With housing prices rising and student loans at an all-time high young adults are finding it increasingly difficult to purchase their first homes. Paradoxically, many of them could afford the monthly payments on a home – in fact they are paying as much for rent as a monthly mortgage payment would cost – but they find it next to impossible to come up with a down payment.
I recently stumbled across a tool that could help. I actually came across variations of the tool in two completely different contexts. The idea intrigued me when I first heard it but its use was limited. The second variation of the tool makes it available to a lot more people. I want to share the idea with the hope that it will help some people who are otherwise ready and able to buy a house, but can’t afford the down payment, get into a place of their own.
Parent or Grandparent Equity Investment
In December, 2015 I became a grandfather. I had always been told how wonderful being a grandparent was but I was still unprepared for how much joy it would bring.
Being completely unfamiliar with the role of grandfather, but wanting to make the most of it, I was happy to notice a year or two later that an author I enjoy, Richard Eyre, was coming out with a book called Being a Proactive Grandfather. It was just what I needed to learn about the possibilities of my new role and the book didn’t disappoint. It is full of great ideas for making the most of the unique role grandfathers can play in the lives of their grandchildren.
One chapter of the book that I really enjoyed is called “Being a Financial Facilitator” and there was an interesting idea in this chapter about a way to help a child or grandchild afford their first home that I had never considered before.
The idea is that a parent or grandparent will help out with the down payment on a house not by gifting the money, or by providing a loan, but by taking an equity position in the house. The idea would work like this:
Let’s imagine one of your children or grandchildren is ready to purchase their first home. They have proven to be responsible, they have a stable job, and they can afford the monthly payment, but they are struggling to save enough for a down payment. Also imagine that you are in a financial position to be able to help. The house costs $250,000.
You would provide up to a $50,000 down payment in return for up to a 20% equity position in the house [$50,000/$250,000 = 20%]. The goal would be to have the total down payment be at least 20% of the value of the house, so if your child or grandchild can provide some of the down payment your investment would be less than 20%. Again, this is not a gift or loan, but an investment in the house.
Now imagine the house is sold several years later. You would receive a percentage of the proceeds of the sale equal to the percentage of your initial investment, with the rest going to your child or grandchild. If the value of the home increased you would make a profit but if the home fell in value you would participate in the loss. This type of arrangement has many things going for it.
Advantages to the Child or Grandchild:
- They can get into a home of their own much sooner than they could have otherwise.
- The amount they have to borrow will be less, which will decrease their monthly payment.
- They will not have to pay Private Mortgage Insurance (PMI), which is typically required if the down payment is less than 20%. This will further decrease monthly payments by around $100 to $200.
- Total monthly savings for your child or grandchild can easily add up to several hundred dollars per month.
- In return for giving up some of their potential gains, this arrangement will limit your child or grandchild’s losses in the event of another real-estate down turn.
- They will know that they have parents or grandparents who care about them and are willing to support their worthy goals.
Advantages to the Parent or Grandparent:
- You can provide needed assistance to someone you love deeply.
- It preserves capital you might need later.
- It allows you to teach your child or grandchild about investing and personal finance.
- It can deepen your relationship with your children or grandchildren.
I love this idea but the number of people it can help is obviously limited, as most parents and grandparents aren’t able to assist in this manner. This got me wishing that this solution could be made available to more people.
Unison Turns the Grandparent Equity Investment Into a Business
The answer to my wish came a few weeks ago as I was listening to the “Animal Sprits” podcast with Ben Carlson and Michael Batnick. Ben and Michael were interviewing Brody Gay from a company named Unison. Unison describes itself as a home “co-investing” company and after listening for a few minutes I realized that Unison had taken the grandparent equity investment idea described by Richard Eyre and turned it into a business.
As with the grandparent investment, Unison will invest in the house you choose to buy by providing money for the down payment. This is an equity co-investment, not a loan.
Unison requires the buyer to pay a down payment of at least 5% of the value of the home. Unison will then co-invest enough to bring the total down payment up to 20% of the house’s value. So if you can pay a down payment of 5% Unison will co-invest 15% of the house’s value.
As with the grandparent investment, Unison’s investment will lower your monthly payments considerably by allowing you to borrow less and by eliminating PMI. When purchasing a house for $250,000 the Unison website estimates monthly savings of around $300 and if you purchased a house for $500,000 Unison estimates you would save close to $600 per month.
In return Unison takes an equity position in any gain on the house based on the percentage of their co-investment. If Unison’s initial investment was 10% of the home’s value their equity position in the gain would be 35% and if Unison initial investment was 15% of the home’s value their equity position in the gain would be 40%. If, several years after purchasing the house, you sold it for a $100,000 gain, Unison would get their initial investment back plus 35-40% of the $100,000 gain.
If, on the other hand, the house lost value, Unison would participate in the loss. This would result in Unison getting its initial investment back less 35-40% of the amount the house lost in value. Under these circumstances Unison’s investment acts as a hedge for the home-buyer limiting their losses in the event of another real-estate crash.
You have likely figured out that the deal Unison is offering for its co-investment isn’t nearly as generous as the terms Richard Eyre described in his grandparent equity investment scenario. This shouldn’t surprise you as Unison is a company trying to make a profit rather than a loving grandparent supporting you in a worthy goal.
You might also be thinking that giving up 35-40% of the gain in the value of your house is a big price to pay for help with a down payment. Perhaps so, but if you can’t come up with the down payment any other way, but can otherwise afford the monthly costs of home ownership, it could very well be worth it. Also, don’t forget the several hundred dollars of savings you get each month that you own the home.
Unison only co-invests in single-family, owner-occupied houses in certain parts of the United States. It currently operates in thirty of the fifty states. If you are considering a specific property you can enter the address into the Unison website and it will tell you instantly if that property is eligible for a co-investment.
The Unison website also has an easy to use calculator that will estimate how much you will save per month by entering into a co-investment contract. I spent a few minutes on the Unison website and found it intuitive and easy to navigate.
Buying a house is not for everyone, and you should not consider it unless you have enough steady, stable income to afford the monthly costs of home ownership and plan on staying in the area for at least several years. However, if you are otherwise ready to purchase a house but can’t afford a down payment a co-investment arrangement is worth considering.
Look first to a parent or grandparent to co-invest with you as they are likely to offer the best terms. If that is not possible you might consider a company like Unison. You will be giving up a considerable portion of the future appreciation on the house but you will be saving hundreds of dollars per month during the time you own the home and will likely be able to afford a place of your own much sooner than you could have otherwise.
Note: This post is not an endorsement of co-investments in general or Unison specifically. I am simply passing on an idea that I find intriguing. I do not have an affiliate arrangement with Unison and I will not profit in any way if you enter into a co-investment agreement with them. There is also a loan fee of 2.5% of Unison’s investment if you enter into an agreement with them. I am guessing your grandparents might wave this fee.