Equity sharing

Last updated September 28, 2023

Equity sharing is another name for shared ownership or co-ownership . It takes one property, more than one owner, and blends them to maximize profit and tax deductions. Typically, the parties find a home and buy it together as co-owners, but sometimes they join to co-own a property one of them already owns. At the end of an agreed term, they buy one another out or sell the property and split the equity. In England, equity sharing and shared ownership are not the same thing (see the United Kingdom and England sections below).

Equity sharing in different countries

United States

Equity sharing became desirable in the United States when in 1981 Section 280A of the Internal Revenue Code allowed mixed tax use of a single property for the first time permitting the occupier to claim principal residence tax deductions and the investor to claim investment property tax deductions. Since shared ownership is conferred by the federal tax code, this ownership vehicle can be used in any state.

Companies in the United States include Unison Homeownership Investors, Landed, and OwnHome Mortgage & Finance.^[1]

United Kingdom

There are many uses of the term "Equity Sharing" in the UK, often applied to different forms of Low Cost Home Ownership schemes. These include equity loans, sometimes referred to as Equity Sharing Loans, and some forms of Shared Ownership (part buy/part let) leasehold schemes being referred to as an Equity Sharing Lease. Some local authorities may also refer to resale price restrictions under planning documentation as being Equity Sharing arrangements. However, the use of shared equity in reference to shared ownership is inaccurate, because shared ownership is not ownership, but is in fact an assured tenancy under the terms of the Housing Act 1988.^[2]^[3] With a shared equity scheme you own all of the property, albeit you have a loan on a part of your deposit – whereas with a shared ownership scheme you do not own the share you bought, but instead have the chance to buy the full lease from the landlord in the future, if you can afford to do so.^[4]

England

The UK government facilitates shared equity chiefly through the Homes and Communities Agency. As of 2009^[update] this was under the banner of HomeBuy. This aims to help households earning up to £60,000 p.a.^[5]

New Build HomeBuy is where purchasers buy at least 25% of a newly built home, and pay rent on the remainder. The HCA generally subsidises housing associations or other providers to hold the remaining share. The rent is capped at 3% of the value of the unsold share, but typically set at 2.75%. Purchasers may buy additional shares whenever they can afford to do so; this is known as "staircasing".^[6]

HomeBuy Direct was introduced in 2009, under which the government and a housing developer jointly fund an equity loan of 30% of the valuation, so that the purchaser only needs to pay a mortgage on 70% of the value. If the purchaser buys an additional share, all three parties participate in any increase in value. The HCA allocated £300 million to the scheme for 2009—2011, and 10,000 homes are available under the initiative.^[5]

Open Market Homebuy allowed purchasers to buy at least 25% of a property on the open market, with a conventional mortgage on that part, and a low-interest loan on the remainder. This is not currently available as the funding for 2009-10 has already been fully committed.^[7]

Social Homebuy allows tenants of participating Councils and housing associations to buy their rented home on shared ownership terms, with a proportion of the usual Right to Acquire discount.^[8]

FirstBuy a scheme for first-time buyers announced in the 2011 Budget. Under it first-time buyers can get help to fund the difference between a 5% deposit and a 75% mortgage. It is only available on selected newbuild schemes. The top-up equity is provided in equal shares by the HCA and the developer.^[9]

Private sector shared equity in England

Private sector shared equity or, as it is sometimes known, investor shared equity, operates quite differently in that there is no element of taxpayer subsidy. Instead, third party investors provide the difference between the buyer's deposit and (typically) a 75% mortgage, in return for an equity stake in the property and a rent. These schemes are run over 5 or 10 years (sometimes with a 'hardship' extension), meaning that at the end of the relevant period, the owner has to buy out the equity stake at the relevant percentage of the then market value. There is generally no penalty on early redemption or partial buy-backs. Thus, equity sharing can be seen as a step up to full ownership of a property.

