What is a “preferred return” and why is the investor entitled to one?
You, as the home buyer, have complete control of the property, which leaves the passive investor, to a great extent, at your mercy. This presents a problem if you should sell the house shortly after taking on an investor because the transaction costs associated with selling your home (realtor fees, title fees, etc.) can be significant. If the home is not given time to appreciate in value, your decision to conduct a sale shortly after taking on an investor will almost certainly result in a loss to the investor. The investor signed up to bear a market risk over which you and the investor have no control. However, the short-term sale is something under the home owner’s control that could result in taking advantage of the investor. To address this potential problem, if the home is sold within 12 months of the initial PRIMARQ investment (not a secondary trade) the investor is entitled to a preferred return of some level, e.g. 3-4%. After the 12month period the preferred position is lost.
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