THE WALL STREET
December 2, 2008
Putting Your House to Work
How some homeowners are trying to turn their homes into profit centers, despite falling values
By DIANA RANSOM
Faced with rising expenses -- and declining home values -- homeowners are finding creative ways to squeeze money out of their houses.
Some are renting their place out to boarders, or to film crews who want to shoot commercials and movies on location. Others are cultivating crops in their backyard to peddle at farmers' markets, while some are installing solar panels on their roof and then selling the renewable-energy credits they get from the government.
No matter which course they choose, "rising costs have sent many homeowners scrambling for ways to stay afloat," says Marilyn Sullivan, a real-estate attorney in Arroyo Grande, Calif., who often counsels troubled homeowners.
Here's a look at four strategies homeowners are using to make ends meet.
Renting Out the House
The rental market has been flying high these days. As foreclosures mount, displaced homeowners are looking for someplace else to live -- and potential buyers are getting gun-shy about leaping into ownership.
Some cash-strapped homeowners are trying to use the situation to their advantage. Eric Thompson, a 39-year-old insurance salesman, recently moved out of his Richmond, Va., home and rented it to a couple of twentysomethings for $1,500 a month.
"I had to do something," Mr. Thompson says. "I have other bills to pay, and I can't afford them."
Mr. Thompson bought the 1906 Victorian row house for $365,000 in 2005. He moved to the area to start an ice-cream franchise with his brother and sister-in-law. Two years later, he got a job offer in California and was ready to leave -- but found he couldn't unload his home.
"It was on the market for six months and did not get one offer," Mr. Thompson says. He even tried reducing the price well below what he paid, but that didn't work, either. "In my neighborhood, it's been four months since the last home sold," he says.
So, Mr. Thompson found lodgers and moved back in with his parents in Santa Maria, Calif. They agreed to let him come home, as his situation appeared bleak.
Mr. Thompson continues to worry about his bills, particularly his five-year adjustable-rate mortgage, which he says could cause his monthly payment to skyrocket if the interest rate on his loan adjusts upward in two years.
Location, Location, Location
Frank Sanford also knows a thing or two about contending with a pricey house payment. The 50-year-old London transplant pays about $9,000 a month to live in a 4,300-square-foot colonial clapboard house in Los Angeles, which comes equipped with four bedrooms and a tennis court.
To make his mortgage more affordable, Mr. Sanford rents out his home between 30 and 40 days a year to film studios. The house has shown up in commercials for the likes of Wal-Mart Stores Inc., Microsoft Corp. and Verizon Communications Inc., as well as the movie "Transformers."
Mr. Sanford usually charges about $995 a day, although the price can shoot up as high as $5,000. All told, he says, he pulls in about $25,000 a year from the fees.
Of course, not every homeowner -- or every home, for that matter -- is cut out for the movie business. "It's a big house, and I'm just one guy," he says. But, more important, "I'm not the kind of person that feels that my home is my castle."
For the setup to work, Mr. Sanford says, you have to be willing to see people traipsing in and out of your home, alarming the neighbors, leaving scuff marks on the floor or chipping away at the paint.
Now he's thinking of getting out of the business -- but not because of those hassles. When he started renting his house, at the recommendation of friends in the film business, Mr. Sanford was also running a press agency at home. That helped him save on office space and allowed him to write off part of his mortgage.
But he recently sold the business, so he's looking to sell his home, too. "I think I'll get less than I could have gotten last year," Mr. Sanford says. "But it doesn't make sense to hold onto this house without the offices in it."
Back to the Land
Martin Barrett, a Scottish native living in Portland, Ore., didn't know the first thing about growing crops when he and his friend Dan Bravin discovered spin farming. The practice -- short for small plot intensive farming -- involves growing produce in nontraditional urban or suburban settings, and then selling it.
Despite their lack of experience, the two were tilling soil and planting seeds in Mr. Barrett's 9,000-square-foot backyard in no time. Then they started to move beyond those confines, cultivating crops on other people's property and giving them fresh produce in return for the use of the space.
