Moving past the mortgage: How startups are shifting home financing from debt to equity

By Dima Williams • Forbes

Library | 3/6/2020
Valley Mortgage

       
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When Damien Vrana and his wife, who wed last year, began looking for a house in New Jersey, their lender suggested a rather novel approach to financing. For the down payment, they could co-invest with Unison, a San Francisco-based real estate company.

  

Vrana, who owns a small business that rehabs and readies homes for sale, liked the idea.

  

“As much money as I can reinvest back into my own business as opposed to tying it all up in a large down payment on a house just made a lot of sense to me,” he says.

  

For the three-bedroom, two-bathroom split-level abode, which cost about $500,000, Vrana put down 12%. Unison supplied 18%, bringing the down payment to 30%, above the usual benchmark of 20%. Most clients, though, halve a 20% down payment with Unison, says CEO Thomas Sponholtz.

  

Vrana and his wife closed on the house last August. For them, working with Unison effaced the need for a mortgage insurance (obligatory for down payments below 20%) and deflated the family’s monthly outlays.

  

According to a scenario calculator on Unison’s website, a home buyer fairly splitting with the company a 20% down payment on a $500,000 home could save nearly $500 a month for a 30-year mortgage with a 4.125% interest rate.

  

“We can keep our money in our own possession, which allows us to potentially do other investments and grow that money, whether it’s into my small business or other possibilities as the years go by,” says Vrana, adding that the family has already undertaken a basement renovation.

  
    Co-investing in mortgage down payments

  

Co-investing in mortgage down payments:

   

Vrana does not owe Unison for its part of the down payment—at least not immediately. The two parties are co-investors in the residence but Vrana and his wife are owners. Once they sell, they will have to repay Unison’s share of the home and any appreciation linked to it.

   

A 10% down payment support from Unison translates into 35% of the rise in value for the company when the home changes hands, says Sponholtz.

   

According to Unison’s calculator, if that hypothetical $500,000 home (with an equally split 20% down payment) gained $100,000 in value at the time of sale, the company would receive $83,000 and the seller would walk away with $517,000 less the repayment of any remaining mortgage obligations.

   

If the abode depreciated to $400,000, however, Unison would get only $17,000 (much less than its original $50,000 investment) and the home seller would have $383,000 before paying off the home loan.

   

“We really win or lose together with the homeowner,” says Sponholtz.

   

As an investor in residential real estate, for the last four years, Unison has melded debt financing—a mortgage—and equity financing to offer a new model to home ownership. (Unison recently made the latest Forbes Fintech 50 list.)

   

“Residential real estate is the biggest asset class in America, the biggest part of the GDP, the biggest part of inflation, the biggest part of the economy,” says Sponholtz. “And, stunningly, it’s also the only big asset class in the world that only had debt financing available to the buyer. The only option was to take debt and more debt.”

   

Operating in 1,500 cities across 30 states, Unison does not remove mortgages altogether—unless, theoretically, a shopper is short about 20% of the home’s total value from purchasing it cash.

      
   

   

No need for a mortgage at all:

   

But one company, a newcomer to home ownership assistance programs, attempts to completely erase loans. This is Fleq, which is to launch in Pittsburgh, “any day now,” according to founder and CEO Todd Sherer. Sherer is also a member of Forbes’ Real Estate Council, which is a paid program.

   

While Fleq and Unison differ in their approaches to home ownership, from how they vet their clients to the avenues for customers to exit the partnerships, both companies are upending the traditional method of purchasing a residence. Their emphasis on equity as opposed to debt comes in a time when various pressures weigh on home buyers—from substantial student debt to lack of savings.

   

“I don’t think that a mortgage is necessarily the best way to acquire housing any longer,” says Sherer. “The mortgage really hasn’t been improved upon since the 1930s or 1940s.”

   

Fleq teams up with home buyers to purchase their primary residence in cash, requiring them to put between 3% to 8% down, while the company covers the rest.

   

“With the partnership, we would be a cash buyer day one, which means a certain amount of bargaining power,” Sherer says.

   

Home shoppers then pay a market-rate lease for the portion of the residence Fleq owns. With time, partial homeowners-renters can buy equity shares and, thus, reduce the rent—or, in the event of a move, can transfer their equity amount to a new residence. In a traditional sale, however, Fleq has the right of first refusal.

   

“In practice, what that means is we would provide a sell-above-price to you and your realtor,” says Sherer. “As long as you sold above that price, we would agree to waive our right of first refusal.”

       
    Co-investing in mortgage down payments

  

Credit score still seems to matter:

   

Attempting to solve what Sherer calls “six barriers to home ownership” (affordability, attainability, flexibility, sustainability, portability and convenience), Fleq caters to current renters who wish “to not only build wealth but get the safety and security that goes with buying a home and owning a home.”

   

As a result, Fleq’s approval process, Sherer told Housing Wire earlier this year, would focus on income and payment history, not on credit score (payment history is one factor used to calculate credit scores). In contrast, Sponholtz says Unison sets a minimum qualifying credit score of 680, which is in line with most lenders’ requirements for mortgage applicants.

   

“That’s just to make sure that we’re dealing with a partner that is typically paying their bills and they can afford the house they are buying,” Sponholtz says.

 
   

This article was written by Dima Williams from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

 

Disclosure:
Valley National Bank and Unison are not affiliated entities.  A Unison representative will guide the purchaser through Unison’s independent application process. The purchaser must contribute a down payment of 5% to 15% of the purchase price. A transaction fee equal to 2.5% of Unison’s investment must be paid at closing. Unison’s percentage share of the home’s change in value depends on the amount of its investment.  If Unison invests 15%, then its share of the appreciation or depreciation is 52.5%.  The purchaser retains all the equity built through monthly mortgage payments. Maximum term is 30 years. At year 30, the purchaser must pay Unison the value of its interest in the home. The purchaser can do this by selling the home or buying Unison out. The purchaser can sell their home whenever they choose. If the property is sold in the first three years, Unison does not share in any decrease in value. The purchaser can buy Unison out after 3 years based on appraisal price. The purchaser client should carefully review the Unison Homebuyer program with their legal, tax and financial advisors.  Additional terms and conditions apply.

 

  

 
A new way to get to  that magic 20% down payment
Unison Program

A new way to get to that magic 20% down payment

Unison’s funding can give you greater purchasing power. That means you can expand your homebuying search to include more homes and more neighborhoods. So, if you’re waiting to buy a home while you save up for a down payment, working with Unison can speed up your timeline.