Millennials Get A New Way To Clear The Down Payment Hurdle To Homeownership

When Gallup polled Americans recently about what they consider the best long-term investment, more picked real estate than chose stocks, bonds or gold. Yet a handful of startups are betting that homeowners will give up some of their potential gains to either buy a house they couldn't otherwise afford or to liberate cash for other uses--say, starting a business, paying for college or even investing in stocks. (Over the past three decades, the S&P 500 has produced an average annual return of 11%, compared with 4% average annual appreciation for U.S. housing.)

Among the startups are Point Digital Finance, with Andreessen Horowitz as lead investor; Patch Homes, which counts an Airbnb cofounder as a backer; and Own Home Finance, which is developing a special mortgage with shared appreciation built into it.

The granddaddy and leader of this tiny sector is San Francisco-based Unison Home Ownership Investors, which was formed in 2004 and for years bumped along buying equity from existing homeowners. In 2012, it expanded into shared down payments, which it now offers (in concert with mortgage lenders) in Washington, D.C., and 12 states, including California, New York, Illinois and New Jersey. In February, Unison announced it had raised more than $300 million from institutional investors--enough to complete the 2,500 shared-appreciation deals it expects to make this year.

For a $1 million home, the purchase program works like this: The home buyer makes a $100,000 down payment, and Unison kicks in $100,000, reducing the monthly mortgage payment (including property taxes and insurance) from $6,161 to $5,118. (This estimate, from Unison, assumes a 30-year fixed-rate mortgage and a one-percentage-point-higher interest rate without the extra 10% down.) When the house is sold, Unison gets its $100,000 back plus 35% of any appreciation--before selling costs such as a Realtor's commission, which come out of the homeowner's share. If the house's value has declined, Unison subtracts 35% of the loss from the $100,000 it's owed.

"It is the home that pays us, not the homeowner," insists chairman and co-CEO Thomas Sponholtz, who was a fixed-income manager at Barclays Global Investors before cofounding Unison (originally called FirstREX). But this isn't cheap money. Whether the deal makes sense depends not only on what happens to your home's value but also on why you're sharing appreciation.

Eoin Matthews, who cofounded Point in 2015, got interested in shared equity when he helped friends buy a house because their own cash was tied up in the husband's startup. Point, which is now buying pieces of existing homeowners' equity, plans to expand to down payments soon.

Shared appreciation has some economist fans. In his 2014 book House of Debt, Princeton's Atif Mian proposed the whole home-lending industry offer "shared-responsibility mortgages," where borrowers would give up a small percentage of gains in return for some downside protection. The startups, he says, are an indication the mortgage market "can move away from this heavy reliance on the traditional debt contract."

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