Now Messrs. Barrett, 42, and Bravin, 38, sell people annual subscriptions to their produce for $350 a pop. Their business, City Garden Farms LLC, also peddles produce at farmers' markets throughout the city.
"Before March 2008, I had never grown a vegetable in my life," says Mr. Barrett. "After six months, we grew in excess of 5,000 items for people."
From his property alone, Mr. Barrett estimates, the business has sold about $2,000 of produce collected over the 20- to 25-week harvest season from June to October. However, between buying seeds, farming tools and a refrigeration unit for his garage, Mr. Barrett says he and Mr. Bravin have just broken even.
Next year will likely be more profitable, Mr. Barrett predicts. "We will probably double the number of subscriptions we sell," he says.
Living Off the Grid
When Monica Ball and her husband, Bill, decided to hitch a 9,900-watt solar-panel system to their 4,000-square-foot home three years ago, they had some reservations. Even though the Sergeantsville, N.J., couple got a generous 70% subsidy from the state, they had to borrow $19,000 from their retirement savings to pay the balance.
In retrospect, however, "it was the best decision I ever made," says Ms. Ball, 43. Not only does the power from the panels help lower the family's utility bills, which Ms. Ball estimates used to total about $500 each month, the Balls also earn between $6,000 and $7,000 annually from the panels.
Here's how it works. Each year, the state of New Jersey provides the Balls with Solar Renewable Energy Certificates, which represent the cost of offsetting pollution-generating energy. The Balls then sell the certificates for about $500 to $700 on the open market to brokers or electricity suppliers who are required to invest in solar energy under New Jersey's Renewable Portfolio Standards.
Having this added income is especially helpful as the Balls' home, which is situated on seven-acre lot, costs a whopping $13,000 a year in property taxes, Ms. Ball says.
"To me, that $19,000 investment on the roof is the equivalent of having a rental property, except you don't have a tenant," Ms. Ball says.
Write to Diana Ransom at firstname.lastname@example.org
THE WALL STREET
July 9, 2007
A Little Help, Please
For first-time home buyers coming up a little
short, here's one option: Share the wealth
By DIANA RANSOM
While most people want to own a home, young singles and couples
often find it impossible to scratch together enough cash to make
the purchase. More established folks, too, sometimes discover that
the down payment for their dream house is just too big a nut to
It doesn't have to be that way. Simple financial strategies exist that allow disadvantaged buyers to split the cost of a house by sharing the wealth.
"We can do more when we join with other people's money," says Marilyn Sullivan, a real-estate attorney in Arroyo Grande, Calif. Using a form of co-ownership known as equity-sharing, at least two people or entities can own one piece of real estate, and the second party -- often a family member or friend -- doesn't have to be a resident. Nor does the second party have to wait until the property is sold in order to benefit from the investment. Indeed, co-owners who itemize can use the arrangement to claim deductions on their income-tax returns. Here's how to get by with a little help from a friend:
Basic Equity Sharing
In a traditional equity-share arrangement, one party occupies
the property and pays for all of the expenses, while a nonresident
investor -- typically a family member, real-estate investor or the
property's seller -- supplies all or a portion of the up-front cash.
Mom and Dad might agree to bankroll the down payment in return for a proportional share of the home's appreciation when it is sold. In some cases, the sellers may be willing to take on the investor role if they haven't been able to recoup the full value of their house.
Whoever the investor is, he or she will want to be named on the title along with the occupant. But the investor may not want to be named on the loan. Being on the loan, says Andy Sirkin, a real-estate attorney in San Francisco, may hamper future investments if the investor has other loans, since lenders generally consider excessive debt to be risky.
Once the overall financing is taken care of, there is the matter of rent -- and those promised tax benefits.
In equity-sharing, the occupant is required by the Internal Revenue Service to pay rent to the investor for the portion of the property that the investor owns. The amount depends first on what the property could rent for in the open market. Say the fair-market rental value is $2,000 and the investor's ownership stake is 20%. That means $400 a month is owed to the investor.
SHOULD YOU LEARN TO SHARE?
Here are some questions you should ask yourself if you're considering equity-sharing:
FOR BUYERS FOR INVESTORS
Am I willing to stay in one particular home for five years? Most equity shares have five-year terms, and require that the occupier remain in the arrangement for the full term. You forfeit some of your equity as damages if you end the equity share early.
