Financing
Sources...
Shared appreciation mortgage is when the borrower gives the lender a portion of the real estate property's appreciation in return for a lower rate of interest.
To
illustrate, a lender
who would otherwise
charge 15% interest
might agree to take
10% interest plus
one-third of the
appreciation of the
property. The lender
is accepting what
amounts to a
speculative
investment in the
property in return
for a reduced
interest rate. The
borrower is able to
buy and occupy a
home that he or she
might not otherwise
be able to afford,
but gives up part of
any future price
appreciation. In
August, 1980, $2 1/2
million of SAM loan
money was offered by
a Florida S&L.
The prevailing
market rate at the
time was 12% and the
loans were offered
at 8% with one-third
of the appreciation
going to the lender.
All real estate loans were taken
by the end of the
next business
day.
Despite the
apparent advantages
of the SAM, there
are some major
pitfalls. For
example, at what
point in the future
is the gain
recognized and the
lender paid off? If
the home is sold,
the profits can be
split in accordance
with the agreement.
However, what if the
lender feels the
home is being sold
at too low a price?
What if the home is
not sold for cash?
What if the borrower
does not want to
sell? One answer to
the last situation
is that the lender
may set a time limit
of 10 years on the
loan. If the home
has not been sold by
that time, the home
is appraised and the
borrower pays the
lender the lender's
share of the
appreciation. At a
10% appreciation
rate, a $93,750
house would be worth
$243,164 ten years
later. If the lender
was entitled to
one-third of the
$149,414
appreciation, the
borrower would owe
the lender $49,805
in appreciation plus
the remaining
$70,000 balance on
the loan. Unless the
borrower can pay
cash, this would
have to be
refinanced at then
current rates of
interest. On the
other hand, if the
real estate property experiences
no appreciation in
value, the borrower
will have enjoyed a
below-market-rate
loan for 10 years
and be responsible
only for refinancing
the remaining loan
balance at that
time.
Shared
Appreciation
Mortgage To
Graduated
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