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Silicon Valley Has a New Investment Opportunity: Your Home

The Wall Street Journal. logo The Wall Street Journal. 2/18/2018 Peter Rudegeair, Christina Rexrode

Some well-funded startups have an unusual pitch for homeowners strapped for cash: Let’s own this house together.

A handful of companies, including those backed by marquee Silicon Valley names such as Andreessen Horowitz and Mark Zuckerberg’s philanthropic organization, are experimenting with a product that essentially lets them take an ownership position in a house along with the homeowner. The agreements, called shared-equity contracts, provide a new way for investors to get exposure to rising home prices across the U.S.

Shared-equity products are aimed at new buyers who need help with a down payment, or current homeowners looking for an alternative to a cash-out mortgage refinancing or a home-equity loan. The first use has caught the attention of mortgage-finance giant Freddie Mac, which recently agreed to buy loans on properties where one firm, Unison Agreement Corp., contributes to the down payment.

In those cases, home buyers get money for part of their down payment in exchange for pledging some of the home’s future price appreciation. The firms market them as a better alternative to low-down-payment loans, since they can give consumers more buying power without requiring them to take out pricey mortgage insurance.

Landed Inc. offers these down-payment contracts to teachers and other educators. Last year, the Chan Zuckerberg Initiative, a philanthropy co-founded by Facebook Inc.’s chief executive, gave Landed $5 million to start a new fund.

Michael Nizhnikov found out about Unison’s shared-equity product from his mortgage lender, Guaranteed Rate Inc. He used it for half of the 20% down payment on a home when he moved to accept a position in the psychology department at Southern Connecticut State University.

Dr. Nizhnikov, 46 years old, said the idea of sharing ownership of his home at first was a bit disconcerting. One thing that won him over: If his home’s value falls, Unison shares in the loss. “We get to feel comfortable, just in case something crazy happens,” Dr. Nizhnikov said.

The length of the contracts can vary from a few years to 30. Homeowners can repay early, including if they sell their house before the term ends. How much they end up owing depends on how the value of their home changes. Because the funds are equity, not a borrowing, they don’t require monthly payments.

For example, a Unison customer could receive $50,000 toward a $100,000 down payment on a $500,000 house. If the home later sells for $600,000, the customer gets back the $50,000 he or she initially put down plus 65% of the $100,000 appreciation. Unison gets back its $50,000 plus the other $35,000 of appreciated value. (That is keeping the mortgage constant at $400,000 for illustrative purposes.)

And if the home goes down in value? Unison shares in the loss, but not all of it. Say the home sells for $400,000. After paying back the $400,000 mortgage, the homeowner’s $50,000 in equity is wiped out. Unison only shares in 35% of the loss, preserving some of its equity. That means the homeowner is on the hook for the difference and needs to pay Unison $15,000.

Shared-equity contracts can help home buyers unload some risk of a decline in property values, but they can also end up being expensive if housing prices rise. “The homeowners who are going to do this are the ones who don’t have a lot of choices,” said Allan Weiss, who founded a home-price analytics firm that bears his name.

Patch Homes Inc., Point Digital Finance Inc. and Unison are among the companies that are marketing these products as an alternative to home-equity loans and cash-out refinancings. Unlike those products, shared-equity contracts don’t add to the consumer’s outstanding debt and tend to have looser qualification standards.

Raju Mann of Marin County, Calif., took out about $85,000 through a shared-equity contract on her home from Point in 2016. She was encouraged by the startup’s shareholders, which include Andreessen Horowitz and former Citigroup Inc. CEO Vikram Pandit.

a person sitting on a bench in front of a piano © Brian Flaherty for The Wall Street Journal

Ms. Mann, 54, said banks rejected her for loans because her sources of income—including royalties on the sale of books written by her grandfather, Nobel Prize-winning author Thomas Mann—were unpredictable.

After getting funds from Point, Ms. Mann used the money to pay off debt. Home prices were rising in her neighborhood, though, and the longer she waited to pay back Point, the more the firm would make. She decided to exit her contract last month, using money she got refinancing her existing mortgage. Ultimately, she wound up paying Point around $120,000. “They made good money with me,” Ms. Mann said.

The market for shared equity is embryonic. Unison said it has done 600 agreements in the past year; the other firms have done fewer.

To the firms, the idea is to give homeowners the same option that companies have in raising funds via both debt and equity. The firms also typically charge fees for arranging the contracts.

For investors, yields can be attractive. Kingsbridge Wealth Management Inc., a Las Vegas multifamily office, has placed about $3 million into a fund that Point manages since May 2016, earning an internal rate of return of roughly 16%, said Kingsbridge President David J. Dunn.

But there is also risk that investors’ capital will be tied up for years before recognizing any gains.

High-school biology teacher Sara Shayesteh and her husband, Isaac, used an agreement with Landed to cover about half their down payment for their home in San Mateo, Calif. That followed a discouraging search for homes where they kept getting bested by buyers with bigger down payments.

The Shayestehs have 10 years to repay Landed, but can choose to do so after one year. They said it feels odd to have an investor own part of their house but are grateful for the arrangement. “We’re trying to live in a crazy area with a market,” said Ms. Shayesteh, 32. “There’s no other way we could have purchased a property that would have met our needs.”

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and Christina Rexrode at christina.rexrode@wsj.com

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