A cottage industry of innovative companies is developing creative ways for existing and prospective homeowners to capitalize on a home’s future equity.
Own your home and need some cash? Sell a stake of your future equity and get a check today. Short on a downpayment? One of these companies can cover you.
The concept is called shared equity.
One of the companies promoting this idea is San Francisco-based Unison, which offers one product to help with a downpayment and another to buy future equity in an existing home.
For the latter, homeowners sell a slice of equity to Unison to get a lump-sum payment, which they don’t have to pay back until they sell the home, said Unison spokesman Michael Micheletti — who took a job with another company after Scotsman Guide interviewed him for this story.
“There’s no monthly payments, and there’s no interest charges associated with that money,” Micheletti said.
The size of the share of future equity depends on how much money Unison puts up. If a homeowner has a $500,000 home, for instance, but needs $50,000 for medical bills, college tuition or another expense, Unison will front the money, minus a fee. Under this scenario, Unison will receive 35 percent of the future equity. If the home is sold for $600,000 in a few years, Unison would collect $85,000 — the original amount plus 35 percent of the $100,000 in accumulated equity.
Unison’s share goes down equally if the home loses value. If this home sells for $400,000, then Unison would lose $35,000, or 35 percent of the $100,000 negative equity position. Unison would still be owed money from its initial investment, but that would be $15,000, instead of the full $50,000.
The company is backed by institutional investors, such as pension funds, that can wait years for a return. Unison started in 2004, but went into “hibernation” during the housing crisis. Since then, the business has slowly expanded and is now doing about 400 to 500 deals a quarter, Micheletti said.
“ The underlying theme is people trying to figure out new ways to release equity. ”
Another company working in a similar vein is EasyKnock. It’s not a shared-equity company. It’s a residential sale-leaseback company. The company actually buys your home and leases it back to you. Its product is called Sell & Stay. But the aim is the same.
“The underlying theme is people trying to figure out new ways to release equity,” said Jarred Kessler, co-founder and CEO.
Who would want to sell their home and lease? People who need to tap into the equity of their home, but are reluctant to leave,Kessler said.
“The emotional aspect of telling people they have to leave their home if you have a daughter who’s a junior in high school, or you belong to a church, or you have a child on a sports team, it’s emotionally draining,” Kessler said. “And then there’s extra costs, which is moving, painting your home and hiring a broker.”
Large percentages of people don’t qualify for a home equity line of credit (HELOC) or a reverse mortgage, so selling is their only option, Kessler said. Until now.
This concept helps mortgage originators, he said. Before, originators didn’t have an option for people rejected for HELOCs or reverse mortgages. Now, those originators can recommend EasyKnock and potentially get a referral fee, Kessler said.
“All of a sudden, we have a solution that helps the consumers, the loan officers and our company,” Kessler said.
EasyKnock is headquartered in New York City, but it’s core markets are in Texas, Georgia and Florida. It has raised money from the venture capital community.
Another company in this space is Tangello, a startup launched a little more than a year ago that offers a product for prospective homebuyers and another one for existing owners.
On the first product, an individual can choose a house and put up as little as 2 percent of the purchase price. Tangello will then buy the house with cash and work out a rent-to-own deal with the individual. Tangello frames it as being a silent business partner in homeownership.
“We’re buying a house with you and you have to put less down than you would a mortgage,” said Sean Marsh, founder and CEO of the San Diego-based company. “Every month, there’s a lower payment. If you want to pay more and build equity, you can.
“If you have equity and you want to sell some, you can, instantly. If you want to get a mortgage at some point and buy us out, you can.”
This allows homebuyers to gain an equity stake in a home in a high-cost metro area or to get into a more expensive home than originally planned, Marsh said.
Marsh makes the pitch to investors that the idea has all of the returns and upside of rental properties with none of the downsides. No property-management cost, no maintenance and repairs, and the occupants are less likely to leave.
Tangello plans to be nimble so prospective homebuyers can access the homes’ equity. Marsh said the company will allow participating individuals to skip some payments as long as they maintain at least a 2 or 3 percent stake in the home.
“Money’s tight?” Marsh said. “No problem, you just own a little less of the house.”
There are pros and cons. These companies can increase a homeowner’s buying power and offer them a way to pay for high-cost bills. But one of the reasons to buy a home is for the wealth-building power of future equity.
This shared-equity approach could blunt just how much homeowners will realize from the sale of their property. The concept of shared equity also is new enough that the tax issues are still an open question.