[Editor’s note: This is a blog post from Unison. Unison is a Silver Sponsor at LendIt USA 2017 which will take place on March 6-7, 2017 in New York City.]
See our white paper, titled A New Era for Home Buying: The Rise of Home Ownership Investments, for more information.
Homeowners have traditionally financed their homes solely with loans. But that is now changing due to the introduction of home ownership investments — a new way to finance a home. Whereas a loan is a debt investment that produces a return to the investor by charging the homeowner interest and collecting monthly payments, a home ownership investment is financing based on partnership and shared incentives between the homeowner and the investor.
Unison introduced the home ownership investment category in 2007. Over the last decade, Unison has remained the leader and dominant player in the category and has expanded nationwide by working with lenders, regulators, and institutional investors to integrate home ownership investing into the U.S. housing finance system. In a home ownership investment, an investor provides financing in exchange for the opportunity to share in the gain or loss in the home’s value when the homeowner decides to sell. There are no interest charges or monthly payments on the financing provided. What sets Unison apart is true partnership: Unison invests at the same home value as the homeowner and shares both the downside risk and upside potential.
The New Home Buying Generation
Over the next decade, Millennials and other young home buyers will represent the majority of entrants into the housing market. Contrary to some predictions, members of this generation do have a strong desire to purchase a home. According to Ellie Mae, 91% of millennials say they intend to own a home one day. The problem is that home ownership has been out of reach for too many of them.
This generation of home buyers is facing an unprecedented “perfect storm” of conditions that have blocked them from pursuing their dreams of home ownership. Many of these recent graduates have high student loan payments that take a deep slice out of their monthly budgets. At the same time, rents in most cities have been rising quickly, leaving this generation with only a limited ability to save money for a down payment on a home. Even so-called “low down payment” options are not a good solution for many, because of low approval rates and the high monthly cost they entail.
Caught between low savings rates and rapid home price appreciation in many housing markets, these prospective home buyers are searching for a way to buy a home that does not require waiting 10+ years to save for a 20% down payment and comes with a mortgage payment they can actually afford.
An Exciting New Way to Finance a Home
Fortunately, home ownership investments are giving this generation new hope. Because this type of financing is structured as an investment with shared incentives — not more debt — it cuts the time to save for a down payment in half, allowing homebuyers to enter the market much earlier than they otherwise could.
That means millennials will be able to purchase a desirable home with monthly payments they can afford, by putting 10% down and getting 10% down from a home ownership investment company like Unison. They will start building equity in a home sooner and become a homeowner without taking on too much risk. They will also have greater choice over important considerations like commute, school district, and home features.
By using a home ownership investment these home buyers can not only get into the housing market but can also secure financing that is less risky for them. With 90% mortgages — or even more highly leveraged loans — the home buyer is exposed to much higher risk. A single property is a highly volatile investment and data shows that financing options which allow the homeowner to borrow more than 80% of the home’s value are much more likely to lead to default on the loan. Home ownership investments reduce risk for homeowners and for the housing market as a whole.
Alignment between Investors and Home Buyers
The home ownership investment model creates a natural alignment between the investor and the homeowner. A home ownership investment company like Unison aggregates and manages thousands of home ownership investments on behalf of institutional investors who have a natural need for long-term price exposure to residential real estate.
What this means is that Unison and the end investors have a natural incentive to help the homeowner make good decisions — for example, about the value of potential home improvements. They also have incentive to help the homeowner avoid foreclosure if they lose their job and can’t make their mortgage payments. Any gains or losses are shared by the homeowner, investor, and Unison.
The following program features are critical in promoting natural alignment in a home ownership investment:
- Everyone starts the investment at today’s fair market value of the home (as opposed to a discounted value).
- Everyone shares in both the upside and downside of the home’s change in value.
- Everyone’s success is directly tied to the performance of the investment.
- The investor provides patient capital (a 30-year term). As a true partner, the investor understands that for many people home ownership will naturally be a long-term undertaking; a 30-year term allows the homeowner to raise a family and enjoy a lifetime in their home without worry over a pending financial obligation.
- Full transparency of terms and a robust education process.
The natural alignment between the homeowner, investor, and Unison makes a home ownership investment a powerful new way to finance a home. Consumers who choose to purchase a home with this new type of financing stand to benefit from greater flexibility, opportunity, and control. For many families, this is the future of home buying.