When Damien Vrana and his wife, who wed last year, began looking for a housein 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 asmallbusinessthat rehabs andreadies homes for sale,liked the idea.
“As much moneyasI 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 sensetome,” he says.
For the three-bedroom, two-bathroom split-level abode, which cost about $500,000, Vrana put down12%. Unisonsupplied18%, bringing the down payment to 30%, above theusual benchmark of 20%.Most clients, though, halve a 20% down payment with Unison, says CEO ThomasSponholtz.
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 buyerfairly splittingwith the company a20% down paymenton a $500,000 homecould save nearly $500 a month for a 30-year mortgage witha 4.125% interest rate.
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“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 orother possibilities as the years go by,” says Vrana, adding that the family has already undertaken a basem*nt renovation.
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-investorsin the residence but Vrana and his wife are owners. Once they sell, they will have to repay Unison’s share of the homeand any appreciationlinked to it.
A 10% down payment support from Unison translates into 35% ofthe 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 lessthe repayment ofany remaining mortgage obligations.
If the abode depreciated to $400,000, however, Unison would get only $17,000 (muchless 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,” saysSponholtz.
As an investor in residential real estate, for the last four years, Unison has melded debtfinancing—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,” saysSponholtz. “And,stunningly, it's also the only big asset class in the world that only had debt financingavailable to the buyer.The only option was to take debt and more debt.”
Operating in 1,500 cities across 30 states,Unison does notremove mortgagesaltogether—unless, theoretically, ashopper is shortabout 20% of thehome’stotalvalue from purchasing it cash.
No need for a mortgage at all
But one company, a newcomer to home ownership assistance programs, attempts tocompletelyeraseloans.This isFleq, which is to launch in Pittsburgh, “any day now,” according tofounder and CEO Todd Sherer. Sherer is also a member of Forbes’ Real Estate Council,which is a paid program.
WhileFleqand Unison differ in their approaches to home ownership, from how they vet their clients tothe 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 debtcomes 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.”
Fleqteams upwithhome buyers to purchase their primary residencein cash, requiringthemto put between 3% to 8% down, while the company covers the rest.
“With the partnership, we would be a cash buyer day one,which meansacertain amount of bargaining power,” Sherer says.
Home shoppers thenpay a market-rateleaseforthe portion of the residenceFleqowns.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.”
Credit score still seems to matter
Attempting to solve what Sherer calls “six barriers to home ownership” (affordability, attainability, flexibility,sustainability,portabilityandconvenience),Fleqcaters 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’sapproval 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,SponholtzsaysUnisonsets 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 andthey can afford the house they are buying,”Sponholtzsays.
