What Is Equitable Interest?
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Legal Interest vs. Equitable Interest
A property owner is an individual who holds the title to an asset (such as real property), therefore possessing legal interest on it. An owner can also sell, transfer, or use the property as they wish. However, it also comes with certain responsibilities, such as the property’s care and maintenance.
By contrast, an individual with an equitable interest in a property holds no title to the asset yet enjoys the privileges of its ownership. An example of equitable interest is the beneficiary’s interest in a trust or a silent partner’s interest in a partnership. Meanwhile, in a real estate transaction, the seller holds legal interest; the buyer, equitable interest.
Equitable interest can also represent a person’s financial interest in the property. This allows the person to list the property or to market it for sale.
BY THE NUMBERS: Almost 65% of families in the U.S. hold the legal title to their primary residence.
How to Obtain (and Prove) Equitable Interest
Courts of law recognize and, at times, enforce equitable interest, although it may require the legal owner’s express consent. It may be established in writing and usually happens when the buyer and seller enter into a purchase and sale agreement. As soon as the buyer executes a purchase and sale agreement and any monetary consideration has been contributed by the buyer, the buyer obtains a legitimate, equitable interest in the property even if they do not have the legal title yet.
All parties need to formalize the extent of their interests in an asset or property. A contract of sale is an agreement that binds the buyer and the seller, which establishes the buyer’s equitable interest in a property.
A declaration of trust may prove equitable interest and shows that an individual has rights over a property. In the agreement, the buyer agrees to perform duties and responsibilities to get equitable interest.
To claim an equitable interest in a property, a person may also need to show that they make payments on the property. This may involve direct contributions to the purchase price of the property or payments made for renovations. In some cases, sweat equity may go toward equitable interest as well.
Examples of Equitable Interest
Equitable interest may come in the form of purchase and sale contracts, mortgage contracts, option contracts, short sale approval letters, deed contracts, lease option contracts, among others. Here are some examples of equitable interest.
The beneficiary of a trust is among the common examples of a person holding equitable interest. While the trustee holds the title to the asset, the beneficiary may claim equitable interest and legal ownership of the trust in certain ways. Such conditions include instances when the trustee misuses the asset or violates the terms of the trust.
A person who enters into a lease option arrangement may also have equitable interest in the property. The tenant may rent the property for a period, after which they have the option to purchase the property.
Couples who purchase an investment property have equitable interest in the asset. One may pay 50% of the purchase price while the other holds the legal title to the property. While the one who paid 50% is not the legal owner of the property, they still have an equitable interest in the property.
Real Estate Transactions
Equitable interest applies in buyer-seller transactions where the seller finances the buyer’s purchase. The buyer agrees to purchase a property from a seller and will pay the price of the house in installments. The buyer has equitable interest and may use and enjoy the property even without legal ownership.
The seller holds the legal title until the buyer pays the balance in full. Once the buyer completes the payments, they may claim legal ownership of the property.
Can a Person Transfer Equitable Interest?
In real estate, a common way to transfer equitable interest is by wholesaling. For instance. an investor may enter into a purchase and sale agreement with a seller, which grants them equitable interest over the property. However, instead of buying the property outright, they then instead advertise the property to an actual end buyer, assigning the equitable interest in them to the end buyer.
The investor does this by assigning or giving the equitable interest through a deed of assignment. In this case, the buyer becomes an assignor, and the person receiving the equitable interest becomes the assignee. The assignee becomes responsible for fulfilling the terms of the purchase contract, therefore buying the property during closing. In this transaction, the investor acts as a middleman who earns a “finder’s fee.”
The deed of assignment contains details of the transaction between the assignor and the assignee. These include information on who will cover the costs for drafting the deed, what is being assigned, how to sell the property, and the signatures of both parties.
Note that not all holders of equitable interest can transfer it this way, nor is it as easy. For example, a beneficiary of a trust may give or sell their equitable interest to another person but must do so in writing through a deed of assignment.
- A person with an equitable interest in a property may use and enjoy it, even obtain legal title to it eventually, even if they do not hold the legal title to it.
- The most common example of equitable interest is the one held by a trust beneficiary, but it may also come in other forms, such as by an equitable interest held by partners, a seller-financed property deal, or a marital investment.
- A buyer with equitable interest in a property may give or assign that interest to another person through a deed of assignment. This procedure is known as real estate wholesaling.
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- Legal Information Institute. (n.d.) Sec. 535.6 – Equitable Interests in Real Property. Cornell Law School. Retrieved from https://www.law.cornell.edu/regulations/texas/22-Tex-Admin-Code-535-6
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- Law Offices of Stimmel, Stimmel & Roeser. (n.d.) Assignments: The Basic Law. Retrieved from https://www.stimmel-law.com/en/articles/assignments-basic-law