Introduction

When it comes to selling your home, alternative financing structures like seller financing and shared equity leases can open the door to broader buyer pools while setting you up for passive income. While both options offer unique benefits, the GoodRoots shared equity lease is particularly suited to today’s market. This model not only provides flexibility for sellers but also helps first-time buyers enter the market by offering a sustainable path to ownership without a hefty upfront payment.

‍

Q&A: What’s the difference between seller financing and a shared equity lease?

‍

We get this question often. While seller financing is an established method for transferring ownership gradually to a homebuyer, GoodRoots designed the shared equity lease to be more beneficial for sellers while simultaneously providing greater access for first-time homebuyers.

First, let's lay the groundwork with some basic definitions.

Basic Definitions

Seller financing

In a seller financing transaction using a seller note, the seller provides a loan to the buyer (known as a “seller note”), and the buyer agrees to repay the seller over time, typically with interest. Basically, the seller acts as the mortgage bank to the buyer: the seller transfers title to the buyer, the buyer starts making regular payments, typically including principal and interest, back to the seller. The purchase price, down payment and interest rate are all determined up front.

Shared equity lease‍

In the GoodRoots shared equity lease program, sellers are signing two separate agreements with their future buyers: (a) a lease agreement, which includes shared appreciation rights for the buyer/renter, and (b) a purchase option agreement, giving the renter the right to purchase the home in the future at a to-be-determined fair market value. Along the way, the resident builds shared appreciation rights in the home by making Home Equity payments upfront (typically 1-5% of the home's value) and every month (usually amounting to 1% to 3% of the home's value over time). Typical lease terms are at least 2 years and no more then 10 years, giving the future buyer ample time to build their Home Equity balance. When the buyer is ready to sell, their Home Equity balance is contributed by the seller as a credit against the purchase price.

Similarities between Seller Financing and Shared Equity Leases

• The ultimate goal is to sell your home. In both scenarios, the goal is to have the buyer take full ownership by the end of the term of the agreement, and have the seller walk away with the full sale proceeds.
• Your buyer gets to take possession of the home today. The buyer is typically an owner-occupant who expect to move into the home today and pay down their obligations to the seller over time.
• Both structures typically arise when the buyer can’t get a mortgage. This is why a creative sale structure is necessary in the first place. For seller financing, the reasons for this can be varied, but it’s often due to poor condition of the property, or the lack of creditworthiness of the buyer. For shared equity leases, the buyer typically has great credit and strong income (GoodRoots screens for these factors upfront), they just don’t have the down payment funds available today.
• It’s typically a multi-year agreement. In residential real estate, both seller notes and shared equity leases typically have terms of 3-10 years, giving the buyer ample time to build up their credit, savings and/or income before they take full ownership.

‍

Key Differences between Seller Financing and Shared Equity Leases

• A shared equity lease is a LEASE, not a LOAN. That means you keep title to the property during the entire term of the lease, and if the resident walks away from the purchase or defaults on their payments, the process for getting your property back is much simpler (lease evictions are typically less expensive and faster than loan foreclosures).
• Upfront proceeds. With a seller financing deal, the seller will typically get a larger lump sum payment upfront, as large as 20%, whereas with a shared equity lease, the upfront proceeds are typically 1-5% of the home’s value.
• Can you keep your current mortgage? If it’s a seller financing deal, probably not. You’ll likely need to pay down your entire mortgage at the time of entering the seller financing agreement. With a shared equity lease, on the other hand, you retain full title and no title is transferred, meaning you can keep your mortgage in place. This is a huge benefit if you have a mortgage balance that wouldn’t be covered by the buyer’s upfront payments. Plus, in today’s mortgage rate environment, folks who are sitting on a mortgage loan with less than a 4% interest rate are sitting on an asset, not a liability. Best to keep that mortgage as long as you can!
• Deferred capital gain treatment. With a seller financing deal, you’ll need to recognize capital gains with each payment of principal along the way. While this is still better than getting the entire tax bill upfront, it’s not quite as favorable as a shared equity lease, where the shared equity payments along the way are tax-deferred until the future sale (confirm with your tax and legal professionals).
• Seller financing makes a 1031 exchange much more complex. A 1031 exchange allows the owner to defer paying capital gains taxes on the property sale by reinvesting the proceeds into a "like-kind" property. We won’t get too deep into the complexities of 1031 exchanges here, but suffice it to say that it will be far more expensive and complicated to execute a 1031 exchange if you sell using seller financing. With a shared equity lease, on the other hand, you’re not actually selling until the future date, and then you receive all of the sale proceeds at one time (after deducting the value of any shared appreciation rights that belong to the buyer). That lump sum payment can easily be rolled into your next property using a 1031 exchange, just like a traditional sale. Be sure to always talk with legal and tax professionals before pursuing a 1031 exchange.
• Tax deductions. With a shared equity lease, you’ll technically become a landlord. That means you can deduct certain expenses each year of the lease, including depreciation expense, property taxes and insurance costs, HOA fees, and more. This creates a substantial tax benefit that isn’t available with seller financing.
• Keep upside. Shared equity leases mean you retain the majority of the upside in your property’s value. So if the value of the property rises, you’ll get most of the benefit, and your buyer will participate to the extent they’ve accrued shared appreciation rights per the lease agreement. Over the course of several years, this can amount to substantial gains for sellers.
• Help solve the affordability crisis. With higher-for-longer mortgage rates and sky-high housing prices, the next generation of renters is locked out of homeownership in “innovation hub” housing markets. Despite amazing job opportunities in these areas, the number one barrier to homeownership for renters is coming up with a down payment. The GoodRoots shared equity lease was designed to tackle this problem and alleviate the affordability crisis for first-time homebuyers. Our shared equity lease program creates access to the housing market without a huge down payment, allowing them to move in today, build shared equity rights over time, and buy when they’re ready. By working with GoodRoots to find your future buyer, you’re helping the next generation of homeowners put down roots today. 

‍

Other thoughts

In the past, some sellers attempted to avoid the downsides of seller financing by replacing using an installment sale instead of a seller note. In an installment sale, also known as contract for deed, the seller holds onto the title until the buyer makes their final installment payment, which could be years after the initial agreement. But last August, the Consumer Financial Protection Bureau (CFPB) cracked down on this practice, giving buyers in such instances far more leverage and effectively making the treatment of installment sales and seller notes virtually identical.

‍

Conclusion

If you’re considering using a creative financing method to structure your sale, both seller financing and a shared equity lease can be effective tools. But if you’re open to delaying most of the proceeds until the future sale, the shared equity lease is the clear winner in most scenarios. As long as you work with a reputable professional management company to screen buyers, collect payments and service the shared equity lease on your behalf, a shared equity lease can be an effective way to become a passive investor in your home while your buyer builds up to a future purchase.

‍