they sold the house. The nephew got married and used his share to buy a home for his wife and future family. 3. A broker and an attorney made a business of equity sharing. They formed limited partnerships to raise money and then create equity shares with investors and homebuyers. They wrote articles and gave public and industry seminars. Together, they did about 300 equity shares. They earned an “organi- zation fee,” a “management fee,” and the broker earned real estate commissions. It was a profitable venture helping future homeowners get started. EXIT STRATEGIES Equity sharing arrangements typically wind up with the property being sold, or one party buying out the other. Either party can buy out the other based on an appraisal. Usually, the RCO cashes out, often to acquire a whole property rather than share the next time. The ICO, being an investor, will cash out and pay taxes on their gain, or conduct an IRC 1031 Tax-Deferred Exchange into another investment property to save taxes. Both parties come out ahead in their chosen direction. RISKS AND PRECAUTIONS The only risk potential is the RCO defaulting by not paying their obligations, maintaining the property, dying, getting divorced, or filing bankruptcy. These are covered in the equity-sharing agreement, but an attorney will be needed to deal with them. If the parties are intelligent, good-natured, and fully informed, all usually goes well. The agreement is complicated, exceeding 20 pages, including addenda. Meeting with a knowledgeable attorney for explana- tions is essential. Additionally, when buying the property, it is important for the parties to receive the set of disclosures that brokers or agents usually provide. Obtain physical inspec- tions (e.g., pest control, roof, and property). If a broker or agent is not involved, it would be wise to hire one for an hourly fee to process the disclosures and arrange for inspections. The parties can split the cost. • Bruce Kellogg has been a real estate agent and investor in California for 44 years. He has purchased approximately 350 investment properties for himself, mostly with high-leverage and tax-deferred exchanges. In the process, he made three fortunes and has experienced three real estate downturns since 1980. Kellogg has transacted roughly 550 properties for clients, creating fortunes for several. His book “Real Estate Investing Wisdom” is currently in publication. He can be reached at Brucekellogg10@gmail.com or (408) 489-0131.
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