Can I afford to tie up money for five years? Although investors are permitted to sell their equity-sharing interests, finding a buyer may be difficult.
Are my business and personal circumstances stable? Life changes such as a job loss can lead to default and loss of investment if, say, you can no longer afford the household payments. o Would I feel comfortable delegating control? The everyday management of the equity-share property will be in the hands of the occupier.
Would I feel comfortable discussing future financial troubles with my investor? The best way to avoid dispute and loss is to discuss trouble early and develop a strategy. o Am I willing to consider investment decisions from a homeowner's standpoint? For the occupier, the equity-share property is both a home and an investment, and his primary motivation may not be investment return. For the equity share to run smoothly, you will need to compromise on occasions when quality-of-life concerns clash with investment concerns
Can I share control of my home? You will need to consult with your investor on major decisions. Source: The Equity Sharing Manual by Andy Sirkin
Then, if the investor pays for expenses such as insurance, maintenance,
association dues and property taxes, the rent can just be considered
reimbursement for those costs.
The investor can deduct those expenses from his or her taxable income in an amount equal to -- and in some cases exceeding -- the rental income. If the deductible expenses, which are considered "passive" investment losses, add up to more than the rent, the excess may be carried over to future years or taken as a deduction against other passive investment gains such as those arising from other rental income or the eventual sale of the property.
The success of co-ownership arrangements hinges on having a well-crafted
equity-sharing agreement, which spells out various contingencies.
The agreement "is critical for managing the tax complexities,"
says Matthew I. Berger, a real-estate attorney in Santa Barbara,
There are potential downsides for investors: If the value of the
property has declined at the time of the sale, the investor must
share the loss. In addition, "they are parking their money
and aren't seeing any immediate profits," since the rental
income is used to fund property expenses, says Mr. Berger.
Many equity-share or tenancy-in-common agreements, as they're also
called, specify that the home has to reach a certain value before
it can be sold. But the agreements can specify in some cases what
both parties' responsibilities are if the occupant gets a job transfer.
At HomeEquityShare.com, a Web site that matches prospective home
buyers with real-estate investors, individuals making successful
connections receive a free equity-share agreement. Custom-made agreements
prepared by an attorney can cost around $1,000.
A second kind of strategy is known as a co-occupier arrangement,
in which at least two parties fund a down payment, pay subsequent
homeownership costs, occupy the property together and split the
gains or losses from the sale of the home.
One caveat: Co-occupancy loans are typically shared, meaning if one owner skips town, the other is liable for the full loan.
"When you buy something with an unrelated person you are considered
to be tenants in common," says Alexander Laufer, a real-estate
attorney in Fairfax, Va. In this way of holding property, you can
each sell your interest individually and designate who will inherit
your interest if you die -- otherwise your share of the property
would pass to the other owner.
Avoid Personal Loans
Parents might consider making the down payment themselves, thus
avoiding the complication of sharing equity. But a parent can't
give a child more than $12,000 a year without incurring gift tax.
Parents also might think about making the down payment a loan.
But this is a bad idea for several reasons.
The interest payments on the loan -- especially if it's from Mom
or Dad -- won't be tax deductible unless the loan is legally secured
by collateral. Moreover, if a mortgage lender is already lined up
for the purchase, that lender may see the additional loan as increasing
the borrower's risk level, and so increase its rate.
And finally, the ability to claim deductions and avoid taxes in the event of a property exchange requires being co-owners of the property. Just lending the money, says Marc J. Minker, an accountant and financial adviser in New York, is "squandering a tax deduction."
July 24, 2008
Equity-sharing the American Dream
Proposed law may help put
the brakes on thousands of foreclosures
Equity-sharing proposal may provide relief for threatened homeowners
By Broderick Perkins
Federal legislative relief for the nation's housing crisis contains a provision that could turn a rarely used home-financing option equity sharing into a key steppingstone on the path of homeownership.
Along with other provisions, the law would create a Federal Housing Administration-sponsored equity-sharing program to refinance loans at a discount for homeowners facing foreclosure. In return, homeowners would share future equity gains with the FHA.