Although investor shared equity is, on the face of it, more expensive than public sector schemes, because of the need to pay rent on the non-owned portion, it nevertheless holds significant advantages:

First, it is not confined to newbuild, or to any particular housing provider. Instead, the buyer can research the whole of the market for the best bargain. Some would say this avoids the peril of paying an inflated price to a housebuilder.^[10]
Secondly, there is less in the way of form filling and waiting lists. Because investor shared equity is essentially a financing mechanism, it is as simple as applying for a mortgage.
Thirdly, it is less likely to run out of funding than public sector schemes. So long as investors achieve their desired return, the resources are theoretically limitless.
Fourthly, the buyer is put in the position of a cash buyer and is thus empowered to negotiate the best deal with the vendor.
Finally, of course, an injection of cash gives the buyer the chance to access the better interest rates and lighter credit checks associated with 75% mortgages.

Economic theory

In economic theory, ownership is studied in the field of contract theory. Specifically, Oliver Hart (1995) has argued that ownership matters in the context of incomplete contracts.^[11] When some future contingencies cannot be taken care of in a contract today, then negotiations will take place tomorrow. Ownership improves the bargaining position in these negotiations. As a result, today an owner has stronger incentives to make relationship-specific investments (i.e., the hold-up problem is mitigated). In this framework, Schmitz (2017) has shown that shared ownership of an asset can be desirable today, even though tomorrow it is optimal to give the asset to the party who values it most.^[12] The reason is that shared ownership yields more balanced investment incentives of the involved parties. The optimal ownership shares depend on whether the investments are embodied in the physical capital (so that the owner can always seize the returns) or in the parties’ human capital.

Related Research Articles

This aims to be a complete list of the articles on real estate.

Owner-occupancy or home-ownership is a form of housing tenure in which a person, called the owner-occupier, owner-occupant, or home owner, owns the home in which they live. The home can be a house, such as a single-family house, an apartment, condominium, or a housing cooperative. In addition to providing housing, owner-occupancy also functions as a real estate investment.

A housing cooperative, or housing co-op, is a legal entity, usually a cooperative or a corporation, which owns real estate, consisting of one or more residential buildings; it is one type of housing tenure. Typically housing cooperatives are owned by shareholders but in some cases they can be owned by a non-profit organization. They are a distinctive form of home ownership that have many characteristics that differ from other residential arrangements such as single family home ownership, condominiums and renting.

A Lease-Purchase Contract, also known as a lease purchase agreement or rent-to-own agreement, allows consumers to obtain durable goods or rent-to-own real estate without entering into a standard credit contract. It is a shortened name for a lease with option to purchase contract. For real estate, a lease purchase contract combines elements of a traditional rental agreement with an exclusive right of first refusal option for later purchase of the home.

<span class="mw-page-title-main">Secondary market</span> Type of market in finance for used goods

The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the security by the issuer to a purchaser, who pays proceeds to the issuer, is the primary market. All sales after the initial sale of the security are sales in the secondary market. Whereas the term primary market refers to the market for new issues of securities, and "[a] market is primary if the proceeds of sales go to the issuer of the securities sold," the secondary market in contrast is the market created by the later trading of such securities.

Canada Mortgage and Housing Corporation is Canada's federal crown corporation responsible for administering the National Housing Act, with the mandate to improve housing by living conditions in the country.

A real-estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets, and it typically follows a land boom. A land boom is a rapid increase in the market price of real property such as housing until they reach unsustainable levels and then declines. This period, during the run-up to the crash, is also known as froth. The questions of whether real estate bubbles can be identified and prevented, and whether they have broader macroeconomic significance, are answered differently by schools of economic thought, as detailed below.

Buy-to-let is a British phrase referring to the purchase of a property specifically to let out, that is to rent it out. A buy-to-let mortgage is a mortgage loan specifically designed for this purpose. Buy-to-let properties are usually residential but the term also encompasses student property investments and hotel room investments.

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Commercial property, also called commercial real estate, investment property or income property, is real estate intended to generate a profit, either from capital gains or rental income. Commercial property includes office buildings, medical centers, hotels, malls, retail stores, multifamily housing buildings, farm land, warehouses, and garages. In many states, residential property containing more than a certain number of units qualifies as commercial property for borrowing and tax purposes.

