Cash-for-Equity the New Frontier for Mortgage Lending?

At the beginning of the year, the LA Times published some 1600 words on Unison, a company based in San Francisco offering what is essentially down payment assistance to home buyers - in exchange for an ownership stake in the property.

Perhaps an odd-seeming arrangement, but an appealing alternative to cash-strapped or credit-challenged home seekers. Unison provides an unorthodox way to supplement your conventional mortgage loan so you can buy your "dream house."

Founded twelve years ago, and formerly known as FirstREX, the company bills themselves as "one of a handful of firms developing novel financial products aimed at helping buyers afford increasingly expensive homes now that the market has recovered from last decade’s housing bust."

Unison is available in 11 states, including California and New York, and will be available in eight more later this year. The LA Times article states that Unison's chief executives Jim Riccitelli and Thomas Sponholtz believe there will be healthy demand for their down-payment program given that 'credit is still very hard to get.'

Team Gale took some time to assess Unison's pitch, and break down for our readers & clients whether a cash-for-equity system was a viable approach in financing their individual real estate goals.

Local lender John Cunius with Alpha Mortgage reviewed the article and said "We have seen this in the past in the form of a personal loan from a bank to help with the down payment. In this program, the lender would have to count the payment against the client" in terms of their assessed debt-to-income ratio.tea "The article states that 'Unison's program could help some buyers get into homes they otherwise could not afford' this in itself makes me nervous," Cunius admits. "There are other options available to buyers putting down less than 20% to avoid mortgage insurance, that does not require them to give up a 35% equity when they decide to sell."

Jack Gale, founder of Team Gale with regional leader Coldwell Banker Sea Coast Advantage, echos Cunius' concerns. He notes that this sort of program will appeal individuals with "a certain credit score," or someone in a unique financing situation, "not someone buying a $150,000 house." After researching Unison's pitch a bit, he raised a few questions, positing that "the borrower would probably have to start paying a portion back earlier, as the lender wouldn't want to be on the hook" in the event of a divorce or short sale.

Ira Rheingold, the executive director of the National Association of Consumer Advocates, is quoted in the piece as cautiously optimistic about Unison's approach to mortgage supplementing. "It's not a bad idea. It's a good idea, as long as it's marketed to the small niche of people who it really works for."

Unison's literature expresses that while the company's deals are structured, their contributions are a sliding scale, rather than a hard and fast 10%. They may contribute more or less depending on the buyer's needs. Their intention is to get back what they've given "plus gains or losses, when the home is resold." "If homeowners haven't sold or don't want to sell after 30 years, they're obligated to get an appraisal of the house's value and cash Unison out." Additional contingencies apply when working with Unison, so it is worthwhile to speak with a financial advisor or experienced lender in your area to understand whether the package from Unison is your best course to homeownership.

The Truth About Mortgage profiled the company following their 2016 name change, and noted that "Additionally, [Unison] gets a transaction fee at the time of purchase," so concerns applicants may have about monthly payments on the sum borrowed can be assuaged. "...they don’t collect any monthly payments on the down payment or charge any interest. They are also strictly co-investors in your property, not co-owners with any occupancy rights."

Tom Gale, team leader for Team Gale, was cautiously optimistic about Unison's product. While having the firm's investment experience on your side in the purchase/venture, he notes that "building equity is one of the best parts of home ownership" and you don't want something eventually beneficial to your savings account to be shared with another entity.  "A home's value has historically doubled every ten years. If they let you borrow 10% ($10K on a $100K purchase) and you sell in 10 years, they'll make $35K profit," he concludes.

In our SENC market, a wonderful alternative to a cash-for-equity arrangement would be the WHS grant program. Three members of Team Gale hold the Workfore Housing Specialist designation, exclusive to North Carolina, aimed to benefit the state's healthcare employees, teachers, and first responders specifically. Finding a knowledgeable and respect agent, like Tom, who is involved with moving the industry forward and participating in continuing education is your best bet to a smooth home purchase.