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I’m a huge finance nerd, so I love to stay in the loop with all of the latest innovations of the FinTech companies. Recently, I read about the 2017 Finovate Spring Show and perused through the Best of Show award winners.
Typically, most of these award recipients include backend-type companies. Many of these companies attempt to make banking more secure by utilizing artificial intelligence. But then I stumbled upon Unison.
Home Equity Investing
Unison has an incredibly interesting concept to equity investing in homeownership. They offer themselves as an investment partner through a homeowner’s down payment on a home in exchange for a portion of the profit when the homeowner sells their home.
The concept intrigued me. Beforehand, I only thought of home equity sharing in instances when a parent buys a home with a child or when investors contribute to home-flipping projects.
A Catch?
When I first started learning about Unison, I thought there had to be a catch.
Well, there isn’t.
I spoke with Unison’s management team. They shared that if I was looking to buy a $400,000 home, if I put down a $40,000 down payment, Unison would then match the down payment up to $40,000, dollar for dollar.
If you put down 10% for the home, they will also contribute 10% towards the down payment for the home. It’s as simple as that.
Restrictions
The only restrictions are that the maximum down payment that they will make is $500,000. Also, the down payment cannot exceed 20% of the value of the property.
In other words, you couldn’t buy a million dollar home and make a $500,000 down payment, hoping that Unison would also put down a $500,000 down payment so that you could live mortgage-free. Believe me, I asked.
Profit or Loss
In exchange for the down payment, they require that when you sell the house that Unison receives up to 35% of the profits that you make on the home, plus their original down payment returned. On the flip side, if the home loses money during the period that you hold the property, they will contribute up to 35% on the loss.
Before all you home flippers become too excited, Unison has a couple exceptions. They only accept homebuyers who are buying a home that will be their primary residence for a minimum of 3 years and a maximum of 30 years. At 30 years, homeowners have the option to buy Unison out if they still want to live there, or they would have to sell at that point.
On top of that, you may not rent out your house. If you do, you will be in violation of the terms of the agreement with Unison.
How It Works
First, they must agree to invest with you on a down payment. Then, you are responsible to obtain the mortgage and pay all of the closing costs, along with any fees and taxes that occur along the way. Unison only contributes to the down payment. All other costs are yours to incur. Unison will not assist with paying for the closing costs or helping to make monthly mortgage payments.
Should You Consider Using Unison?
A 35% profit on a home is a lot of money to give up, right? Yes, but, there may be some benefits to consider along the way.
For instance, if having the down payment will help avoid paying Private Mortgage Insurance (PMI) and potentially lower your monthly payment by 15-20% a month, then it may be well worth it.
Private Mortgage Insurance (PMI)
Let’s say you decided to buy a $400,000 home with a $40,000 down payment. If you partner with Unison and receive a $40,000 down payment, you may be able to avoid paying PMI. Typically, homeowners who cannot put down 20% for a down payment must pay PMI, which costs 0.3% to 1.1% on an annual basis.
Following this example, if you had to pay PMI for almost 10 years, that could cost you anywhere between $1,050 to $3,850 (avg. $2,400) each year. Over a ten-year period, that is $10,500 to $38,500 (avg. $24,500).
Mortgage Interest
In addition, you could pay over $221,000 in interest on a 30-year loan with a fixed interest rate of 3.5%.
Source: Credit Karma
However, following this example, using Unison as a partner, the interest would drop to around $197,000 for a savings of $24,000.
Source: Credit Karma
Let’s use the average PMI figure of $24,500 and the amount saved in interest of $24,000. That is a potential total savings of $48,500 in PMI and interest with Unison.
As long as your house does not increase more than $150,000 in gains over the 30 years, you would come out ahead in the transaction.
Likelihood of Coming Out Ahead
Historically, housing prices have risen by 3.5% per year. Over 30 years at a rate of 3.5%, that $400,000 home could be worth $1,100,000 if it continues to grow at a linear rate.
Speaking from experience though, since buying my house in 2004, my home’s value has only risen at a rate of 1.6% over the last 13 years. So, you can’t always assume that historic trends will continue at the same rate.
Eligibility
Right now, Unison has restrictions on which states that they can currently invest in. Here is a list of the states that they serve.
- Arizona
- California
- Connecticut
- Illinois
- Maryland
- Massachusetts
- New Jersey
- New York
- Oregon
- Pennsylvania
- Virginia
- Washington
- District of Columbia / Washington D.C.
If you think that Unison would be a good partner for you, they will provide you a free home quote.
This is an interesting business model. Do you have to pay the down payment back as well? Doesn’t seem like they would be able to cover their costs with only a 35% take of the appreciation (esp at three years) but I guess they’ve run their models and work in the areas of the country where appreciation is higher.
