Robert E. Muir

110 West A Street, Suite 625, San Diego, CA 92101-3707 (619)231-6500


By: Robert E. Muir, Attorney

Equity sharing is a financing option for homebuyers who need assistance with their purchase. With tighter lending standards, some buyers may benefit from having an investor help with the down payment or to qualify for a loan. Investors can benefit by being able to purchase a property they would not be able to qualify for by themselves, and having an owner, rather than a tenant, live in the property and pay the debt service.

In a typical equity sharing arrangement, the buyer and investor become co-owners. The investor, sometimes called the owner-investor, usually provides all or most of the down payment and their good credit. The buyer, or owner-occupant, pays the mortgage, taxes, insurance and maintenance expense. Later, at an established time or when the prop erty is sold, any appreciation (or loss) is shared by the co-owners.

Although equity sharing has been around for many years, it is more popular when loans are harder to obtain, whether this is due to high interest rates or, as is the case now, due to tighter lending standards. Equity sharing is always popular with buyers who do not have the necessary down payment. C.A.R. currently has no equity sharing agreement, although it does have a Q & A (March 11, 2008), so the agreement should be prepared by an attorney. Agents dealing with clients interested in equity sharing should be familiar with the general issues.


Equity sharing is like a partnership. The agreement should state the duration of the agreement as well as how it can be terminated, whether this be voluntarily and involuntarily (such as upon foreclosure). The agreement should also include what occurs if the owner occupant fails to make the payments, how tax benefits are apportioned, who pays for maintenance and improvements, how this is approved, how a party can purchase the other's interest, and what happens if the parties cannot agree on a sales price. The agreement should also address the possibility of negative equity.

One variation in equity sharing agreements involves whether the owner occupant and owner-investor initially purchase the property together or the agreement comes into play after one party has already purchased the property. This is important because when the owner investor sells an interest in the property to an owner-occupant, or gives a lease with an option to purchase, this may trigger the lender's due-on-sale provision in the note and deed of trust. Parties should be aware of this risk and the agreement should address what the parties will do if the lender calls the note due.

Equity sharing agreements vary in length from two pages with little concern for possible contingencies, to over 50 pages detailing numerous possible events. The key is to have an agreement in plain language covering all the essential terms.

Clients interested in equity sharing usually have the co-owner picked out, often a relative or close friend. The parties should understand their invest ment objectives, their financial abilities, and the tax risks and benefits.


As with other transactions, agents may represent one or both parties as long as the required agency disclosures are made. In equity sharing agreements, the parties may be in unequal bargaining posi tions such as with an experienced investor with capital and a new homebuyer with little or no capital. To ensure fairness in a transaction, the parties should have the opportunity to review the agreement with their own attorney and if only one attorney is involved, know whether the attorney represents one or both parties.

A real estate agent's duty to their client may extend beyond the initial date of the equity sharing agreement since events in the agreement may occur over a period of time. Agents should remind their clients to calendar important dates in the agreement, and contact their tax or legal professional if questions arise.


The parties to the agreement share the tax benefits. Although an equity sharing arrangement is like a partnership, for tax purposes it is not treated as a partnership. The owner-investor can receive certain interest and expense deductions, such as the depre ciation allowance. The owner occupant, on the other hand, can take similar deductions to a homeowner, depending on the percentage of ownership and structure of the agreement. Due to IRS re quirements in this area, a CPA should review the tax issues before the parties sign the equity sharing agreement.


As with other business relationships, much of the success of equity sharing arrangements depends on how well the parties work together. Each party should know the otherís business experience and financial status and this information should be verified, if necessary. Optimism at the outset is good but parties need to be realistic.

Problems can occur if a party defaults. Should the owner occupant stop making monthly payments, the owner-investor may not be able to bring an unlawful detainer action to evict the owner-occupant, as with an ordinary tenant. Some agreements anticipate this problem by allowing the owner-investor to hold a quitclaim deed from the owner-occupant, however, a court may not allow this procedure.

There are ways to lessen the burden of a default and the procedure to address this possibility should be set out. Events such as bankruptcy, death, divorce and default should be anticipated. Arbitration and mediation provisions for disputes can also allow a quicker and more cost effective resolution of any problem.


Equity sharing arrangements can benefit both parties and result in a sale of a property that might not otherwise occur. Equity sharing agreements should be written plainly, be fair to both parties, and possible contingencies should be anticipated. With a good equity sharing agreement, the owner investor and owner occupant, as well as agent benefit.

This article, with modification, was published in The San Diego Realtor in October 2011.