The challenged circumstances of the US economy require new thinking and new solutions, particularly in housing finance. As the housing industry is the second largest component of US GDP, its health is critical to the health of the economy in general. For decades, homes have been financed largely through high levels of borrowing, with lenders believing values wouldn’t decline, thus being willing to lend aggressively. However, with loan securitizations and government guarantee programs, lenders became less accountable for the quality of the loans they originated. Now they are facing the consequences of their lending practices and have become financially tenuous. This is leading them to take a more conservative approach in lending, including lower levels of loan-to-value and improved debt-to-income ratios. Fundamentally, though, a more prudent approach to housing finance will be beneficial to the economy by enabling more affordable and sustainable home ownership, due to less leverage. However, achieving lower loan-to-value lending and reduced debt-to-income ratios will require new sources of external capital. This is where equity capital and equity sharing finance become a solution to this “gap financing” need.
What is Equity Sharing?
Equity sharing is a financing structure where an investor invests equity funds alongside a home buyer or home owner in order to participate in the economic return of the property’s appreciation over time. In the case of a home purchase, both the investor and the home buyer contribute to the down payment with the allocation of how much equity each receives being subject to negotiation. The home buyer enjoys exclusive occupancy rights, while being solely responsible for mortgage payments, property taxes, insurance and other normal maintenance expenses. Both parties participate in the market returns, whether that be increases or decreases in the property value.
In the case of a refinancing, whereby a home owner is seeking to cash out some equity in the home, rather than borrowing against it, the home owner could sell a percentage of the home to an investor. Again, both parties participate in the market returns.
Equity sharing is not new. It has been used globally throughout Europe, Asia and the Middle East. But with the evolution of the mortgage market in the US, including the advent of sub-prime mortgages, with their easy credit and low down payment provisions, mortgage lending became the sole mechanism of home finance. As a result, equity sharing finance has never been widely adopted in the US. Now with banks practicing more conservative lending, and with consumers unable to make up the difference with larger down payments, new approaches are needed.
Pure equity sharing is NOT debt financing, such as with a mortgage, reverse mortgage, or even a shared equity or appreciation mortgage. Equity sharing involves a direct ownership interest in the property. Alternatively, mortgage debt is borrowed funds against the value of the property, typically looking for periodic payment, and has a priority position to the equity in the case of liquidation, which could be a sale. Essentially, the mortgage debt generally needs to be paid off before any proceeds come to the equity holder. In addition, mortgage debt is not intended to adjust to the volatility of home prices, i.e., if the property goes down in value, the decline is absorbed by the equity holder first, even to the extent of a full loss, before the lender incurs any loss. Conversely, if the property appreciates in value, such increase goes solely to the equity holder, with the lender’s mortgage debt remaining unchanged.
Why Equity Sharing?
Equity sharing directly addresses the needs of the participants and fills the “gap financing” needs of the marketplace:
Home buyers:
- Addresses the #1 hurdle to home ownership by providing additional down payment funds
- By securing a larger down payment, the home buyer has a smaller loan and lower monthly payments, making home ownership more affordable and sustainable
Home owners:
- In today’s tight credit market, allows the home owner to secure cash in exchange for a portion of their home equity without incurring a debt that must be repaid
- Allows home owners to diversify their single largest asset so that volatility in the real estate market need not derail important plans such as retirement
Investors:
- Equity sharing enables investors the opportunity to invest in an understandable asset class, with a party (the homeowner) who has similar objectives
- As most homes have some amount of mortgage debt, an equity participation becomes a leveraged investment (without the recourse of the debt), enabling attractive investor returns
- Uniquely, through the PRIMARQ exchange, investors can achieve liquidity on a discretional basis, without the underlying property being sold or refinanced – In essence, PRIMARQ brings liquidity to a heretofore illiquid asset class
What is PRIMARQ?
PRIMARQ is an exchange where equity sharing transactions are facilitated. The exchange consists of thousands of “accredited’ investors seeking attractive investment opportunities in real estate. Through PRIMARQ, a prospective home buyer or an existing home owner, seeking funding, works with the PRIMARQ team to package the investment opportunity which is offered to the market. Included in the offering is information about the home buyer or home owner and an extensive analysis of the property and its prospects for appreciation, with such information supplied by large data and analytic companies. Interested investors then bid on the opportunity, and the winning bidders are selected. PRIMARQ provides the offerings in a standardized format so that investors can readily compare opportunities. Additionally, PRIMARQ uses a proprietary transaction structure and provides standardized documentation to consummate the investment.
After the transaction is completed, PRIMARQ, in conjunction with the home buyer or home owner, prepares quarterly updates to the investor to keep the investor informed; much like the Securities and Exchange Commission (SEC) requires publicly traded companies to file 10-Ks and 10-Qs.
Lastly, PRIMARQ conducts secondary market trading for the investor’s equity investment, thereby the respective property does not have to be sold or refinanced for the investor to liquidate their investment. PRIMARQ’s paradigm shifting approach presents an opportunity for everyone. It makes homes more affordable while providing an exciting new alternative investment opportunity. By putting together those who need capital with those who can provide it as an investment, everybody gains. We encourage you to dig a little deeper and learn how PRIMARQ can directly benefit you. To learn more, simply click on the link that represents your interest: Investor, Home Buyer, or Home Owner.