Down Payment Help In Exchange for Appreciation or Equity
51 OFFERS ON ONE PROPERTY! (HOUSING MARKET MUST BE CRASHING)
One of our pre-approved buyers was one of 51 offers yesterday.
When CNBC’s Diana Olick (the loudest housing doomsday voice in the media) heard about the 51 offers, she immediately called the sellers and offered them $100,000 to accept an offer below list price – so Ms. Olick could keep telling the world that the housing market is going to crash…
OK… that might not have happened, but the 51 offers story is true!
The 51 offers were made for a low-priced entry-level home in a lower-end market – reminding us all that there is a clear shortage of entry-level homes in most markets (and that a “housing crash” is pretty unlikely 😊)
EQUITY/APPRECIATION SHARE IN EXCHANGE FOR DOWN PAYMENT HELP
I have had several agents ask me about trying to make “equity share” or “appreciation share” arrangements work for relatives who want to help someone with a down payment.
These are relatives who don’t want to just “gift” the funds and they don’t want to saddle the person they’re helping with monthly payments or accruing interest.
So, an equity share arrangement could work – but, unfortunately, most people will not like the terms if they are even close to the “market rate.”
CA’S DREAM PROGRAM WAS NOT THE “MARKET RATE”
California’s “Dream For All” down payment assistance program was most definitely NOT the “market rate” – and that is one of the reasons why the program ran out of funds so quickly.
The program offered a full 20% down payment in exchange for only 20% of the appreciation of the home (plus the repayment of the original loan) – with no other payments or accrued interest due.
Everyone did the math very quickly and realized how good of a deal it was – and the program died.
UNISON REPRESENTS THE “MARKET RATE”
There has been a private sector company in the market for years that does offer “equity share” or “appreciation share” loans.
BUT – they only offer them as cash-out options against existing homes; they do NOT lend for purchases at all.
The company is Unison – and they offer loans up to 17.5% of the value of a home – with no monthly payments and no interest accruing at all.
What they do require though is a share of the appreciation in the home that is equal to 4x the amount of the loan (plus the repayment of the original loan).
Hence, if they loan 10% of the value of the home, they will demand 40% of the appreciation when the loan is paid off (4x MORE than what the CA Dream program charged).
They charge so much because they are not collecting any payments and get no cash flow, and they are taking a tremendous amount of risk because they also share in the home’s depreciation if the home’s value falls.
Unison has spent years coming up with their formula and pricing structure, and I know of no competitors in their space – so I suspect they really do represent something close to the “market rate.”
Hence, the biggest message from Unison and from this blog is this: If a relative is offering down payment assistance in exchange for a chunk of equity, the recipient should consider herself lucky if the relative demands a share of appreciation that is anywhere less than 3X the loan amount.
The other message might be that CA is not very good at figuring out market rates – and that it is no surprise that its Dream program ran out of money almost immediately.
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