A new type of mortgage that pairs home buyers with investors and makes them co-owners is being offered in the Washington area, but few buyers are utilizing it.
The shared appreciation mortgage -- also called a shared equity mortgage -- is being offered by the Ticket Home Purchase Plan, a California-based program, through Heritage Homes in Northern Virginia.
There are several reasons why shared appreciation mortgages have not caught on more quickly. One is that this type of mortgage cannot be offered in Maryland, because it would violate the state's usury laws. Another factor is that the shared appreciation mortgage benefits only people who can't afford to buy a home any other way, because it requires buyers to share the profits with the investors when homes are sold -- usually after one to five years.
If buyers want to keep homes longer, they must be able to refinance and buy out investors.
In addition, buyers often must share tax deductions for mortgage interest and property tax payments.
There are many different kinds of shared appreciation mortgages. Sometimes investors, who may be individuals or savings and loan associations, contribute to the monthly payment by subsidizing the interest rate. Or investors may pay most or all of the down payment. Sometimes they do both.
Under the Ticket plan, investors put in as much as 20 percent of the purchase price for the down payment, and buyers put down at least 5 percent. The investors and buyers split the profits equally. If the investors put down 10 percent, they get 25 percent of the appreciation. The buyers get 80 percent of the tax deductions for mortgage interest and property tax payments, and the investors get 20 percent.
At the start, buyers and investors agree on how long the deal will last, but it must continue at least one year.
Ticket President Chuck Peterson said the usual agreement is to sell in five to seven years.
If buyers don't want to sell when the time comes, they can refinance the home and buy out investors by paying them the amount contributed to the down payment plus the agreed-upon share of the appreciation, which is established by appraisal.
Peterson said buyers should try to get an agreement that lasts at least five years. By then, he said, buyers should have enough equity to refinance and pay off investors.
If the climate for home sales is poor when it comes time to sell, buyers and investors can extend the agreement.
In addition, under the Ticket plan, buyers can buy out investors any time after a year regardless of the agreed-upon resale date, but investors can't force a sale before the agreed time. However, investors can sell their interest in homes to other parties.
If buyers make capital improvements, they must get investors' permission and agreement on costs, but buyers don't have to share the part of appreciation attributable to the improvement with investors.
"If the average $100,000 home in the Washington area appreciates 10 percent a year, it will cost $160,000 in five years," Peterson said. "A buyer would have to save $6,000 a year to afford a 20 percent down payment. Many people can't save that much. Our program is a good alternative for them."
However, buyers should take as little as possible from investors to keep as much of the appreciation as possible, Peterson said.
This type of mortgage has disadvantages for both buyers and investors.
For example, the major disadvantage for buyers involved with the Ticket program is that they may be forced to sell or refinance when the market is in a slump and interest rates are high. In addition, buyers must give up a portion of the appreciation and tax benefits.
The major disadvantage for investors is that they cannot be sure how much a home will appreciate.
Another major problem is uncertainty about how the Internal Revenue Service will treat the deal.
The IRS hasn't ruled that investors can share deductions for mortgage interest and property taxes. But Peterson said IRS audits so far haven't questioned the arrangement. Still, he advises prospective investors to check with their accountants or tax attorneys beforehand.
He also advises investors not to take depreciation, because they are considered co-owners, not landlords.
Most realtors in the Washington area are not offering shared appreciation mortgages because of the problems involved. Advance Mortgage Corp., the largest mortgage banker in the area, made some of these mortgages, but stopped because high interest rates made it difficult to attract investors.
"If we could find investors, we'd have home buyers standing in line," said Albert Bryant, assistant vice president of Advance.
Thomas Owen, president of Perpetual American Federal Savings & Loan, said that shared appreciation mortgages are "a great idea," but that financially strapped S&Ls do not want to get involved with the mortgages at this time because they need current income, and these mortgages do not provide an immediate return.
However, Ticket President Peterson says his firm has engineered several hundred home sales through local real estate agents, mostly in the West, since getting under way two years ago.
"This is a new concept," Peterson said. "It's not tried and true, and there may be problems that haven't surfaced yet. But in the two years we've been in operation, we haven't had any major problems."
Ticket offers real estate agents training in shared appreciation mortgages and how to find investors, and access to its computer list of investors and buyers.
Ticket collects training and document charges and one-half percent of the sales price. That fee comes out of agents' commissions, but agents may charge buyers a special commission that usually amounts to 10 percent of whatever the investors put in.
Peterson said most participants are first-time buyers who couldn't afford to buy a home any other way and are more interested in finding a nice place to live than in making a killing in real estate.
The program has attracted many types of investors, he said, but the largest group comprises individuals who normally invest in rental property.
Generally, investors specify the area and type of housing they want to work with. Ticket tries to match investors and buyers geographically so investors are familiar with the real estate market. The company also suggests that investors inspect the property occasionally.
In addition to helping hard-pressed home buyers, the program also can be used by people having a difficult time selling their homes at today's high interest rates, Peterson said. If they become investors in their homes instead of taking back second mortgages, they would get a greater return, he said.
Builders also would be better off becoming investors in their houses rather than subsidizing the interest rate to increase sales, he added.