"The feds are about to take equity sharing to the next level," says Jeff Langholz, founder and CEO of HomeEquityShare.com, an online network that matches equity- sharing partners.
Not only would the government effort save an estimated 400,000 homes from foreclosure, federal backing could raise the profile of this unconventional creative financing tool and push it into the mainstream of housing finance.
"Every transition in life comes with intermediate stages. Before you are married you get engaged, before you get your driver's license you get a learner's permit. Before you get to homeownership, what intermediate transition is there?" Langholz asks.
He is banking on the equity-sharing provision in the federal relief package. That may be a safe bet.
Both the U.S. House of Representatives (H.R. 3221 by Rep. Nancy Pelosi, D-Calif.) and the U.S. Senate (the unnumbered bill known as the "Federal Housing Finance Regulatory Reform Act of 2008" by Sen. Chris Dodd, D-Conn.) this summer passed versions of the same relief package. Both contain the equity-sharing provision.
This month, federal legislators were reconciling differences for final approval, which is expected "certainly before the August [congressional] break," says Pelosi spokesman Brendan Daly.
Equity sharing is a symbiotic relationship as well as a legal agreement between two or more parties holding title to one home. Two or more parties share title in order to share the risk, thereby also reducing the risk. Inevitably, however, home price appreciation is the bottom line. The property must grow in value over the term of the deal for it to really pay off.
Parties in the mutually beneficial relationship, and their roles are:
The seller. The seller can use equity sharing as a way to quickly sell in a slow market. The seller can also become the investor and retain a stake in the property.
The occupying homeowner. Often savings-poor, but income-rich, one person, with little or no money down, becomes the buyer-occupant. The home's occupant pays the mortgage and other costs associated with owning and operating a home, including taxes, insurance, maintenance and the like.
He or she gets to deduct a share of the mortgage interest and property taxes, along with other tax breaks that come with home ownership. With enough equity growth, the occupant can eventually cash out, buy out the investor, keep the home or use the equity gain to buy another.
The investor. Typically a non-resident, the second owner provides the initial financial leverage in the form of a down payment or larger stake. He or she can be a family member, trusted friend or professional investor. The investor also gets tax deductions for his or her share. With time, provided equity grows, the investor likewise enjoys a joint venture-like return on the investment.
Title to the home can be held in a variety of ways joint tenancy with right of survivorship, tenancy in common, partnership or as a living trust.
Like its creative-financing cousins seller financing and lease options equity sharing often makes the news as an alternative financing tool that buyers and sellers turn to in tough, cash- or credit-tight markets. That's because equity sharing lessens the upfront costs buyers face in any market. When buyers can buy, sellers can sell.
However, a tight market isn't mandatory:
Equity sharing can be strictly business an investment purely for financial gain, provided the investor and buyer are willing to assume the risk. Their hope is to realize enough appreciation to make the deal pay off.
The federal legislation points to equity sharing as a tool to help stave off foreclosure. Even without federal backing, a defaulting homeowner can privately bring in an equity-share investor to buy a lump sum stake in the property or subsidize monthly payments over time; that is, pay some or all of the monthly mortgage for some period. Again, for the effort, the investor gets an equity stake.
Equity sharing can be used by a financially secure seller who doesn't need to drop his or her home price, but wants to move. With an investor buying an 80 percent stake, the seller could retain 20 percent ownership and get another home. Then, say five years down the road, the seller and investor sell the home, each taking an appropriate share of the equity. Again, and always, appreciation must be sufficient for the deal to pay off.
Some local governments offer equity-sharing deals. The City of San Jose, for example, offers an equity-sharing, deferred-payment loan program for qualified, first-time, low- and moderate-income households. The program provides housing from select, targeted properties in new housing developments.
Qualified buyer-occupants pay zero. They live mortgage-payment free. There's no down payment, no monthly payment and no interest payment, until it's time to sell or the loan is due in 45 years.
However, when the home is sold, the sale price goes to the city, which has been picking up the monthly mortgage tab. The city (in exchange for also paying the interest) and occupant share any equity gain on a pro-rated basis based on the terms of the mortgage. If the gain is sufficient, the occupant can use it to buy his or her own home.
