Home Equity Sharing Agreements (“HESAs”) or Home Equity Investment Contracts (“HEI”s) are becoming an increasingly popular way for homeowners to access the equity in their properties without taking on traditional monthly loan payments.
A Home Equity Sharing Agreement (HESA) allows a homeowner to receive a lump-sum payment from an investor in exchange for the investor receiving a negotiated percentage of the property’s future appreciation or value, with the homeowner generally avoiding the monthly principal and interest payments associated with a traditional home-equity loan. Unlike a conventional loan, the homeowner’s ultimate obligation may depend on the property’s future value and may become payable upon a sale, refinance, transfer, or expiration of the agreement, making it important to understand the valuation formula, repayment terms, fees, and any mortgage, deed of trust, lien, or other recorded interest securing the provider’s rights.
Why This Matters for Real Estate Transactions
Because HESAs are relatively new and can involve complex contractual and title issues, title underwriters now considers transactions involving HESAs to be atypical residential transaction structures requiring underwriting approval.
Potential issues may include:
- How the HESA is characterized under applicable state law
- Whether the agreement raises equity-clogging concerns
- How the HESA interest affects the property’s title
- How an existing HESA must be paid off and cleared from title
- Whether the HESA can be closed and insured in the applicable jurisdiction
What This Means for Our Clients
If you are involved in a transaction where a homeowner has an existing Home Equity Sharing Agreement—or where a HESA is being used as part of the transaction’s financing—please notify the title company as early as possible.
Underwriting approval is required before a transaction involving a HESA can be closed or insured. Once underwriting parameters have been established for a particular HESA provider, those parameters may generally be applied to future transactions involving the same provider, provided there are no material changes to the provider’s model, transaction documents, or jurisdiction.
Bottom Line
If a HESA appears anywhere in the transaction, don’t wait until closing. Early identification allows the title and underwriting teams to evaluate the agreement, determine how it must be handled, and avoid potential closing delays.
Please contact our office if you have a transaction involving a Home Equity Sharing Agreement. We are happy to help identify and address these issues early in the transaction.