Housing equity partnership
Encyclopedia
Equity sharing, also known as shared ownership or in the US as housing equity partnership (HEP), allows a person to purchase a share in their home even if they cannot afford a mortgage
on the whole of the current value. It is generally used in affordable housing
, providing a "third way" of land tenure
between home ownership and renting.
There are various detailed methods to implement equity sharing, and it is implemented in over a hundred community land trust
s in the United States. The remaining equity share may be held by the housebuilder
, by a private investor or by a landlord such as a housing association
. In some models the resident pays rent
on that share.
Public sector equity sharing implies some form of taxpayer subsidy and is seen by government as a useful tool of social policy, for example in allowing more first time buyers to access property ownership.
The government in England
facilitates shared equity chiefly through the Homes and Communities Agency
(HCA), currently under the banner of HomeBuy. This covers a range of low cost home ownership options; all aim to help households earning up to £60,000 p.a. to buy a home that they could not otherwise afford. Some are targeted at first-time buyers and key worker
s.
The current types of Homebuy are:
To apply for all Homebuy schemes, applicants must contact their local Homebuy Agent.
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:
, Sewin Chan, Joseph Tracy and Charles Freedman in the late 1990s and are very similar to shared-equity plans that have existed for decades in the UK, Europe and the U.S. They are also similar to an earlier proposal produced by Geltner, Miller and Snavely (1995) to develop Home Equity Investment Trusts (HEITs). There have been various spins on this concept from sharing on existing properties, alternatives to reverse mortgage
, new purchases and now even investment properties. Originally, in a mutually beneficial way this type of strategy was used for buyers to acquire a property that they could either, not otherwise afford, lacked capital for a down payment
, insufficient income to support loan payment, etc. These types of situations have commonly been factors that would lead to a beneficial equity sharing relationship. In summary, the traditional example of equity share for the purchase of a home provides the buyer with a 20% down-payment; they will have much lower payments, no PMI, better terms/rate and will save a great deal just in payments versus what it will cost them in equity at the eventual sale or refinancing of the property at some point in the future.
Particularly, in the case of investment properties there are some other factors to be taken into consideration, like cash flow
from the property. If the total of the mortgage payments, taxes, insurance/association dues, and all other expenses must be less than the rent that the tenant pays on the property. If not, the investors will run into a negative cash flow situation, whereby they are paying more than they are getting from the property. This was very common in the era of high LTV (loan to value
) loans on investment properties where in most cases they were viewed as risky by banks and therefore had high interest rate
s and even PMI (private mortgage insurance) in some cases. That being said, how does equity share help an investor and how does it work?
If the investor puts up the 20% for the down payment to purchase the property, then after the close enters into an agreement with the fund they give you up to 20% of the purchase price in consideration for a share of the future equity in the property, with no interest and no payments, ever. Now you have a situation where the investor has an 80% LTV loan with lower payments then they would otherwise have, which means greater cash flow potential and less capital expenditure’s. The additional benefit of the money (20% initially used for the purchase) that would otherwise be tied up in the property, illiquid, and inaccessible without the Fund, will instead be in your pocket. This will also allow individual investors to purchase multiple properties by using their initial capital for a down payment then entering into an Equity share agreement; get cash from the fund and use that cash to purchase more properties and get more cash from the fund.
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
on the whole of the current value. It is generally used in affordable housing
Affordable housing
Affordable housing is a term used to describe dwelling units whose total housing costs are deemed "affordable" to those that have a median income. Although the term is often applied to rental housing that is within the financial means of those in the lower income ranges of a geographical area, the...
, providing a "third way" of land tenure
Land tenure
Land tenure is the name given, particularly in common law systems, to the legal regime in which land is owned by an individual, who is said to "hold" the land . The sovereign monarch, known as The Crown, held land in its own right. All private owners are either its tenants or sub-tenants...
between home ownership and renting.
There are various detailed methods to implement equity sharing, and it is implemented in over a hundred community land trust
Community land trust
A community land trust is a nonprofit corporation which acquires and manages land on behalf of the residents of a place-based community, while preserving affordability and preventing foreclosures for any housing located upon its land.-Key features:...
s in the United States. The remaining equity share may be held by the housebuilder
Real estate development
Real estate development, or Property Development, is a multifaceted business, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of improved land or parcels to others...
, by a private investor or by a landlord such as a housing association
Housing association
Housing associations in the United Kingdom are independent not-for-profit bodies that provide low-cost "social housing" for people in housing need. Any trading surplus is used to maintain existing homes and to help finance new ones...
. In some models the resident pays rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
on that share.
Equity sharing in the United Kingdom
There are two forms of equity sharing in the UK, public sector and private sector.Public sector equity sharing implies some form of taxpayer subsidy and is seen by government as a useful tool of social policy, for example in allowing more first time buyers to access property ownership.
