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A Houston startup is offering up a new way to own a home without the mortgage

Houston Chronicle 8/3/2022 R.A. Schuetz, Staff writer

Home prices have soared since the beginning of the pandemic. Interest rates are on the rise. And, faced with rising costs on all sides, prospective homeowners — even those with solid incomes who had saved for a down payment — have found themselves squeezed out of the market.

But what if, asks a Texas startup, there were a different way to finance a home? One that brings monthly payments more in line with what a household would have paid to rent?

Most Americans don’t have the funds on hand to buy a home in cash. Instead, buyers pay for a portion of the home out of pocket and take out a loan to cover the rest. Rising home costs and interest rates mean monthly payments on such mortgages have skyrocketed, shooting up a whopping 80 percent for a median-priced Houston home since March of 2020, when the pandemic hit.

But developers with plans for a commercial project — say a hotel or an office tower — have a third possible source of funds. They can sell a percentage of the project — what’s known as equity — to an investor. In that case, there’s no loan requiring regular payments. Instead, the investor owns a portion of the building’s monthly cash flow. When the building is ultimately sold, the investor who bought that equity owns a portion of the proceeds.

And here’s where a Texas company is carving out a new path to homeownership in Houston.

Mirabilis has set about bringing that model of shared equity financing to homeowners. In doing so, the Austin-based operation has joined a slew of startups nationwide that are marketing various spins on home-equity sharing as a way for people to finance that dream home that may have been out of reach with a conventional mortgage.

Real estate experts say Texas laws governing such startups are different than those in other states, so out-of-state companies have focused on other markets. That makes Mirabilis, which just entered the Houston market, a trailblazer.

Patricio Zambrano, founder of Mirabilis, said he and his team decided to bring the model to Texas because as millennials they saw how difficult it was for people from their generation to purchase homes. From 1980 to 1999, the median U.S. home cost a little more than three times the median income, according to Harvard University’s Joint Center for Housing Studies. By 2021, the median home cost more than five times the median income. The reason, they understood, was because home values had grown much faster than incomes.

“Obviously there was a massive need for a different solution,” he said.

How shared equity works

This past winter Enrika Goins, a nurse living outside of Austin, learned that her landlord planned to put the house she had been renting for four years on the market.

Goins lived with her mother and had grown attached to the area. She had already decided she was buying her next house. Goins had been saving for a down payment and was in the process of improving her credit score for just that purpose. But when her landlord broke the news, her credit was not yet where she needed it to be in order to buy.

So she began searching online for alternate options, typing in "rent-to-own." Rent-to-own programs typically give renters the option to buy the home at the end of a lease, sometimes helping renters put aside money for a downpayment. But the home is in the company's name until that potential purchase — meaning there's a period in which a family has no ownership stake to cash in. When she stumbled across Mirabilis's model instead, she liked the idea of owning a percentage of the home from the start.

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Every home-equity sharing model is a little different. Mirabilis allows clients to start out purchasing as little as 1 percent of a home’s value, Zambrano explained. Then, every month, Mirabilis charges a fee, which is set every year at no more than market rent. The monthly “rent” cannot increase by more than 4 percent a year, which Zambrano called “very important”: “We don’t want people getting priced out of their own homes.”

Because Mirabilis is a partner with the family, the monthly cash flow is split between the two according to the amount they own. Say, like Goins, you start out purchasing 5 percent of the home. If the monthly fee charged is $1,300 and the monthly costs, including taxes and homeowner association fees, are $300, Goins would own 5 percent of the resulting $1,000 in cash flow: $50. That money goes toward increasing the share of the home she owns.

Goins could also buy additional equity from Mirabilis at any point of her choosing (the value of the home, used to determine the cost of buying equity, is also set once a year, and cannot increase by more than 8.5 percent a year.)

Whenever a family decides to sell their home, the profits are split according to the percentage shares Mirabilis and the family each own. So if the joint company owning the home makes $500,000, (after selling costs) and the family owns 20 percent, they would pocket $100,000.

The program only lasts seven to 10 years, after which a family has the option of either selling the home or taking out a conventional mortgage to pay off the portion that Mirabilis still owns.

Goins filled out the online application, which includes a soft credit check (Zambrano said credit scores for Mirabilis clients are “preferably upward of 600” but average near 700). The very next day, she received a call from a Mirabilis employee explaining the program, and within a week, she was looking for homes with her real estate agent.

Goins said her real estate agent was skeptical of Mirabilis’ model at first. Now the agent is helping her sister buy a home through the startup.

Why home-equity sharing is catching on

At its heart, the practice of home-equity sharing goes back centuries. Islam frowns on the collection or payment of interest, so families often find someone they know to co-invest in a home, explained Ralph McLaughlin, chief economic advisor of the California home-equity sharing company Haus. But using equity sharing to help people purchase homes has become an increasingly popular model for startups in recent years.

That’s in part because technology has made the model scalable. Buying or selling portions of homes relies on being able to accurately value those properties, something real estate data and algorithms have made easier, explained McLaughlin.

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And there’s plenty of incentive to finding ways to get a cut of rising single-family home prices, he said, calling home-equity sharing “a new type of asset class.”

“Traditionally, if you wanted to invest in single-family homes, you either became a landlord and you had to deal with property management, tenants turning over, evictions, things like that,” McLaughlin said. “Or you could buy mortgage-backed securities — but mortgage-backed securities don’t go up or down with the value of the house.”

At its best, home-equity sharing has the potential to benefit both homebuyers and their co-owners. It can provide families a path to lower month-to-month costs than they would have with a mortgage, while still building equity in the home. And it can open up a way for co-owners to profit from the rising price tags of owner-occupied homes, historically viewed as safe investments because families who own their homes tend to take care of them.

If prices fall in response to rising mortgage rates, as they have in some places, the family members and their co-owners share any potential losses — but that same dynamic makes it less likely that a family will sell before prices have time to recover.

“It’s possible to (have a) win-win,” said Allan Weiss, founder of the home-price data company Weiss Analytics. Weiss is readying to launch his own home-equity sharing startup.

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But he said, when evaluating purchasing through home-equity sharing, people should keep in mind that details matter. Buyers should make sure they understand how the cost of monthly fees and purchasing equity are determined, and what portion of the home’s sale they will receive.

Goins moved into her new home in Hutto this April. With four bedrooms, two-and-a-half baths and an at-home office for her mother, it checks all her boxes, and she believes her monthly payments are at fair market rent. What’s more, when a storm took off a few shingles a few weeks into buying the home, Mirabilis took care of the maintenance right away.

“I feel very good about the whole situation,” she said. “I have no heartburn. I have no worries.”;

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