A growing number of startups, such as Unison and OWN Home Finance, are offering buyers help with a down payment in exchange for a stake in their home’s future equity.
Unison gives buyers up to 50 percent of the cost of a down payment—or 10 percent of the total cost of a home—but when the buyer sells, they typically must pay the company about 35 percent of the profit from the sale. Unison has partnered with Freddie Mac to begin automating the process of underwriting mortgages with an equity stake. OWN, which will launch soon with a similar business model, plans to target buyers with median incomes of about $55,000 to $60,000 who want to purchase a home around $400,000 to $500,000.
“There’s a major hurdle that locks out a lot of qualified people [who] can’t come up with hundreds of thousands of dollars, even if they have good credit,” OWN cofounder Brian Bailey told MarketWatch. “We view our product as a rung in the ladder, helping people enter homeownership and build wealth.”
Brett Theodos, a senior research associate at the Urban Institute, says he thinks it’s a good experiment in assistance for prospective homeowners. “It’s really intriguing, as home prices appreciate and incomes don’t. It feels like a missing rung in the ladder between renting and owning. We have so many investment vehicles that you can get into for small amounts of money, but homeownership is very much an all-or-nothing proposition.”
But Theodos warns that homeowners need to carefully read the fine print for these types of programs, noting that the companies make money only when the home is sold. Unison officials say “special provisions” apply if owners sell in less than three years because they want owners to hold onto properties long enough for home prices to appreciate.
Daren Blomquist, senior vice president of ATTOM Data Solutions, sees a challenge for deeper market penetration of equity-sharing mortgages. “I see this as a response to a problem,” an affordability crunch that is particularly paramount in high-cost markets, he told MarketWatch. “It’s not going to be appealing if home prices start dropping. It’s hard to see it as something that could exist in all market cycles.”
Unison spokesman Michael Micheletti says that while the program “definitely addresses affordability challenges,” it’s appeal is much broader than that. “This is for somebody who doesn’t want to own all their home,” Micheletti says. “People don’t want to put all their money into an asset that they may or may not get all the return on because they saw what happened a decade ago.