The government in England
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
facilitates shared equity chiefly through the Homes and Communities Agency
Homes and Communities Agency
The Homes and Communities Agency is the non-departmental public body that funds new affordable housing in England. It was established by the Housing and Regeneration Act 2008 as one of the successor bodies to the Housing Corporation, and became operational on 1 December 2008.-Background:On 17...
(HCA), currently under the banner of HomeBuy. This covers a range of low cost home ownership options; all aim to help households earning up to £60,000 p.a. to buy a home that they could not otherwise afford. Some are targeted at first-time buyers and key worker
Key worker
A key worker is a public sector employee who is considered to provide an essential service. The term is often used in the United Kingdom in the context of those essential workers who may find it difficult to buy property in the area where they work....
s.
The current types of Homebuy are:
- New Build HomeBuy, under which purchasers buy at least 25% of a newly-built home, and pay rent on the remainder. The HCA generally subsidises housing associationHousing associationHousing associations in the United Kingdom are independent not-for-profit bodies that provide low-cost "social housing" for people in housing need. Any trading surplus is used to maintain existing homes and to help finance new ones...
s 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".
- HomeBuy Direct is a new form of shared ownership 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.
- 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. Over 6,000 households used the scheme in 2008/09.
- 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.
- 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.
To apply for all Homebuy schemes, applicants must contact their local Homebuy Agent.
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.
- 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.
Equity sharing in the United States
Equity sharing has been around for some time now and has been put on the shelf in recent years given the loose financing programs. These partnerships were championed by economists Andrew CaplinAndrew Caplin
Andrew S. Caplin is a British economist, now living in America. He is a Professor of Economics at New York University and co-Director of the Center for Experimental Social Science. His work has been in behavioral economics as well as in the economics of real estate markets...
, Sewin Chan, Joseph Tracy and Charles Freedman in the late 1990s and are very similar to shared-equity plans that have existed for decades in the UK, Europe and the U.S. They are also similar to an earlier proposal produced by Geltner, Miller and Snavely (1995) to develop Home Equity Investment Trusts (HEITs). There have been various spins on this concept from sharing on existing properties, alternatives to reverse mortgage
Reverse mortgage
A remortgage is a form of equity release available in the United States. It is a loan available to seniors aged 62 or older, under a Federal program administered by HUD. It enables eligible homeowners to access a portion of their equity...
, new purchases and now even investment properties. Originally, in a mutually beneficial way this type of strategy was used for buyers to acquire a property that they could either, not otherwise afford, lacked capital for a down payment
Down payment
Down payment is a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the initial upfront portion of the total amount due and it is usually given in cash at the time of finalizing the transaction.A loan is then required to make the full...
, insufficient income to support loan payment, etc. These types of situations have commonly been factors that would lead to a beneficial equity sharing relationship. In summary, the traditional example of equity share for the purchase of a home provides the buyer with a 20% down-payment; they will have much lower payments, no PMI, better terms/rate and will save a great deal just in payments versus what it will cost them in equity at the eventual sale or refinancing of the property at some point in the future.
Particularly, in the case of investment properties there are some other factors to be taken into consideration, like cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
from the property. If the total of the mortgage payments, taxes, insurance/association dues, and all other expenses must be less than the rent that the tenant pays on the property. If not, the investors will run into a negative cash flow situation, whereby they are paying more than they are getting from the property. This was very common in the era of high LTV (loan to value
Loan to value
The loan-to-value ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. For instance, if a borrower borrows $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000/$150,000 or 87%.Loan to value is one of the key risk...
) loans on investment properties where in most cases they were viewed as risky by banks and therefore had high interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s and even PMI (private mortgage insurance) in some cases. That being said, how does equity share help an investor and how does it work?
If the investor puts up the 20% for the down payment to purchase the property, then after the close enters into an agreement with the fund they give you up to 20% of the purchase price in consideration for a share of the future equity in the property, with no interest and no payments, ever. Now you have a situation where the investor has an 80% LTV loan with lower payments then they would otherwise have, which means greater cash flow potential and less capital expenditure’s. The additional benefit of the money (20% initially used for the purchase) that would otherwise be tied up in the property, illiquid, and inaccessible without the Fund, will instead be in your pocket. This will also allow individual investors to purchase multiple properties by using their initial capital for a down payment then entering into an Equity share agreement; get cash from the fund and use that cash to purchase more properties and get more cash from the fund.
Further reading
- Geltner, David M., Norman G. Miller and Jean Snavely. 1995. We Need a Fourth Asset Class: HEITs. Real Estate Finance: 71-81.
- Caplin, Andrew (1997). Housing Partnerships: A New Approach to a Market at a Crossroads. MIT Press. ISBN 0-262-03243-0.