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Unison investment offer ~ "Shared Appreciation Mortgage"

Home Real Estate Investing Unison investment offer ~ "Shared Appreciation Mortgage"

  • Avatar csciora 
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    What are the downsides to this offer? I’m struggling to see any, but there’s always negatives with every deal. Thanks!

    Cheers,

    Chris

    p.s. Posting in real estate investing since that seems the most likely place for useful feedback.

    I got an intriguing offer from a San Francisco investment company called Unison to buy a portion of our house equity. It’s a shared ownership arrangement that we used to call it a “shared appreciation mortgage (SAM)” back in the real estate investor days. They write a check for up to 17.5% of the available equity. The percentage share stays constant, so the investment value rises or falls with the property valuation. You’re basically trading future equity gains (losses work in your favor since it drops the payoff value) for some cash today.

    In our situation, I’m considering selling $50K of the $300K in existing equity. Half of that would go to finishing the basement. We live in a pricey area with strong demand, so that translates to another $125K in immediate value. Probably more depending on the finishes. The other half would go into an index fund for diversification. Between the added equity from forced appreciation, diversification and index fund returns which will almost certainly exceed housing appreciation, it seems like a good deal all around.

    A HELOC would require ongoing monthly payments, increases debt and reduces cashflow. All the opposite of our financial planning goals.

    Personally, I also wouldn’t arbitrage a HELOC into an index fund (although other people think it’s a good idea for various reasons).

    DETAILS

    – 3.9% in setup costs (no other ongoing or future fees)

    – investment is secured by a lien on the property with some option contract language that covers the rise/fall in equity value

    – option to pay off at current value after five years (without selling the property)

    – not 100% sure about the tax impact, but I believe it will be treated as a loan for all practical purposes

     

    #239345 Reply
    jfoxcpacfp jfoxcpacfp 
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    Here’s a kind of similar thread.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #239350 Reply
    Zaphod Zaphod 
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    High fees.

    You dont get much.

    You give them a lien, this is much more sinister that they make it seem.

    Minimal appreciation. These are basically worthless scams that dont give you things you cant get elsewhere and the downsides, ie, locking you out of gains and usually worse in the fine print, are too much.

    #239354 Reply
    Avatar csciora 
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    Sorry, Zaphod. I’m not really following your comments.

    – almost everyone will pay around 4-5% to sell their home, so I don’t view 4% for selling a portion of it as unreasonable.

    – everything involved with home finance involves putting a lien on the property. HELOC, renovation loan, any unpaid contractor with a pen handy

    – minimal appreciation???

    The house will be sold at some point within the next few years. You can either take some of the equity now with less later or take all of the equity later. The only question is whether one path generates a better return than the other. There shouldn’t be much argument that an index fund will generate far better returns than housing (on average). This offer is similar to a reverse mortgage, but available to people younger than 62 YO.

    If you could move today’s equity into a better performing investment, why wouldn’t you? No different than moving from CDs to bonds or stocks.

    #239358 Reply
    Zaphod Zaphod 
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    Sorry, Zaphod. I’m not really following your comments.

    – almost everyone will pay around 4-5% to sell their home, so I don’t view 4% for selling a portion of it as unreasonable.

    – everything involved with home finance involves putting a lien on the property. HELOC, renovation loan, any unpaid contractor with a pen handy

    – minimal appreciation???

    The house will be sold at some point within the next few years. You can either take some of the equity now with less later or take all of the equity later. The only question is whether one path generates a better return than the other. There shouldn’t be much argument that an index fund will generate far better returns than housing (on average). This offer is similar to a reverse mortgage, but available to people younger than 62 YO.

    If you could move today’s equity into a better performing investment, why wouldn’t you? No different than moving from CDs to bonds or stocks.

    Click to expand…

    You’re still going to have all the normal transaction fees when you sale anyway right? And that high fee up front is just to get the loan, then if you take only 17.5%, you owe them 70% of any profits, that after realtors, etc…means you’ll unlikely get any home equity, which of course a large amount of it would otherwise be tax free so go ahead and tack on your marginal rate to the 70% and thats how much theyd be taking.

    Its an exceedingly large transaction fee with unbounded cost (their unlimited upside) for a relatively small (17.5%) up front fixed amount. Its just dumb and predatory. All of these latest “home” value things are that have come out of silicon valley, they are predatory in the worst way. If you’re not careful they could end up owning your house. What if you dont sell in 30 years? What if the house doubles in value, etc…? I’d love to see the fine print but its just unicorn rainbows on their website.

    People that do this will regret it. Are you telling me you cant get access to a loan of some nature with similar amounts of principal for cheaper cost and better terms. Pretty sure a cash advance and switching between 0 fee credit cards would be cheaper in the long run.

    #239363 Reply
    Zaphod Zaphod 
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    In your example, you put in 25 to the house and get 125 in value, they are going to reap 87.5k of that increase, giving you, almost nothing more than what you put in it. Why would you do that. I would put 25 cash if it had that kind of instant 500% return, most things dont.

    #239367 Reply
    Avatar ajm184 
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    In our situation, I’m considering selling $50K of the $300K in existing equity. Half of that would go to finishing the basement. We live in a pricey area with strong demand, so that translates to another $125K in immediate value.

