Making the Dream (Move) Work : Shared Equity Loans - Good, Bad, Ugly?

April 19, 2021 2:57 PM

HomeTap! It's all over NPR! We want to buy in our dream location and need options for our down payment. Tell me about your experiences or knowledge with 'shared equity loans'. They seem like a new loan product and we're considering applying to some of the various companies that offer them instead of going with a traditional home equity loan because of the lack of payments needed to service the debt, among other things. What's the deal with this style of financing?

My partner and I recently moved to our dream location in California because we miraculously found good jobs here. The housing market is insane and much more (x5) expensive than where we were previously. Think Bay Area compared to Merced, except more disparate. Initially the timing wasn't great because we were refinancing the house we bought in 2017 when we found jobs and began getting our affairs in order to move. Fortunately we made the move and job change happen and are currently renting in our new community. We also found renters for our former residence so we wouldn't loose out on the cost of the refinance by selling immediately after it. The 'shared equity loan' would be against the rental property. The house is in a very popular and up-and-coming market. We purchased quite low in the market and are pleased to have the investment pay off.

I've read around a bit and while it appears these agreements take various forms I'm wondering if there are any general rules to follow...Like should I go with a company that takes a cut of the total value at sale or just the appreciation? If we never sell the property, what happens? Is there a term expiration date?

I've done some googling and cannot, for the life of me, find an example of an 'equity sharing agreement' that I can get for free. Part of my ask is for help in finding one so I can check the provisions and at least have some slight familiarity with the structure. Also, what are the history of these agreements? Have they always been around? Are they regulated?

Any other input anybody has would be much appreciated, thanks!

posted by fook to Work & Money (6 answers total)

Best answer: "Shared equity loans" in some respects are like reverse mortgages -- a way to pull cash out of a property without selling the property, but then once you do sell the property that loan has to be paid off first. Reverse mortgages, generally speaking, are a very bad deal for the borrower and historically those companies prey on financially naive or vulnerable homeowners. The "shared equity" lenders tend to put a glossy tech veneer on their marketing, but it's really the same type of predatory loan.

I truly do not understand why anyone would use them to purchase property if they have any other conventional loans available to them, especially with today's ultra-low mortgage rates. Why hand over a chunk of future asset appreciation to the FinTech bros from the get-go? If you calculate out what you end up paying for the loan, it works out to usurious rates that would be illegal in other contexts.
posted by stowaway at 3:46 PM on April 19, 2021 [3 favorites]

Best answer: Loan length varies by company. An example of a California-based company, Unison: This Unison Homeowner Program Guide from 2017 has "detailed calculations" in Section H. If you needed to relocate for employment again: "In general, you must intend to occupy the home as your primary residence, although some owner occupied second homes may qualify. Rental properties do not qualify." [Likewise, "You must live in your home at least six months out of the year to be eligible with Hometap."]

Unison HomeOwner Agreements and Unison (the product name and company name) have been referred to by a variety of names in the past, including REX Agreements, EquityRock, Rex & Co., Home Equity Shares, Equity Release, and Shared Appreciation Agreements.

In almost every scenario, Unison will cost more than alternative programs if the property appreciates. -- Unison Review: Capturing Home Equity Through Shared Appreciation, The Motley Fool, updated March 2021.
posted by Iris Gambol at 4:03 PM on April 19, 2021 [2 favorites]

Best answer: To illustrate how bad of a deal it is for the homeowner, I played around with the estimates HomeTap's website. What a homeowner would pay to HomeTap upon selling their home after 10 years is DOUBLE (!!!!) what they would have paid on a standard home equity loan over the same period. It's usury. Don't do it.
posted by stowaway at 4:04 PM on April 19, 2021 [4 favorites]

Response by poster: None of this is financial advice, I know. But seriously, all, thanks for bring up these issues with this form of financing. It appeared quite attractive, but I going the home equity loan route definitely seems better. Thanks!
posted by fook at 4:32 PM on April 19, 2021 [4 favorites]

I dont want to be a downer, (and perhaps you are all too aware of this already) but I want to caution you that the market is extremely weighted towards sellers, and people with loans of any kind are consistently getting outbid by cash buyers who can go significantly above asking. I would highly recommend factoring that into your home search, and looking at lower priced homes so you have some room to go up, and making sure you have the cash on hand to make up the difference.
posted by ananci at 9:39 AM on April 20, 2021

Home equity loan + new mortgage sounds like a great way to overextend to me - if you're able to save while renting, I'd consider building up a little more liquidity for a down payment first.
posted by aspersioncast at 2:05 PM on April 20, 2021