A shared appreciation agreement (SAA) (also known as home equity agreement (HEA)) is a financial arrangement where a homeowner receives a lump sum of cash in exchange for a share of the future appreciation of their home’s value. This can be an attractive option for homeowners who need liquidity but want to avoid traditional loans or selling their property. SAAs must comply with state and federal regulations, including the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).
How It Works:
The homeowner and the investor agree on the terms, including the percentage of future appreciation the investor will receive and the amount of the lump sum payment. Unlike traditional loans, there are no monthly payments, which can ease cash flow constraints.
The investor provides the homeowner with a lump sum, which is typically a percentage of the home’s current value. Provides homeowners with access to capital without increasing debt or affecting credit scores. The lump sum received is generally not taxable as income, but the appreciation share paid to the investor may have tax implications.
When the home is sold or after a specified period, the homeowner repays the initial lump sum plus a percentage of the home’s appreciated value. The investor shares in the risk of the home’s value decreasing, as their return is tied to the home’s appreciation. According to the IRS Publication 523, Selling Your Home, the appreciation paid may be considered a capital gain.
Example: Suppose your home is worth $500,000, and you enter into an SAA for 10% of the future appreciation in exchange for $50,000. If the home appreciates to $600,000 when you sell it, the investor would receive the initial $50,000 plus 10% of the $100,000 appreciation, totaling $60,000.
The effective cost of capital can be high if the home appreciates significantly. If the home does not appreciate or depreciates, the homeowner may still owe a significant amount. These agreements can be complex and require careful consideration of terms and conditions.
This type of agreement is provided by companies like Point, Hometap, Unison, Unlock and others.