For my first post in a few months I want to give a shout out to a company that I think is doing something pretty cool in the real estate space. The company is called Unison and they have a down payment assistance program that I think more people should know about.
The problem they are solving is one where a homebuyer has the cash flow to make monthly payments on a mortgage but hasn’t saved enough to make a 20% down payment at that same price point. Some people can lean on family to help out with a big check but many people don’t have that option and end up renting for extra years while they save down payment funds.
Enter Unison. Unison is the well capitalized relative you didn’t realize you had. Unison lets you put 10% down without requiring you to buy Private Mortgage Insurance (PMI) – because they match your 10% – getting you up to a standard 20% down payment. In exchange you give them an equity position in your house, meaning that they take a portion of the gain or loss when you finally sell your home.
Unison isn’t doing this out of the goodness of their heart but it’s a business where what’s good for them and what’s good for you might line up really well. What’s good for them is that they are getting exposure to levered home price appreciation without paying for the leverage (I will explain). What’s good for you is that Unison expands your world of home buying possibilities with this 2x down payment multiplier, and their terms – especially the most important ones – seem surprisingly fair.
Regarding their terms – I want to study them a bit more carefully but I am most happy to see that they have a 30 year term on the agreement. This is a big window and means that you won’t be forced to sell your home in 10 or 20 years to buy them out of their position. And 30 years is outside of most people’s planning horizon, especially if you were scraping together down payment funds in the first place. 50 years or no term would be even better, but you probably couldn’t get investors to put cash into a business that had no timetable to return capital.
The other significant term is what percentage of the gain/loss do they take. They state that their share is typically 35% and it will be a little more of the net gain because you pay selling costs (broker fees) out of your portion of the gain. I want to think about this one a little more but it doesn’t seem unreasonable at first pass.
Regarding what’s good for Unison – when you take out an 80% mortgage you are buying an asset using 5x leverage. If you buy a $1m home by putting down $200k and then sell the home next year for $2m, you didn’t 2x your money – you made back your $200k plus ALL of the gain from $1m to $2m, minus your carry costs and transaction costs. That might be more like a 4.5x return. Now, you pay for that leverage, in interest payments to your lender and by utilizing your personal credit. And so this is the opportunity for an investor – by contributing a slice of equity up front they get a percentage of your future gains, which are levered through your home loan, but they don’t have to make any extra or ongoing payments (as you are, in interest payments) to maintain that leverage.
I probably would rather fund my whole down payment both to retain the full home price appreciation as well as to have 100% control of when I sell the home, but if down payment assistance is your best path to home ownership (and obviously, you want to buy a home) then I think this is a great service to know about.