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Equity stripping, also known as equity skimming, is a type of foreclosure rescue scheme. Often considered a form of predatory lending, equity stripping became increasingly widespread in the early 2000s. In an equity stripping scheme an investor buys the property from a homeowner facing foreclosure and agrees to lease the home to the homeowner who may remain in the home as a tenant. Often, these transactions take advantage of uninformed, low-income homeowners; because of the complexity of the transaction, victims are often unaware that they are giving away their property and equity. Several states have taken steps to confront the more unscrupulous practices of equity stripping. Although "foreclosure re-conveyance" schemes can be beneficial and ethically conducted in some circumstances, many times the practice relies on fraud and egregious or unmeetable terms.

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Seller financing is a loan provided by the seller of a property or business to the purchaser. When used in the context of residential real estate, it is also called "bond-for-title" or "owner financing." Usually, the purchaser will make some sort of down payment to the seller, and then make installment payments over a specified time, at an agreed-upon interest rate, until the loan is fully repaid. In layman's terms, this is when the seller in a transaction offers the buyer a loan rather than the buyer obtaining one from a bank. To a seller, this is an investment in which the return is guaranteed only by the buyer's credit-worthiness or ability and motivation to pay the mortgage. For a buyer it is often beneficial, because he/she may not be able to obtain a loan from a bank. In general, the loan is secured by the property being sold. In the event that the buyer defaults, the property is repossessed or foreclosed on exactly as it would be by a bank.

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A foreclosure rescue scheme is a scam that targets those whose house is facing potential foreclosure. The scheme preys on desperate homeowners whose mortgages are in default by offering to prevent the foreclosure. There are various ways in which foreclosure rescue schemes work, causing different types of harm to the homeowners, but all ultimately with the likely end result of the owner being forced out of his/her home and losing even more money.

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The property bubble in New Zealand is a major national economic and social issue. Since the early 1990s, house prices in New Zealand have risen considerably faster than incomes, putting increasing pressure on public housing providers as fewer households have access to housing on the private market. The property bubble has produced significant impacts on inequality in New Zealand, which now has one of the highest homelessness rate in the OECD and a record-high waiting list for public housing. Government policies have attempted to address the crisis since 2013, but have produced limited impacts to reduce prices or increase the supply of affordable housing. However, prices started falling in 2022 in response to tightening of mortgage availability and supply increasing. Some areas saw drops as high as around 9% - albeit from very high prices.

References

↑ Bernard, Tara Siegel (1 June 2018). "Getting Down Payment Help Now. Sharing Home's Gain (or Loss) Later" – via NYTimes.com.
↑ "A shared ownership lease is an assured shorthold tenancy? Is this just another form of renting?". National Housing Federation. Retrieved 2021-08-30.
↑ See Richardson v Midland Heart (2007). Discussed in: Peaker, Giles (3 September 2013). "The hidden dangers of shared ownership". The Guardian. Retrieved 7 April 2021.
↑ "Shared equity explained". MoneySuperMarket. 2019-07-05.
1 2 HomeBuy Direct Archived 2009-07-14 at the Wayback Machine on DCLG website
↑ New Build HomeBuy Archived 2009-07-14 at the Wayback Machine on DCLG website
↑ Open Market HomeBuy Archived 2009-07-26 at the Wayback Machine on CLG website
↑ Social HomeBuy Archived 2010-12-05 at the Wayback Machine at HCA website
↑ HomeBuy Agents list on HCA website
↑ "A new affordable way to buy a home". www.strideup.co. Retrieved 2019-03-29.
↑ Hart, Oliver (1995). Firms, contracts, and financial structure. Clarendon Press.
↑ Schmitz, Patrick W. (2017). "Incomplete contracts, shared ownership, and investment incentives". Journal of Economic Behavior & Organization. 144: 153–165. doi: 10.1016/j.jebo.2017.09.021 .

Davis, John Emmeus (1994), Shared Equity Homeownership: The Changing Landscape of Resale-Restricted, Owner-Occupied Housing, National Housing Institute