The occupant can also stay put for the 45-year term of the mortgage again, cost free. However, the loan is due at the end of the term, and again, any proceeds go to the city. If the occupant remains until the end of the term, the city relinquishes any and all claims on equity gains.
Either during a sale before the end of the term or at the end of the term, the occupant is not obligated to use the equity to buy a new home, but can choose to use that gain as he or she wishes.
In the past several years, San Jose has housed hundreds of families with variations of its equity-sharing program.
The devil's in the details
Equity deals are not silver bullets.
They are most often short-term contracts of five, seven, 10 years or so to make sure the period of risk exposure is short. At the end of the term, the net proceeds from the sale are split and doled out according to contract.
Because the deal relies upon appreciation within a short term, equity sharing can be a tough sell in a depreciating market. They are perhaps better suited for a bottom market or market already on the rise. The current market also makes the deals dicey because, as of yet, there's no federal backing.
Equity sharing is also a two-sided coin when it comes to the lender. Risk-averse lenders have put a squeeze on all credit and may not look favorably on all but the most "plain vanilla" mortgages.
On the other hand, if the investors has cash for his, say, 80 percent stake and the buyer-occupant needs a mortgage of only 20 percent of the value of the home, the lender might bite.
"Obviously if you are only going to borrow, say, a 30 percent loan [because the investor antes up 70 percent] and there are two people, you have a better chance. You are always better off if you have another person, but lenders are really spooked," says David Hofmann, a San Jose real estate attorney with Hoge Fenton Jones & Appel, Inc.
"Even people who recently qualified are having a tough time. Lenders don't want to see anyone on any loan with any credit issues. Most lenders faced with a default will just take the property back, " Hofmann adds.
Equity sharing also remains obscure because the deals can be complicated. They must be legal and binding contracts designed to provide an equitable means to an end. It must include provisions for any disputes or disagreements that might arise during the term. The contracts typically don't allow extracting any returns until the term is up, unless there's an escape clause. Escape clauses come with provisions that include stiff cash penalties for early outs and other resolutions.
Finally, even if the equity-sharing deal is designed to create a homeowner, its underlying investment approach triggers a different set of underwriting and tax rules, compared to a conventional home buy.
Buyers will almost always need an equity sharing-experienced team real estate agent, attorney and tax professional to set up the transaction's contract.
"These deals can give some new lenders heartburn, but there is surprising interest from senior lenders who were around when shared appreciation mortgages (SAMs) were around in the 1980s," says Langholz.
Here's a list of equity-sharing resources:
The HomeEquityShare.com network for home equity matchups between sellers, buyers and investors, based in Monterey
Larkspur-based Marilyn D. Sullivan's The New Home Buying Strategy (Venture 2000, $25.95) equity-sharing manual (MSullivan.com)
San Francisco-based Andy Sirkin, of Sirkin Paul Associates, offers the Basic Equity Sharing Structure manual and other materials at AndySirkin.com
In San Jose, real estate attorney David Hofmann with the Real Estate Group at Hoge Fenton Jones & Appel, Inc., HogeFenton.com
The San Marcos-based BuyHalfAHouse.com team of Don Reedy (real estate agent), Howard Schwartz (loan officer) and Richard Borkowski (investor)
Broderick Perkins owns and operates DeadlineNews.Com, a San Jose-based real estate and consumer news service. Contact him at email@example.com
THE WALL STREET
February 18, 2004
Brian Collins of our office was the source for this article.
Helping Others Buy a Home Can Be Beneficial
Share the wealth.
By RAY A. SMITH
Staff Reporter of THE WALL STREET JOURNAL
Through shared-equity agreements, individual real-estate investors can do just that to help a family member or friend buy a home -- and reap some profit and tax benefits in the process.
Some accountants and financial advisers are recommending that their clients, especially those with adult children, consider these investment vehicles as home prices have skyrocketed.
The pacts are co-ownership agreements between two parties, an investor-owner and an occupier-owner. The investor-owner puts up cash for either some or all of the down payment for a house that a family member or friend wants to buy. Once the property is purchased, both parties have an ownership interest in the property.
