How startups are shifting home finance from debt to equity

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

Vrana liked the idea, owner of a small company that requalifies and prepares houses for sale.

“Most of the money I can reinvest in my business instead of tying it into a big down payment on a house made a lot of sense,” he says.

For the split-level three-bedroom, two-bathroom mansion, which costs approximately $ 500,000, Vrana sold 12%. Unison provided 18%, bringing the down payment to 30%, above the normal 20% benchmark. Most customers cut a 20% down payment with Unison in half, says CEO Thomas Sponholtz.

Vrana and his wife closed home last August. For them, working with Unison eliminated the need for mortgage insurance (mandatory for down payments of less than 20%) and deflated the family’s monthly expenses.

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

“We are able to keep our money in our possession, which allows us to potentially make other investments and grow that money, whether it’s my small business or other possibilities over the years,” says Vrana, adding that the family has already embarked on a basement renovation.

Co-investment in mortgage advances

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

A 10% down payment support from Unison translates to 35% increase in value for the company when the house changes hands, says Sponholtz.

According to Unison’s calculator, if that hypothetical $ 500,000 house (with a 20% down payment evenly divided) earned $ 100,000 in value at the time of sale, the company would receive $ 83,000 and the seller would leave with $ 517,000 less on repayment of any residual mortgage obligations.

If the house had depreciated at $ 400,000, however, Unison would have gotten only $ 17,000 (far less than its original $ 50,000 investment) and the home seller would have had $ 383,000 before paying the home loan.

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

As an investor in the residential real estate sector, over the past four years, Unison has combined debt financing – a mortgage – and equity financing to offer a new model for home ownership. (Unison recently released the latest Forbes Fintech 50 list.)

“Residential real estate is the largest asset class in America, the largest part of GDP, the largest part of inflation, the largest part of the economy,” says Sponholtz. “And surprisingly, it’s also the only large 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 in 30 states, Unison does not completely remove mortgages, unless, in theory, a buyer runs out of around 20% of the total home value from buying money.

There is no need for a mortgage at all

But one company, a newcomer to home ownership assistance programs, tries to completely cancel the loans. This is Fleq, which will be launched in Pittsburgh, “overnight”, according to founder and CEO Todd Sherer. Sherer is also a member of the Forbes Real Estate Council, which is a paid program.

While Fleq and Unison differ in their approaches to home ownership, from how they control their customers on the ways for customers to exit partnerships, both companies are reversing the traditional method of buying a residence. Their emphasis on equity over debt comes at a time when various pressures are weighing on home buyers, from substantial student debt to lack of savings.

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

Fleq works with home buyers to purchase their main residence in cash, forcing them to cut between 3% and 8% while the company covers the rest.

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

Domestic buyers then pay a market-rate lease for Fleq’s part of residence. With the passage of time, partial owners of homeowners can buy equity shares and, therefore, reduce the rent or, in the event of a move, they can transfer their equity to a new residence. In a traditional sale, however, Fleq has the right of first refusal.

“In practice, this means that we will provide a higher selling price to you and your real estate agent,” says Sherer. “As long as you have sold above that price, we would agree to waive our right of first refusal.”

The credit score still seems to matter

By attempting to solve what Sherer calls “six barriers to home ownership” (convenience, reachability, flexibility, sustainability, portability and convenience), Fleq addresses current renters who want “not only to build wealth but to obtain the security that accompanies purchase a house and own a house. ”

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

“This is only to make sure that we are dealing with a partner who typically pays their bills and who can afford the home they are buying,” says Sponholtz.