    Click to expand…

    I believe you understand the overall concept, you are essentially selling future upside for an amount of money today.  As Zap points out also, it is relatively expensive, 3% to set up the transaction (hopefully only on the $50K versus $300K, which would make it almost onerous).  The person whom ‘owns’ part of your equity isn’t kicking 20% for all the home expenses (property taxes, selling fees, heat, etc.) though you are still responsible for the full financial burden of these ‘costs’.

    Frankly, if you are talking a 5x return for a $25k basement reno, there is zero chance I would allow an ‘equity’ partner to participate.  I would go to a bank, get a HELOC, borrow the $25K, reno the basement and sell the home.  If the financial opportunity on the basement reno is that good, using $25K to invest in index funds (after selling a 20% stake, with the extra $25K) is likely a lower returning asset as you are talking 20 years to turn $25K into $125K.

    #239369 Reply
    Liked by Zaphod
    Avatar wideopenspaces 
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    I don’t understand this. Why wouldn’t you just save up 25k for the Reno? I wouldn’t pay someone 4% so I can invest my own money in the market.

    #239370 Reply
    Dreamgiver Dreamgiver 
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    Wow this is a great deal, for Unison that is. Why on earth would you take on all the expenses, taxes, upkeep, insurance, renovations, just to share the benefits with a third party? I’d lend you the money with no upfront costs and still make out like a bandit at your expense. I hope nobody falls for these predatory traps.

    #239378 Reply
    Avatar jacoavlu 
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    Earnest refinancing bonus

    Like many questions here it’s just a math problem. Why not put some rough numbers to it and figure out the results?

    Need your homes value now. Percent of shared equity planned. Amount spent on renovation. Amount invested in market. Estimations of future home value at sale, how many years from now that is, and expected market return over that time.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #239381 Reply
    Avatar Tim 
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    “This offer is similar to a reverse mortgage, but available to people younger than 62 YO.”
    And this is a good thing?

    High fees, PMI, low percentage of appraisal value, variable rate, due when the person names is not living in it full time, insurance and property taxes must be paid.

    One of the most likely outcomes, borrowed to the limit and gets notice of foreclosure. Probably 3 years of living expenses rather than simply selling at market value.
    Fees exceeded the cost of the loan, then the borrower eats the sale transaction costs as well.

    What could go wrong? It’s a great deal (for the lender).
    Typically, it’s a need for cash with no credit available.
    Payday loans and car title loans fall in the same class.

    Conclusion: If you feel this deal is comparable to title loans, payday loans, and reverse mortgages, you found a sweet spot. Try a home equity or a home improvement loan.

    #239389 Reply
    Avatar csciora 
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    Nope. The equity increase/decrease is shared equally based on the initial investment.

    Let’s say the property is worth $200K with $100K equity. Someone invests $10K which buys them a 5% share in the house. The founders retain a 95% share.

    In your example, Unison would receive an additional $5,000 due to appreciation (5% share). I would keep the other $95,000 due to appreciation (95% share).

    It’s virtually identical to having someone invest in a business to grow it. They cash out when you cash out when it’s an equity purchase.

    #239394 Reply
    Avatar csciora 
    Participant
    Status: Small Business Owner
    Posts: 86
    Joined: 08/17/2016

    In your example, you put in 25 to the house and get 125 in value, they are going to reap 87.5k of that increase, giving you, almost nothing more than what you put in it. Why would you do that. I would put 25 cash if it had that kind of instant 500% return, most things dont.

    Click to expand…

    Nope. The equity increase/decrease is shared equally based on the initial investment.

    Let’s say the property is worth $200K with $100K equity. Someone invests $10K which buys them a 5% share in the house. The owners retain a 95% share.

    In your example, Unison would receive an additional $5,000 due to appreciation (5% share). I would keep the other $95,000 due to appreciation (95% share). It’s virtually identical to having someone making an equity investment in a business hoping it will grow. Or having a partnership buy an apartment building. They cash out when you cash out.

     

    #239395 Reply
    Avatar csciora 
    Participant
    Status: Small Business Owner
    Posts: 86
    Joined: 08/17/2016

    Wow this is a great deal, for Unison that is. Why on earth would you take on all the expenses, taxes, upkeep, insurance, renovations, just to share the benefits with a third party? I’d lend you the money with no upfront costs and still make out like a bandit at your expense. I hope nobody falls for these predatory traps.

    Click to expand…

    Well, you’ve just described how real estate investing works. You borrow a bunch of money while taking on all the expenses, taxes, upkeep, insurance and renovations. The investor or lending party shares in the returns since they’re putting in the money. It’s not predatory and I’ve done it many times. The difference here is it’s a personal residence which made me wonder about tax consequence or other non-financial issues.

    I doubt you’d lend the money without upfront costs because you can’t predict the future. That means taking the loss if the valuation drops along with having no idea whether the investment will be returned within 5, 15 or 30 years down the road. It’s investment is only returned when the property is sold which is entirely the majority owner’s decision.

    #239397 Reply
    Avatar csciora 
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    Status: Small Business Owner
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    Joined: 08/17/2016

    Like many questions here it’s just a math problem. Why not put some rough numbers to it and figure out the results?

    Need your homes value now. Percent of shared equity planned. Amount spent on renovation. Amount invested in market. Estimations of future home value at sale, how many years from now that is, and expected market return over that time.

    Click to expand…

    Yep, working through it later tonight. No changes, HELOC, equity share or using cashs are the four use cases.

    Mostly curious about non-financial aspects that are negatives. Encumbering the property, limitations on transfers, partnership liability, stuff like that.

    #239399 Reply

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