In a participation loan or shared equity loan
the buyer enters into a form of partnership with an investor who
provides cash for the sale. The investor may be the seller, a bank
or any private investor. Instead of charging interest, the investor
in a participation plan receives a percentage of the equity.
Different investors will have varying requirements as to the
percentage of equity to be shared, and as to the method of repayment
of the investment. These issues are between the lender and the
An investor may simply put up cash for the down
payment, or the primary lender may reduce the interest rate in
exchange for share of the equity.
How will the equity be calculated? Equity is the
difference between the value of the property and the outstanding
indebtedness secured by the property. For the purpose of
participation loan, the buyer and the investor must agree as to how
the property is to be valued. Any method acceptable by both parties
may be used. The value of the property at the time of purchase may
be periodically adjusted according to an agreed upon index, or the
parties may choose a particular appraiser whose opinion if value
they will accept.
The parties should also determine whether the
participation loan is to be considered part of the indebtedness on
the property. A critical factor here is whether the participation
loan is secured by a lien against the property. If it is, the it
reduces the equity:
$110,000 value of property -$72,000
balance on a participation loan
$38,000 equity to be shared.
The investor may cash out his or her share of equity
and a pre-agreed tome, for example 5 years or else at the time the
property is sold. If an investor is cashed out before the property
is sold, the buyer will most likely have to refinance at that
When it comes to improvement on a property an
agreement should be made to specify whether the investor will share
any changes in equity resulting from improvements made on the
property. If the buyer invests $5,000 if her own funds in an
addition that adds up to $7,000 to the value of the property, does
the investor get a share of the $2,000 equity created by the
When it comes to taxes and insurance usually the buyer
will pay the property taxes and insurance.