Laurie@ThreeYear recently posted…A Year of Good Habits: Get Up at 5am
Thanks for stopping by Laurie!!! Yes, you have to pay back the original downpayment 🙁
I think I would be disciplined and save a minimum of 20% down payment to avoid PMI and with interest rates still at historic lows avoid partnering with a company like this. It is an interesting model, not sure how a company like this would make out during another prolonged housing slump/recession. Tom
Tom @ Dividends Diversify recently posted…I Have Lost My Compass (Part 1)
Thanks for sharing Tom!!! I thought the concept was incredibly interesting. Whether I would do it is another story but I thought it’d be fun to share and talk about 🙂
This seems like a great opportunity for people who has the income but nt the down payment to buy into the real estate market.
Let say that you bought a home value at $500k, you put in $50k and Unison put in the same amount at the beginning. Ten years down the road, you decided to make a major renovation costing $100k. Here are my questions:
1) will Unison be willing to contribute 50% of the renovation cost?
2) if Unison doesn’t make the contribution to the renovation cost, what will be the profit split when you sell the home down the road?
Leo T. Ly @ isaved5k.com recently posted…10 Money-Saving DIY Home Renovation Projects
I believe that Unison said that they will weigh the costs in when doing a final assessment. How that exactly works I’m not sure but definitely something to explore.
Interesting concept! The biggest reason in my mind would be to avoid the PMI option. There are still many people out there who are paying PMI not by choice of course because they want a big home and cannot afford a big downpayment. But that’s a different story altogether 🙂
Sinc it has to be a primary home, I’m not sure if this option could work for me.
SMM recently posted…From Target Date Funds To Lower Cost Index Funds
Thanks for sharing SMM!!! I definitely agree too many people are paying for PMI due to homes they can’t afford. Definitely not worth it in that case 🙂
Wow this is a super interesting concept! I actually had the same question about whether they would match $500k if I put in $500k (more than 20% of the down payment) hehe. They obviously have thought things through 😉
I’d be curious to see how their business model will work out 10-20 years from now. They must be making enough profit to stay in business. Thanks for sharing! 🙂
I definitely wonder how it will play out long term. If 35% is enough. I am excited to see where it goes from here.
That’s a really unique business model, and you’re right, it probably makes the most sense for people who want to avoid paying PMI. But I would argue the people who don’t have 20% on their own probably shouldn’t be buying the house. If you stay for 30 years, the appreciation may be worth it, but especially for a shorter stint, I could see where you might have appreciation but that it wouldn’t exceed the combination of the 35% and the repayment on the down payment. Interesting concept, but not for me.
Gary @ Super Saving Tips recently posted…What You Need to Know: 5 Key Medicare Questions Answered
I think I agree with Gary. I am a bit put off by a company like this. It seems like you would likely pay more with them (sales cut + repayment of the down) than you would just stomaching PMI in the short term, especially if you can grow equity in your home quickly after purchasing. I honestly do not see a market for this at all, except to the financially illiterate. What am I missing?
Thanks for sharing Heather!!! I think people that want to avoid continuing to rent and think that lowering their PMI plus interest rates might think it’s interesting. There are some Youtube videos of people that have done it. I thought if nothing else it’s a really interesting concept 🙂
Thanks for sharing Gary!!! I tend to agree that 20% is probably optimal but I have too many friends that opted to pay less because they were determined to buy a house.
Interesting concept, I wonder if they offer the same in Canada. Mortgage loan insurance is also required if your down payment is less than 20% and it can get expensive.
You should definitely reach out Caroline. I believe it’s only in the US right now but if the demand is there I’m sure it’ll spread.
Be honest, are you certain your nerd-ness stops at finance?
Wes recently posted…September 2017 Blogging Numbers
Hahhaha…you’re right. I probably don’t 🙂
It’s an interesting concept, though not one I’d personally employer. Having essentially a balloon payment at thirty years or forced to sell your home would really hurt those who are not financially savvy. Those that are I suspect would do better to pay the full down payment.
FULLTIMEFINANCE recently posted…Now What?
Thanks for sharing Full Time Finance!!! I tend to agree it’s a balloon payment for sure. Although how many people these days really live in a home for 30 years.
Came back today just to check the pulse of the MSM readers on this topic. Interesting. I was guessing that frequent followers of MSM would find the topic interesting, but probably not something they would pursue personally. Tom
Tom @ Dividends Diversify recently posted…Please Pass the Salt (Part 2)
I think you hit the nail on the head Tom. For the most part I think people find it interesting in theory but I haven’t heard too many people say that they’d explore much further. Although I’d love to hear from people that were super excited.
Hmm intriguing. On one hand, I can see the benefits of the additional down payment, but that’s a huge equity investment to give up. Particularly if there’s a high probability that you’ll be living there for many years, making improvements to the property, in an area that values would go up, etc.
Patrick recently posted…Simple Advice For Home Soundproofing: An Infographic
Thanks for sharing Patrick!!! I definitely agree that there are pros and cons with the decision 🙂
I’d say though the real savings for me with reading finance blogs (and writing one) is the decrease in monthly tracking by being extra mindful of every expense.
The fine print is that they base the value on their appraisers – and what I have read, is that they under-appraise to market value – this is the hidden catch. If they used 3 independent appraisers and average the together like banks and investment firms do – then I would be ore receptive as an existing home owner.