What is an "Equity Partnership" and How Does it Work?

     An Equity Partnership, (a.k.a. Equity Split) transaction occurs when you enter into a partnership agreement with a homeowner to help them stop foreclosure, which buys them time to sell their home retail. This is not a "no-money-down" Profit Model, since you will have to put up some money to reinstate the defaulting loan. This is the basis for the agreement and the reason the homeowner is willing to share the proceeds with you at closing.

     The mechanics of this transaction are that you will execute documents that put you in partnership with the homeowner and give you legal control of their property. Partnership expenses like marketing or rehab costs will be reimbursed to you at closing. Your net fee will be computed as the percentage of the net sale you negotiated with the homeowner.

     The Equity Partnership is somewhat complex and risky, but when executed with the proper paperwork and mindset, it can be an effective way of making money in real estate without taking ownership of the property. Some real estate and investment experience is recommended, but not required.

MATRIX RATING: Low Risk, High Complexity

INVESTOR LEVEL: Novice, beginner - great introduction to the business of real estate investing.

WHAT'S REQUIRED: Basic understanding of contracts and marketing. May need cash to reinstate the defaulting loan and/or to perform minor rehab on the client's property in preparation for sale to a third party.

WHAT'S OPTIONAL: If you have no cash, but have a credit card or credit line, you might need it us it to reinstate the client's loan or to fund any other transaction expenses. Personal credit rating is completely irrelevant in an Equity Partnership.

WHAT'S ADVISABLE: Like Contract Assignments and Power Flips, Equity Partnerships are a great way to get past the resistance of a seller who is "fee" sensitive. The Equity Partnership is perceived as a more fair exchange of value than when a flat fee or profit is built in when dealing with more sophisticated sellers. Begin by offering a 50/50 split which is usually perceived as fair, depending of course on how much equity is in the property, relative to how much money you will have to produce to reinstate, market and sell the property.

With regard to occupancy, it is highly advisable to have the seller's vacate the property before, or very soon after you enter into the agreement. If they have not vacated the house prior to sending in a loan reinstatement, make sure to execute a short term lease so that you have a legal mechanism to get them out of the house should they choose to linger or renege on your agreement. Evicting them will of course be your last resort after you secured legal right and title to the property or are acting as a trustee for a land trust.

ASSESSMENT: Equity Partnerships are a great tool to make money in real estate without actually buying or owning property. With it, you are essentially buying an "equity option" on a property you have a measure of control over.  This control is a result of the legal documentation you execute and due diligence you perform with the Opportunity Creator system.  This model is a great tool to use to help people in foreclosure who are ready, willing and able to sell their homes retail, but are running out of time as a bank sale date draws near.

It is particularly effective on you more educated clients with more expensive homes who just feel more comfortable with the sharing of risk that goes hand in hand with a partnership. People's ego's more readily accept help and financial assistance under these terms than when turning total control of their property over to a stranger.

BENEFITS: The major benefit of the Equity Partnership is your ability to make money without having to take title or get financing of any kind. For an investor who wants to get an excellent cash-on-cash return in a relatively short period of time, this model can deliver (with willing sellers).  No closing costs, no title transfer or conveyance necessary. Also, you as the partner have no responsibility for filing any paperwork in the county public records.

CHALLENGES: The Equity Partnership must include a short term rental agreement and a Quit Claim and Warranty Deed to protect your ability to sell the property, recoup your expenses and make your profit. While the Equity Partnership Agreement and associated documents and instruments establish your legitimate legal claim to the share of equity, your client could decide to refuse to leave or sell (after you have reinstated their loan and brought it current!). You could file a suit for breach of contract, but it could take years  and lots of money to prosecute...even then you may not win.

However, with a rental, you can utilize the tenant eviction laws to get them out much quicker (check the eviction laws in your state to confirm). To avoid this entire potential headache, our recommendation is that you only agree to fund the reinstatement AFTER they have moved out.