Rents are rising, incomes are swelling, home values are appreciating, but you don't have enough for a down payment.

If you are salary rich, but too cash poor to escape rising rents, consider the equity sharing approach to buying a home - but don't overlook its caveats.

Equity sharing is a symbiotic relationship and a legal agreement between two or more people holding title to one home.

It works something like this:

A buyer-occupant generally lives in the residence, pays the mortgage and sometimes pays rent to the investor. The occupant also pays the expenses and maintains the home and gets to deduct his or her portion of the mortgage interest and property taxes.

The non-resident, often an investor, provides all or part of the down payment, and in return gets tax deductions for her or his share of the mortgage interest and property taxes, plus depreciation on the portion rented to the resident.

Title to the home can be held in joint tenancy with right of survivorship, tenancy in common, partnership or as a living trust. Because all equity-sharing owners must hold title, you generally can't use land contracts or lease-option contracts

Lease-option contracts are better suited for a buyer's market where values are flat or falling. Lease-option contracts typically lock in the purchase price you pay after the lease is up. Few, if any, sellers are likely to risk a locked price in an appr eciating market.

The parties generally cannot recoup their money until the deal is over unless they pay a penalty that allows them to sell the house before the contractual due date.

At the end of a specified period, often five to seven years, the net proceeds from the sale are split between the buyer and investor, based on contractual stipulations.

Theoretically, through appreciation, the investor pockets his profit and the occupant uses his or her share to buy a home alone.

That part of the deal is easy enough in this economy. The market is producing plenty of appreciation.

Nationwide, home values rose nearly 5 percent during the fourth quarter of 1998, compared to the same quarter a year ago, according to Freddie Mac.

Pacific states did best with a 5.7 percent increase followed by East South Central at 3.9. Both New England and South Atlantic states enjoyed 3.5 percent appreciation in home values, while Mid Atlantic states rose only 3.3 percent. Other increases included West North Central (3.2 percent), West South Central (3 percent), Mountain (2 percent) and East North Central (1.5 percent).

"Home price appreciation is expected to continue to be higher than inflation overall, between 3 percent to 4.5 percent for the year. The housing market should remain strong throughout 1999," said Amy Crews Cutts, an economist at Freddie Mac.

While the economy isn't likely to turn on an equity sharing deal, equity sharing partners have been known to turn on each other. The deals can become legal nightmares if, for some reason, the parties feud or want out before the contract is over and contractual provisions aren't iron clad and detailed enough to address the dispute. That means you'll need a savvy attorney experienced in equity sharing deals. Finding an investor in today's market is another hurdle.

More than a decade ago when lenders demanded 20 percent down, finding an investor was as easy as holding up your hand. Today with loans available for as little as 3 percent down, it isn't so easy.

Referrals through real estate agents, is the most common way to find an investor. Most agents have a network of peers involved in various aspects of real estate. Likewise, other professionals you work with and trust, accountants, attorneys, and the like, as well as family members may all be able to provide investor referrals or become investors themselves.

Don't forget to scour newspapers' investment opportunities classifieds sections.

Finally, the greatest obstacle you'll have to over come to land an equity sharing deal is finding a seller willing to wait for the contract.

In hot markets where multiple offers reign, including much of California, New York City, Boston, Seattle and some Denver areas, sellers rule and need wait for very little. Resources:"The Home Equity Sharing Manual," (John Wiley & Sons. Inc.),

San Francisco-based attorney, David Andrew Sirkin, and Larkspur, CA attorney Marilyn D. Sullivan's "The New Home Buying Strategy" (Venture 2000 Publishers, $24.95, 800-843- 6700; ) are two top-notch equity sharing tomes.

A plain-English version of Internal Revenue Code 280A(d)(3)(B), for equity-sharing tax rules is available HERE

Published: March 12, 1999

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