We are living in the era of student loan deb. There is also a high cost-of-living and an equally pricey housing market. And now, a new idea is being floated as a way of helping would-be homeowners realize their homeowning dreams. At least, this is the claim of several companies that are offering the deal. But it’s possible that it is not as altruistic as it sounds. This investment scheme — or, more optimistically, this mutually beneficial strategy — is arranged so that the investors receive a proportion of the home’s appreciation at the time of a sale. Usually about a third. So, how does it work, and is the deal a win-win for both investor and the aspiring homeowner?
The way it works
When a prospective homebuyer chooses a home, an investor goes in on the house with the homebuyer by agreeing to put down a percentage of the down payment. It’s a rather large percentage and usually allows the homebuyer to go from, on average, a 7 or 8 percent down payment to a 20 percent down payment. This is the good ol’ number that will allow homebuyer access to the best interest prices, and to avoid the added cost of private mortgage insurance. Companies, such as Unison, provide about half the down payment, in exchange for a percentage of the appreciation (usually about a third). And, if the house sells at a loss, then the company absorbs a share of that loss with the homeowners, too.
The question is whether upfront cash now and fewer proceeds later is a good deal or not. And, for most homebuyers at least, the answer is unclear. After all, it is hard to tell the future. But, the deal allows homebuyers a middle-ground between renting a place and outright buying it. Many find these poles equally unpleasant, and now there is a middle option.
Unison operates in 22 states and invested in 450 homes in 2017. For 2018, however, Unison plans to up the ante to around 2,500 to 3,000 homes. Unison draws its investments mostly from pension funds and university endowments that are seeking a return only slightly above inflation. It is they who provide the money for the homebuyers’ down payments.
All applicants must apply for a mortgage. The area and home in question must be one in which Unison wants to invest. Unison invests in single-family homes as well as multi-family homes (ones with up to four units). Additionally, Unison invests in townhouses and condominiums. To discourage flipping for a profit, Unison requires their investment families to occupy the property. However, occupants can sell whenever they want. Unison will absorb any loss only after three years of ownership. The homeowner also can buy out Unison’s share at a predetermined and agreed upon price.
The homeowner’s agreement with the investor is not a loan, technically. It is called an option contract, which essentially gives the investor a right to buy a stake in the home at a later date. This would be when the property is sold, or after 30 years, whichever comes first. The company to which the investor belongs will be entitled to one-third (or more) of any appreciation in the home’s value.
Some more rules
Homeowners are not permitted to use their home equity beyond the price of the original mortgage. Additionally, homeowners will be made to perform any renovations and upkeep of the house through their own means. Unison will credit the value that the work adds to the home’s ultimate sale price. There also can be penalties if the property is not maintained properly. If there is a default, Unison can foreclose to protect its stake. But, usually, Unison will step in to settle arrears and to oversee an orderly sale.
Those who decide to apply for an investor with Unison or other similar programs should be sure to consider two things:
- How much they stand to save on their monthly payments over the time they expect to live at the chosen location if they agree to have an investor.
- An estimate of what they stand to relinquish to their investors in appreciation in the future.
The second calculation is by no means an easy one to make. Some say even not much short of impossible. It is, at the end of the day, a gamble and a risk, no matter which way you cut it. If you can’t afford to do anything other than rent, shared equity investment might be a good way to build up your equity — better than the equity you would accrue from just renting. However, whether you want to include an investor in your home-purchasing decisions is up to you. As a relatively new strategy, the market has not yet proven either the benefit or detriment of this new market maneuver.
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