By Peter Rudegeair and Christina Rexrode
Some well-funded startups have an unusual pitch for homeowners
strapped for cash: Let's own this house together.
A handful of companies, including those backed by marquee
Silicon Valley names such as Andreessen Horowitz and Mark
Zuckerberg's philanthropic organization, are experimenting with a
product that essentially lets them take an ownership position in a
house along with the homeowner. The agreements, called
shared-equity contracts, provide a new way for investors to get
exposure to rising home prices across the U.S.
Shared-equity products are aimed at new buyers who need help
with a down payment, or current homeowners looking for an
alternative to a cash-out mortgage refinancing or a home-equity
loan. The first use has caught the attention of mortgage-finance
giant Freddie Mac, which recently agreed to buy loans on properties
where one firm, Unison Agreement Corp., contributes to the down
payment.
In those cases, home buyers get money for part of their down
payment in exchange for pledging some of the home's future price
appreciation. The firms market them as a better alternative to
low-down-payment loans, since they can give consumers more buying
power without requiring them to take out pricey mortgage
insurance.
Landed Inc. offers these down-payment contracts to teachers and
other educators. Last year, the Chan Zuckerberg Initiative, a
philanthropy co-founded by Facebook Inc.'s chief executive, gave
Landed $5 million to start a new fund.
Michael Nizhnikov found out about Unison's shared-equity product
from his mortgage lender, Guaranteed Rate Inc. He used it for half
of the 20% down payment on a home when he moved to accept a
position in the psychology department at Southern Connecticut State
University.
Dr. Nizhnikov, 46 years old, said the idea of sharing ownership
of his home at first was a bit disconcerting. One thing that won
him over: If his home's value falls, Unison shares in the loss. "We
get to feel comfortable, just in case something crazy happens," Dr.
Nizhnikov said.
The length of the contracts can vary from a few years to 30.
Homeowners can repay early, including if they sell their house
before the term ends. How much they end up owing depends on how the
value of their home changes. Because the funds are equity, not a
borrowing, they don't require monthly payments.
For example, a Unison customer could receive $50,000 toward a
$100,000 down payment on a $500,000 house. If the home later sells
for $600,000, the customer gets back the $50,000 he or she
initially put down plus 65% of the $100,000 appreciation. Unison
gets back its $50,000 plus the other $35,000 of appreciated value.
(That is keeping the mortgage constant at $400,000 for illustrative
purposes.)
And if the home goes down in value? Unison shares in the loss,
but not all of it. Say the home sells for $400,000. After paying
back the $400,000 mortgage, the homeowner's $50,000 in equity is
wiped out. Unison only shares in 35% of the loss, preserving some
of its equity. That means the homeowner is on the hook for the
difference and needs to pay Unison $15,000.
Shared-equity contracts can help home buyers unload some risk of
a decline in property values, but they can also end up being
expensive if housing prices rise. "The homeowners who are going to
do this are the ones who don't have a lot of choices," said Allan
Weiss, who founded a home-price analytics firm that bears his
name.
Patch Homes Inc., Point Digital Finance Inc. and Unison are
among the companies that are marketing these products as an
alternative to home-equity loans and cash-out refinancings. Unlike
those products, shared-equity contracts don't add to the consumer's
outstanding debt and tend to have looser qualification
standards.
Raju Mann of Marin County, Calif., took out about $85,000
through a shared-equity contract on her home from Point in 2016.
She was encouraged by the startup's shareholders, which include
Andreessen Horowitz and former Citigroup Inc. CEO Vikram
Pandit.
Ms. Mann, 54, said banks rejected her for loans because her
sources of income -- including royalties on the sale of books
written by her grandfather, Nobel Prize-winning author Thomas Mann
-- were unpredictable.
After getting funds from Point, Ms. Mann used the money to pay
off debt. Home prices were rising in her neighborhood, though, and
the longer she waited to pay back Point, the more the firm would
make. She decided to exit her contract last month, using money she
got refinancing her existing mortgage. Ultimately, she wound up
paying Point around $120,000. "They made good money with me," Ms.
Mann said.
The market for shared equity is embryonic. Unison said it has
done 600 agreements in the past year; the other firms have done
fewer.
To the firms, the idea is to give homeowners the same option
that companies have in raising funds via both debt and equity. The
firms also typically charge fees for arranging the contracts.
For investors, yields can be attractive. Kingsbridge Wealth
Management Inc., a Las Vegas multifamily office, has placed about
$3 million into a fund that Point manages since May 2016, earning
an internal rate of return of roughly 16%, said Kingsbridge
President David J. Dunn.
But there is also risk that investors' capital will be tied up
for years before recognizing any gains.
High-school biology teacher Sara Shayesteh and her husband,
Isaac, used an agreement with Landed to cover about half their down
payment for their home in San Mateo, Calif. That followed a
discouraging search for homes where they kept getting bested by
buyers with bigger down payments.
The Shayestehs have 10 years to repay Landed, but can choose to
do so after one year. They said it feels odd to have an investor
own part of their house but are grateful for the arrangement.
"We're trying to live in a crazy area with a market," said Ms.
Shayesteh, 32. "There's no other way we could have purchased a
property that would have met our needs."
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and
Christina Rexrode at christina.rexrode@wsj.com
(END) Dow Jones Newswires
February 18, 2018 07:14 ET (12:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.