lender out of my half.

</ol>

The result of all this is that I get to live in a house double the value of what my income can support for the cost of some additional property taxes. I have no greater risk than I had before because everything is shared pro-rata. I wouldn't do this now because I would still be taking on the risk of declining home values, but I would do this at the bottom.





Personally, I think an investor would have to be an idiot to want to do this. It is a pure appreciation play. It has all the downside risks of real estate for a rate of return that historically has only marginally beat inflation. If some investor wanted to leverage me up into a McMansion for the hope at some appreciation, I would do it -- it's a no brainer, I get to live in a nicer home on some fools nickel.
 
<p>IR,</p>

<p>I knew you would have something good to say,</p>

<p>Actually, the equity partner puts in $0 down; same as the buyer. The investor (equity partner) is financing 100% to the buyer at a very low interest rate.</p>

<p>It's even better, you are having to pay only 1/2 of taxes and HOA's. When you sell, your selling cost is 6% that will come off the gross proceed.</p>

<p>Anyway, I feel the same as you do about the whole set up. I just did not want to blurt it out first. It's really a no brainer for those who wants a McMansion (just like this young lady did). I do not believe the investor is an idiot. If you are unable to make payment, you are under contract for a buy-out by the investor, which I think there is an IOU to the buyer if the house value goes south. But again, it's no difference in risk than you buying a home conventionally.</p>

<p>Either someone has a money tree or he/she has a lot of confidence in real estate!</p>
 
<p>Aside from the tax advantage, which at the reduced monthly payment, does not really matter, I would love to get one of these loans. However, I think it is rather important to seek some clarification on the issues of forced sale and debt against the properity from the investor. Like IrvineRenter, I am having a hard time understanding why would anyone want to do this. By my rough calculation, the investor will need at least 10% gain a year in order to just make even plus all the other risks. I think something is seriously not adding up </p>
 
tourbillion - What doesn't add up is in a normal equity share, the investor does not help make the payment. The live-in owner makes all the payment. In the true story as presented by nir, the investor is making half the payment for a negative cash flow of $48,000 per year, making him an idiot.
 
IrvineRenter, I digged a little on the issue of SAM (Shared Appreciation Mortgage). Apparently, SAM is usually given at about 2% below the market rate, so instead of a 6% loan, you will get a 4% loan, so the reduction is not as big as we initially thought. It is unlikely the girl in question can reduce her payment as much as IrvineRealtor said in her post based on the information I have regarding SAM. Maybe there is something else with that loan?
 
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