The family member or friend becomes the property's occupier-owner.
For tax reasons, under the Internal Revenue Code (Section 280A),
the investor-owner must charge the occupier-owner fair rent for
the right to occupy the property if he or she wants to take any
tax deductions related to the property. The investor-owner can then
use that rent to cover the expenses, including mortgage payments,
homeowners insurance, and property taxes.
"I almost always recommend that the investor-owner charge rents so [he or she] can maximize tax benefits," says Brian Collins, an attorney in Ross, Calif.
The agreement has a finite life, often varying from three to 10
years, after which the occupier-owner can buy the investor-owner
out or vice versa; the property can be sold with the proceeds being
divided between the parties; or the term can be extended.
These agreements can be advantageous for both parties. For instance, if the property is sold at the end of the deal's term, the investor-owner gets back the original down payment plus a share of the proceeds from the sale. Also, the investor-owner can get a tax write-off on expenses and could receive tax deductions for depreciation.
Owner-occupiers can benefit by deducting mortgage-interest payments
and property taxes on their income-tax returns. What's more, if
and when the property is sold, they qualify for exemption from capital
gains -- as much as $250,000 for individuals and $500,000 for couples,
as long as they lived in the property for at least two out of the
previous five years.
There are some risks, though. For one, the occupier-owner might
fall behind in payments and even default on the mortgage, which
could force the investor-owner to foreclose on the property -- a
lengthy and costly process. The investor-owner would have to pay
out of pocket for the foreclosure process.
In some cases, there's also the possibility of the property depreciating
so the investor-owner either would get less or just the down payment
back. In addition, the occupier-owner also could neglect upkeep
of the property, which means it wouldn't be attractive to a buyer
when the agreement ends.
Sandra West, a Frederick, Md.-based certified public accountant, points out that it's important for investors to consult with a real-estate attorney familiar with the jurisdiction in which they're investing. "Each state has different rules regarding real-estate titling," she says. The names of all participants in the agreements must be on the property title.
AGREEING TO SHARE
Shared-equity financing agreements can be used to create a tax benefit for a parent or other person helping an adult child or other loved one to purchase a residence. Here is how such an arrangement can be structured.
The arrangement provides that the investor:
o Furnishes the down payment of 20% toward the purchase price
of the home
o At the end of five years, the home is sold and the investor receives back the original down payment plus/minus 50% of the profit/loss on the home (which is treated as long-term capital gain/loss)
o Is not a co-signor on the mortgage but may take over the home and mortgage if the buyer defaults
o Is subject to the risk of loss if the property sells for less than the purchase price, but is not liable for any losses in excess of the original down payment
The arrangement provides that the buyer:
o Selects the home and must qualify for the mortgage
o Pays the mortgage and gets tax deduction on interest
o Is responsible for all repairs and maintenance
o Must sell the home when any "triggering event" occurs such as change in marital status, the ceasing of the use of the home as the principal residence, or insolvency. In general, must sell at the end of five years, unless there is agreement to buy out the investor based on qualified appraisals
o Keeps half of the profit on the home when sold.
San Jose Mercury News
SATURDAY, MAY 11, 2002
The San Jose Mercury News serves the heart of the Silicon Valley.
Real Estate Cover Story.
It's a win-win. The only
loser is the IRS, and don't you just love that?
The house is sold, the investor gets
the $80,000 down payment back, and the occupant receives the
$25,000 in mortgage principal they have paid. That leaves
$379,000 for the parties to split, without taking into account
realty agent commissions or other sales costs.
Triangle Realty matches occupants and investors
for equity sharing and also will help would-be occupants find
San Francisco Chronicle
SUNDAY, JULY 29, 2001
Equity sharing can benefit investors, first-time buyers
Judy Richter - Real Money
It's no secret that buying your first house
in the Bay Area is difficult.
If neither one
wants it and they decide to sell the house, they split the
Furthermore, because his share was rental
property, the investor can reinvest in another rental property
However, equity sharing also can be done by
strangers. Some people put ads in the paper looking for investors