Exiting an Equity Share
Equity share agreements typically are for a specified term. At the end of the term, the occupying owner has the right to buy out the investing owner for an amount equal to their initial plus additional capital contributions plus the investors proportional percentage of the mutually agreed upon sale price. If the occupying owner declines the buyout option, the investing owner has the reciprocal opportunity to buy out the occupying owner. If neither is interested in a buyout, the property is sold on the open market and the proceeds divided according to the ownership percentages. At this point, detailed records of subsequent capital contributions are beneficial as the original ownership percentages may be impacted by improvements to the property or by substantial monthly capital contributions by the occupying owner.
Occupancy & Equity Sharing
Some important ownership occupancy issues to consider in an equity share arrangement include:
Exclusivity: The occupying owner in an equity share agreement should have an exclusive right of occupancy to the property. This right should not be able to be arbitrarily usurped by the investing owner without a defined cause (such as failure to make timely payments or adequately maintain the property).
Maintenance & Home Improvement in Equity Sharing
There are many types of repairs and maintenance that must be done on a home, some major and some minor. In general, upkeep on the home is the responsibility of the occupying owner. An equity sharing agreement should delineate the type of maintenance, whether the cost should be absorbed by just the occupying owner or both owners, and should define whether the home repair decision is made solely by the occupant or by both owners. These parameters should be noted in the agreement upfront so that no confusion exists as to "who pays for what and when" in the event of an untimely repair.
Ownership Issues
Some important ownership issues to consider in an equity share arrangement include:
Title: The deed should define the relationship of each owner as it relates to each owner. This means that married couples need to be defined as such, TIC owners defined as such, and so forth.
Equity Sharing & Risk
A equity share arrangement is generally less risky for an investor than owning a rental property. The reason being that renters have little incentive to maintain or improve the property.
In an equity share, the investor assumes less and less risk the more initial capital the occupying owner contributes. If the occupying owner places zero down as initial capital, the investor takes all the risk on the property. The lower the initial capital paid by the occupying owner the higher the reserve funds that the investor should demand of the occupying owner.
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