Home buyers seeking to mitigate their risk may wish to consider an equity sharing arrangement, which allows buyers to share a portion of the potential profits from appreciation with an investor. One such arrangement can be formed by use of a home appreciation participation note (HAPN). By selling shares of their homes’ future appreciation, buyers can reduce their mortgages and diminish the likelihood of future loss due to declines in property values. Investors may also be able to use such a note to assist buyers with negative equity, helping reduce the likelihood of foreclosure.

first tuesday take: Although the linked article portrays equity sharing as a new trend, equity sharing methods have been around for a long time. They can be a valuable form of aid for willing buyers who do not have sufficient funds saved for the 20% downpayment required by fundamental lending practices. The popularity of appreciation-participation devices has waxed and waned over time, and fell out of disfavor in the recent housing boom, but they have always been most helpful before the beginning of a recessionary period like the present. Similar tools include an equity sharing addendum on a purchase agreement or a separate shared appreciation note. The crucial element of all these agreements is reduced risk for the buyer, obtained by sharing potential appreciation with an investor. Buyers who later tire of sharing ownership with a separate investor can always purchase the investor’s share of the property or pay off the note, together with the appreciation which the buyer agreed to share with the investor, who may be either a co-owner or lender. [See first tuesday Forms 155-2 and 430]

Re. A HAPN could help reduce mortgage payment, from Los Angeles Times

For an in-depth look at equity sharing methods, please see first tuesday’s Tax Benefits of Ownership, Ch. 6.