Last year, Mark Zuckerberg got a lot of press for his “philanthropic” funding of a company called “Landed” to help “teachers buy houses.* It is a good idea, but it is not philanthropy to co-invest funds with a home buyer in exchange for a portion of their future equity. There are few better investments than Bay Area real estate, with an 20 year average return on a 20% downpayment of 1104%. Yes, I double checked that number a bunch of times. There has been an 1104% return on the 20% downpayment of an average priced bay area home since 1998 – even more in some.
A while back, many communities recognized this was a way to have a win-win for their pension funds and other public moneys and started programs like the SF Mayor’s Office of Housing’s (“SFMOH”) Downpayment Assistance Program (or “DALP”), which co-invests with people of moderate income to buy homes. The San Francisco program was recently expanded up to $375k per purchase, which has given potential buyers a real chance to obtain homes in the community in which they work. I have had a number of clients take advantage of this and it’s a wonderful program.
All of these programs provide assistance as part of a downpayment on the purchase of a home – usually for a 1st time purchase of a home and don’t have any payments until the home is sold. The MOH program has a 30 year term, meaning you could live for probably the rest of your life, or close to it, with no payments on this loan. The city would just let you live in their share for free and take their % of the home’s value when you sell it.
The biggest difference is that the San Francisco MOH program wants a return of a an equal amount of equity and the commercial programs (including Zuckerberg’s “philanthropic” program) want a much higher return. A simplified example (I am omitting incidental costs of sale to keep the numbers round) – the Mayor’s Office of Housing buys 10% of the house for the buyer. They buy the home for $1,000,000 and use $100,000 of the City’s money. They sell it (or refinance it) in 5 years at a time when the home is worth $1,300,000. The SFMOH will want 10% of the new equity in the home plus their original capital, or $130,000. This is a 30% ROI for the City. If the home was sold for the same price as it was purchased for, the city would just get their original investment back of $100,000.
Another commercial player in this space is Unison. In exchange for a 10% downpayment, Unison wants back 35% of the gained equity in the home. Taking the example above, if a buyer tapped Unison’s resources, Unison would want back $105,000 out of the $300,000 gain over the three years or a 205% return on their original investment.
The Zuckerberg “philanthropic version would take a 25% cut – less than Unison – but still a hefty $75,000 or a 175% return on investment.
Two differences on the side of the commercial players are that they are willing to share in the downside of the market – if you lose money they share that too – whereas the MOH program does not offer that; and that these funds are available without the annual lottery or homebuyer education requirements of the MOH.
Here is a summary of the programs and how they work with links to get you started:
• Mayors Office of Housing (MOH) DALP – Downpayment Assistance Loan Program
• Silent second loan that requires no monthly payments for 30 years or as long
as you own the home up to $375,000
• The principal amount plus an equitable share of appreciation becomes due
and payable at the end of the 30 year term, or repaid upon sale or transfer.
• Lottery process each year, deadline this year is July 31st, 2018
• Households income limit cannot exceed 175% of AMI
• Borrower must contribute a minimum of 5% (2.5% have to be from own
funds, remainder can be a gift)
• Borrower must have no more than $300,000 in assets prior to purchase, and
no more than $60,000 after purchase
• Borrower must have a minimum of 3 months of reserves after purchase
• All MOH programs require pre-approval through a MOHCD approved lender and that no member of applying household has owned interest in housing for 3 years prior
• Homebuyer education requirements for MOH Programs
• 6 hours of First Time Homebuyer workshops plus 2 hours of individual counseling at one of five HomeownershipSF agencies.
• Register at: http://homeownershipsf.org/workshops
• Landed – https://www.landed.com/
• They will provide half of your down payment up to 10%
• No monthly payments towards this loan
• When you sell your home, you share 25% of your investment gain or loss
• Unison – https://www.unison.com/homebuyer/
• They have the potential to provide half of your down payment up to 12.5%
• No monthly payments towards this loan
• When you sell your home, you share up to 35% of your investment gain or loss