Venture capital firms like Andreessen Horowitz and big Silicon Valley companies like Chan Zuckerberg Initiative, founded by Facebook's (NASDAQ: FB) Mark Zuckerberg, have been eyeing ways to enter the real estate market: shared-equity contracts.
Shared-equity contracts give investors an ownership position in a house alongside the homeowner. This was introduced to allow investors an opportunity to gain exposure to rising home prices across the U.S. It is also aimed at new homeowners who are having trouble ponying up their down payment, or current homeowners who are seeking an alternative to cash-out mortgage refinancing or home-equity loans. The length of these contracts can vary from a year for up to 30 years.
In a nutshell, this is how such contracts work: a homebuyer pledges a portion of their home's future price appreciation and gets money from the company to pay a portion of their down payment. How much the homeowner ends up owing the company depends how much the value of their home changes. Since the funds are equity and not borrowed, they do not require monthly payments. This is a very enticing option for new homeowners or those who don't have unlimited resources, because if the home's value were to fall drastically, they would not bear the burden alone. This provides a feeling of safety and comfort to the homeowner.
One such company that offers these contracts is Landed Inc. They offer contracts to teachers and other educators and have received a $5 million donation from the Chan Zuckerberg Initiative to start a fund. The company hopes to give homeowners the same options that companies have in raising funds using both debt and equity. The company will usually also charge fees for arranging the contracts with the homeowners. The investors incur some risk, as it is possible that their capital will be tied up for years before they recognize any gains.
There are two basic approaches to shared-equity contracts: shared appreciation loans and subsidy retention programs. Shared appreciation loans are second mortgages provided by a public or nonprofit agency that buyers repay in full at the time of resale along with a percentage of home value appreciation. These funds are then reinvested to make homeownership affordable to another low-income buyer. Subsidy retention, on the other hand, is a program that subsidizes the unit rather than the homeowners and ensures that the specific home remains affordable to low- or moderate-income families.
The shared-equity program is a great alternative for new homeowners who are looking to purchase a property with the currently rising prices.