INVESTMENT STRATEGY
SAMs
Understanding Shared- Appreciation Mortgages A SAM CAN OFFER BENEFITS TO BOTH BUYERS AND SELLERS, ESPECIALLY IN MARKETS WHERE PRICES AND INTEREST RATES ARE HIGH.
By Bruce Kellogg
A
Shared-Appreciation Mortgage, also known as SAM, is a
or escrow officer can also probably assist with this type of note.
arm them for the meeting—or even arrange to attend!
carryback mortgage in which the purchaser of a home shares a percentage of the appreciation in the home’s value with the seller when a sale, refinance, or loan termination occurs. Do not confuse this seller carryback with the institutional investors who share appreciation with homeowners, a practice that became common during the past few years as housing prices rocketed. APPLICATIONS When the market is appreciating rapidly, it is sometimes difficult to convince a seller to sell on reasonable terms or to carry back owner-financing. The SAM involves a low interest rate, but then gives the seller a percentage of the profit at the end of the loan term. This approach also works in a high interest rate environment because it helps the buyer to achieve a reasonable cash flow to sustain the property. Because it is simply a promissory note with a few custom terms added, a “standard form” for this kind of note can sometimes be found on the internet. A real estate attorney
BUYER BENEFITS • The SAM is good for buying in high-priced markets and high- interest-rate environments. • Price is less important than usual. • Terms are negotiable, building a relationship with the seller. • SAM facilitates the purchase. Some investors in high-priced areas just don’t want to buy “out of area” for all kinds of reasons. They prefer to keep their money close by. Using a SAM can make this possible. The same is true if interest rates are rising or are high. A SAM can be used to still make acquisitions. The best opportunities are those in which the seller has a substantial equity. The more equity there is, the more payments can be reduced by the seller participating. Whether first and/or second loans exist impacts how much seller participation can be. Ideally, the SAM should be struc- tured to give the buyer a positive cash flow, at least. Keep in mind that risks always exist, including vacancies, evictions, rehab needs,
SELLER BENEFITS The SAM offers the seller nu- merous benefits: • Using a SAM gets the property sold, often at full price. • An “installment sale” under IRC 453 can defer income taxes. • The seller doesn’t have
to make payments on senior loans anymore. • It eases a sale when prices are high. • It eases a sale when interest rates are high.
• The seller can trade the note, sell all or part of it, or borrow against it (i.e., hypothecate/collateralize it). It is important to deal with intelligent, good-natured sellers. The relationship will require mainte- nance. Additionally, the seller must believe the property will appreciate over the term of the loan; otherwise, they will not accept the SAM. Finally, expect the seller to take the proposal to an attorney. For best success,
8 | think realty magazine :: september – october 2023
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