The Down Payment Can be an Obstacle to Homeownership
For many buyers, the down payment is the biggest obstacle to home ownership. Think about someone moving from Dallas to Orange County, California.
The exact same 4 bedroom tract home might cost double or triple in Orange County what it would cost in a comparable area of Dallas. A $400,000 house in the Dallas suburb of McKinney might cost $900,000 in the Orange County town of Yorba Linda.
Let’s say that after selling costs and commissions, they had 20% equity in the Dallas house ($80,000). Even if they have the earning power (coupled with lower property taxes relative to Texas) to afford a $3000-$3500 mortgage, coming up with the $180,000 necessary for a 20% down payment might not be an attainable short term goal.
Shared Appreciation Investor Can Provide the Down Payment
Through a shared appreciation investment, someone else invests in the down payment. This might be a company like Point Digital Homes, Unison, or Patch Homes, or it could be a family member or some other private investor.
The basic idea is that the homeowner lives in the home and makes monthly payments on the mortgage, but someone else puts up the money for a portion (or all) of the down payment. When it comes time to sell, the investor gets a portion of the appreciation, perhaps 35% of the appreciation in exchange for a 50% down payment.
Yes, that could cost a lot of money if the home appreciates substantially. However, typically a shared appreciation investment is the only way the buyer would have been able to buy the home in the first place. So they would still be renting (and not benefiting from real estate appreciation) without the program.
And in most cases, the buyer only keeps the investor around for as long as it takes to build enough equity to qualify for a normal mortgage and pay them off.
A shared appreciation investment program might require you to sell the house or refinance their investment plus the share of appreciation after a certain number of years, or to pay them off if you pay off the mortgage. They also would typically share in the depreciation of the home if its value went down.
A Family Member can be the Investor
For parents of a millennial renter, this would be a good way to move them from renting to home ownership. You could put up a big chunk of the down payment and both stand to benefit if the house appreciates.
Unlike dealing with a tenant, you would have someone occupying the property that you knew and trusted, and that had a stake in the upkeep and improvement of the property. Of course, you have to find a lender that is on board with this program.
Lenders historically have been OK with a down payment that was gifted by a relative with no payback requirement, however, they are not OK with a down payment being just another loan. They also want a borrower to have skin in the game in the form of their own cash invested in the property. They would have to be comfortable with the equity structure of this investment.