Shared Appreciation Notes - Any Experience?

[Rick Schuett]

Greetings!

Just joined a few minutes ago, so thought I would start off with a topic that is somewhat uncommon. I apologize in advance for the long preamble but this is a rather unique and somewhat complicated topic.

Many years ago Robert Allen's first edition of No Money Down (early 1980's ?) discussed a concept called a SAM (Shared Appreciation Mortgage) whereby the seller would agree to sell their property at a price (usually lower than FMV), and then would participate in the future appreciation of the property. The benefit to the seller is that s/he sells his property quickly, gets enough cash to provide for his/her current needs, and doesn't allow the buyer to in their mind "steal" the property and in fact benefits as the property appreciates (but obviously not as much as if the property were still held). The buyer gets a "deal", and the only downside is that s/he doesn't get all of the appreciation and also runs the risk that the new owner doesn't take care of the property such that it doesn't appreciate as much as it should.

The amount that is "shared" would typically depend on how much of a discount is offered - a large discount might find the seller hypothetically getting the first $50K of appreciation, then the next $100K is split 50/50, and anything over $150K is split 85/15, etc.

This works potentially well in the case of an owner who has a primary residence and finds themselves still holding another home from a previous move, and their tenant leaves on short notice and the owner in unable or unwilling to carry two mortgages at the same time - a situation I found myself in recently.

I had a property I owned out of state that was independently appraised at $700K but the market was saturated with similar homes (only 8 weeks earlier there were no other similar homes on the market) and thus buyers were playing all of the sellers against each other and bombing prices because they could. I needed to either rent it out again or sell it fast. I thought about offering a special deal - I would sell the property at any amount equal to or higher than my mortgage plus commissions and fees - around $535K - with the caveat that I would have a note that would be filed as a lien on the property for the "shared appreciation" that would be due to me when the property was eventually resold again. I was thinking about a 90/10 split for any sale less than $700K (any discounted sale price less than FMV would come from the 10% the person who bought the house from me controlled; we would split the next $100K (from $700K to $800K) 50/50, and for anything over $800K we would split it 10/90 where I get 10% of the appreciation above $800K.

The nice thing about this type of deal is that the lender who loaned the person the money to buy the house from me shouldn't care because the lien doesn't represent a current financial obligation to the loan holder - the note only becomes due when the property is sold, and there will always be enough money to repay the loan (unless the property were sold for some amount below $535K, which could be dealt with by saying there is no appreciation split at all (actually depreciation split) below $535K).

So why didn't I do this? Several reasons, the best being I ended up leasing the house rather quickly again. But if I didn't lease it, I saw several obstacles and I was wondering how these could have been dealt with, if at all.

1. How would one write up such an offer in the MLS? Presumably I could have used Prudential, which still uses range pricing in our area (and my realtor happened to be a Prudential agent). I could have set the lower limit as my minimum "walk away" number, and the high price limit as the FMV, and waited for an offer to come in and explain it at that time. Any other thoughts/ideas?

2. How would I have structured the lien so that while it was subordinate to the original mortgage, it would take precedent over any other type of loan or lien placed on the property?

3. Would there have been any way to structure the note so that if I didn't want to wait until the property was resold, it would be possible to force the buyer to refinance or take out a home equity loan or use a LOC in such a manner within a pre-defined time period (say five years) that wouldn't require the lender's approval? I couldn't think of any way to do this, and I wasn't sure I wanted to wait for some of my money until the property was sold again.

4. Last but not least, I couldn't find any attorney anywhere who had any idea how to structure the sales agreement to have it say what I wanted to see happen.

It seems to me that this would be a great way to buy homes from homeowners that can still remember where their homes were worth 30-40% more than they might be worth today but need to sell, and don't want to give up all of what they are sure will be a goldmine of future appreciation to someone who they bellieve would be "stealing" their home, even if they bought it a FMV.

Any thoughts or ideas/answers to the above questions would be appreciated, as I'm still convinced that this is a great potential way to buy a home..