If you’ve got a certain amount of equity built up in your home and want to tap into it, you’d have to either take out a second mortgage, a home equity line of credit (HELOC), or sell your home.
But there’s potentially another way to gain access to this cash without having to take these avenues: sell shares of your home equity.
That’s right. Homeowners can sell fractions of their home equity to investors in order to tap into tied-up cash that otherwise can’t be accessed unless the mortgage is refinanced, a second mortgage is taken out, or the home is sold.
This can be good news for homeowners whose properties have significantly increased in value over time, putting more money in their pockets thanks to a boost in equity. It’s also a viable opportunity for investors to dabble in real estate investing in a unique way.
But just like many other types of investments, there are certain risks involved that should be weighed before jumping into this type of arrangement. Before you decide to sell shares of your home equity, you should understand how it works first.
Selling Home Equity – The Details
Selling part of your home’s equity to an investor means that third party would then become your partner in regards to sharing both the risk and return. You would still remain in the home, paying the mortgage, keeping up with maintenance, and so forth. If you ever choose to sell the home one day in the future, you’ll first have to pay the mortgage off, then split the remaining balance with your investment partner.
Instead of increasing your debt by refinancing or taking out a second mortgage, you can sell a portion of your home in exchange for a fraction of your home’s equity. This arrangement can work well for both you and the investor if your home increases in value over time. In this case, the investor can make a decent return on investment, and you are given the opportunity to access cash without having to sell your house or increase your debt.
Of course, the opposite is also true. If the home actually dips in value and you decide to sell, both you and the investor stand to lose money on the deal.
Transferring Ownership to an LLC
While the process of selling shares to an outside investor may seem simple enough, the associated costs and complexities could make things overly complicated and even costly. One way to simplify the process is to transfer the ownership of your home to an LLC that’s owned by several individuals. In this scenario, each person would have the legal right to any profits, capital gains, or distributions from the company.
LLCs have more flexibility and fewer compliance requirements compared to corporations. However, forming an LLC for the purpose of selling shares can come with its own set of hurdles. For starters, you’ll need to spend a lot of money on legal fees to make sure all laws are complied with. Secondly, any administrative overhead you need to secure for this arrangement could be pretty high.
Silicon Valley Startup Helps Homeowners Sell Equity Shares
For those who are interested in selling shares of their equity, a Palo Alto–based company named ‘Point’ has emerged to seemingly simplify the process. The company’s business model is to help homeowners sell fractions of their home equity to investors for a lump sum, without any interest rates or monthly payments.
You’ll need to provide the company with basic information about your home and your income. At least 20% of the equity in your home will need to be retained on your end after Point has made its investment. If you’re pre-approved, you’ll be given an offer, which usually falls between 5% and 10% of your home’s current value. A full application will need to be completed, and documentation for the company’s underwriting team will need to be provided.
Your home will then need to be appraised by the Point team’s appraiser, which you will be responsible for paying. You’ll also be charged a 3% processing and an escrow fee from Point.
The offer will then be finalized after the appraisal and receipt of all application documents, and a ‘Homeowner Agreement’ from Point will be signed and notarized. A Deed of Trust and Memorandum of Option will be filed on your property in your county recorder’s office by Point. After these filings are confirmed, the offer funds are sent to you.
Sounds simple enough, and the rewards can potentially be great. However, any arrangements like these should be done only after teaming up with a seasoned real estate agent to ensure your home’s equity is handled with care.
The Bottom Line
Whether you want to take money out of your home’s equity to fund a large expense, make some renovations on your home, or even invest it elsewhere, selling shares could be a viable option. However, this type of practice can be risky and can even contribute to trouble in the overall housing market if not done properly and carefully. A radical process like this should only be carried out after careful consideration, and after you’ve discussed your options with a financial planner and experienced real estate agent.