It seems some misguided souls would rather turn the concept of equity sharing into equity skimming and bilk thousands of dollars from consumers.
Equity sharing first got its legs more than two decades ago when home loans rates were high and going higher. Conventional lenders had not generally taken the time to explore unconventional options, and adjustable-rate mortgages were unrefined and unacceptable.
Some potential home buyers, seeking all possible methods of getting in the door to a longed-for primary residence, found private investors willing to share the cost of the home in return for future appreciation.
This initial idea, known as equity sharing or shared equity, has slowed for one basic reason: Lenders are now readily making no-down-payment or low-down-payment mortgages. Consumers now are able to borrow so much more that there’s less need for a partner. Why share the pie when a lender is willing to lend you most of the cost of the home?
The answer is some people are forced to share. In some cases where they have borrowed most of the value of the home and then cannot make the monthly payments (perhaps because their low-interest-rate introductory loan has adjusted skyward), they look for a partner who can relieve the pressure in exchange for future equity
With defaults and foreclosures on the rise, however, some unknowing homeowners have deeded the title to their property to the seemingly helpful investor-partner or they end up paying a higher-than-market rent to the investor who was supposed to cure the debt. When the homeowner can no longer pay the high rent, the investor ends up with the title or rent payments — sometimes both.
“Most of the time, these people are vulnerable and believe anything that sounds good to them,” said David Huey, an assistant Washington state attorney general who handles consumer-protection cases. “They don’t even know how much equity they have because all they remember is that they got a 100 percent loan and now can’t make the payments.”
Huey said foreclosure-rescue scammers rarely put “any real money into the deal” other than making a cursory payment to delay foreclosure times and then string along the homeowner with paperwork and promises.
“When you step back and look at the economics of the deal, you can see it absolutely can’t work to the benefit of the consumer,” Huey said.
The need for genuine equity sharing originally was shaped by credit. Under the guidelines that governed most lending institutions, persons who have either cash but no credit or credit but no cash did not qualify for home mortgages at affordable rates. The lender’s position was understandable — it was using money from its depositors and must exercise caution when granting a loan.
Equity sharing is now more often found in an investment-property arrangement. When obtained through the assistance of a reputable investor, equity sharing could be a profitable venture.
In investment (rental) property, a cash-poor buyer who knows of a good investment often seeks a partner to “front” the down payment. The buyer then either occupies the property and makes the mortgage payments or is responsible for renting out the property so the mortgage gets paid. The two form a partnership to share the profits of the sale.
The partners do not automatically get an equal stake in the property. Typically, the buyer, who has not contributed to the down payment, gets 50 percent of the increase in equity over a specified period of time.
Those partnerships are far different than the equity-skimming schemes now seen in many foreclosure-rescue situations. While it’s absolutely possible that a partner could rescue you from foreclosure, be sure you understand what you are giving up to be saved.
The Mortgage Bankers Association of America has unveiled a consumer education campaign called Stop Mortgage Fraud in an attempt to help prevent scams and predatory lending.
The Web site lists the 10 common warning signs of predatory lending. These include everything from being asked to leave signature lines blank to being encouraged to include false information on a loan application. Consumers can either visit the Web site or call 1-800-348-3931 to get information on what steps to take to file a complaint.
Tom Kelly’s new book, “Cashing In on a Second Home in Mexico: How to Buy, Sell and Profit from Property South of the Border,” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com. Tom can be reached at firstname.lastname@example.org.