In the race to invest in homebuyers’ down payment

  • A handful of companies offer homeowners cash in exchange for a stake in their home.
  • The next frontier: making investments similar to buyers who need help with a down payment.
  • Companies face significant obstacles in generalizing this product.

Companies backed by some of the world’s biggest investors are handing out tens of thousands of dollars in cash to homeowners in exchange for a stake in their homes.

However, these types of offers are not yet widely available to first-time buyers who have not built up capital.

Housing today’s market is heavy for these especially younger buyers struggling with inflation, stubbornly high house prices and mortgage rates that have more than doubled over the past year. In this environment, finding enough cash for a large down payment can seem downright impossible.

But some companies are preparing to provide considerable sums to homebuyers who are not shy about giving something back: a part of the equity in their future property.

These deals represent the next frontier for companies like Point, Unlock, and HomePace, which already offer home equity investments to wealthy homeowners on paper but don’t want to pursue traditional debt options, like debt lines. equity in their home. credit, to tap into this wealth.

“It’s an equalizer for those who don’t have generational wealth,” said Point co-founder Eoin Matthews. “We think it has mass market appeal.”

Home equity investment deals took off earlier in the pandemic as soaring home values ​​pushed US homeowners’ net worth to a record $29 trillion, Federal Reserve Data show. Point, one of the largest such companies, has closed nearly $1 billion in such deals since its inception in 2015, with much of that volume occurring in the last year, Matthews said.

These companies now see an opportunity to gain more market share by working with buyers who are desperate to increase their purchasing power in the face of mortgage rates hovering around a 20-year high.

Several companies told Insider that they are moving forward with down payment products, and Point noted that his planned debut was only a few weeks away. While the volumes may be large, they are unlikely to compete with standard real estate investments due to the additional challenges posed by sales transactions, company executives said.

Businesses Think They Can Tackle the Affordability Crisis by Meeting the Money for Down Payments

It is only recently that equity investments have gained widespread acceptance as a legitimate asset class after companies have proven their viability through years of successful returns. Down-payment products could follow a similar trajectory, Point’s Matthews said. His own company will offer investments of up to 15% of the purchase price of a home, up to $250,000, he said.

Buyers are generally required to purchase private mortgage insurance when paying less than 20% of the purchase price of their home. Down payment investments could help them avoid these costs, which can amount to hundreds of dollars per month.

Jim Riccitelli, the CEO of Unlock, estimated that some shoppers could improve their purchasing power by up to 30%, which he called a “huge boost”.

“The affordability problem is unfortunately not going away any time soon, so we are preparing for that,” Riccitelli said, adding that the down payment investments represented “a huge opportunity”.

HomePace, which was founded in September 2020, is another proponent of down payment investments and is developing such a product in partnership with Lennar, the nation’s second-largest homebuilder. In December, the company closed a $7 million Series A funding round led by LenX, the venture capital arm of Lennar.

The waiting list for the company’s anticipated offering includes buyers from 35 states and Washington, DC, Joe Cianciolo, CEO of HomePace, said in an email.

“Once rates become less volatile, HEIs will have a great opportunity to dramatically improve affordability for people who are unable to afford a home in the current environment,” Cianciolo said in the E-mail.

Of course, these deals come with trade-offs, as buyers will have to give up some of the equity in their property. And there are challenges that have prevented this product from going mainstream.

Why it’s so hard to make down payment investments work

In a traditional home equity investment agreement, there are only two parties: the homeowner who agrees to give up a percentage of the future value of their home, and the company offering the investment.

Down payment investments work the same way – a lump sum today in exchange for a slice of equity in the future – but are more complicated as they also require coordination with the mortgage lender, at least two real estate agents , and the seller to ensure that the real estate transaction closes smoothly and on time.

Fannie Mae and Freddie Mac, government-sponsored companies who buy the vast majority of the United States mortgages, will not purchase loans made to buyers who use these equity investments. At least for now, this limits the down payment investment market to the smaller portion of buyers who are willing to go the nonqualified mortgage route, which typically has higher interest rates.

Combine all of these factors, and it’s not hard to see why down payment investing has yet to catch on, despite the fact that real estate investment firms have been around since the mid-2000s. , one of the industry’s pioneers, Unison, stopped offering down payment investments earlier in the pandemic, opting instead to focus on traditional home equity deals.

Additionally, a fintech executive who requested anonymity to protect business relationships doubted any deposit deals would emerge in the next year. Companies haven’t rushed to market, the person said, because this type of investment is a “very difficult product to make decent margins.”

“One of the big mortgage companies is going to have to get involved,” the executive added.

Matthew said the product might initially make sense for high earners such as doctors or lawyers who haven’t reached their full earning potential and are willing to take out an ineligible mortgage, such as a jumbo loan.

He added that he was optimistic that Fannie and Freddie would one day be willing to buy loans from buyers taking advantage of this product.

“But it won’t happen overnight,” Matthews said. “It’s a big effort.”

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