Unison is a “home co-investment” start-up, which means it wants a share of the equity of your home. If your home value goes up, then it wants some of the gain. If your home value drops, then it will absorb some of the loss. In exchange, the benefit to the homeowner is either an increased upfront home downpayment or the ability to cash out your home equity with no monthly payments. Unison is betting that over the long-term, your home value will go up and they will profit when you eventually sell (or when 30 years is up). In addition, they charge a one-time transaction fee at the time of closing (2.5% of proceeds) or at home-equity cash-out (3.9% of proceeds).
That’s the basic idea, although they aren’t technically a co-owner of your home. The arrangement is structured as an options contract with a secured lien on your home, as laid out here (click to enlarge):
In this example, when your home appreciated in value from $500,000 to $600,000, you would only keep 60% of that gain ($60,000), while Unison would take 40% ($40,000). Add in their original $50,000 back, and you get the total of $90,000 back on Unison. This is in addition to the 2.5% upfront ($1,250) you paid as an origination fee.
Unison’s business model depends on home prices going up over time in a reasonably-predictable manner, so they’ve done some research about the reliability of rising home prices. Using their data, Felix Salmon at Axios created this volatility chart that illustrates their conclusion that home price volatility is roughly the same order as S&P 500 volatility:
I don’t know if the average consumer really understands what “20% volatility” means (I don’t), so this statement is much more meaningful:
Any given home has roughly a 30% chance of ending up being worth less in five years’ time than it is today. If you can’t afford that to happen, you probably shouldn’t buy.
That’s an interesting statistic to keep in your head. Of course, it also means that you have a 70% chance of having your home price increase in 5 years, which is probably why many experts recommend that you expect to stay in your house for at least 5-7 years before buying. The odds are in your favor, but not overwhelmingly over a 5-year period.
Bottom line. I predict Unison will become successful, as long as they have patient sources of funding. Customers get a much bigger home downpayment upfront, and the payback is not until later and only taken out of profits (less pain). That’s a pretty brilliant idea in the context of behavioral finance. As a homeowner, you are paying a fee to sell off a piece of future upside (or downside) potential, but anything that makes it possible for people to buy a nicer house now is going to be popular.
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I want to run some numbers trying to take inflation into account here.
From the example, they give me $50k today, but I pay it back with less valuable future dollars.
Interesting…
This is stupid idea for user. You pay 2.5 to 3.9% s upfront fees and are still on hold for the principal as well as future profit. Why not get a refinance or Home equity cash out at 3-3.75% and be done with it.
If housing values go down (and I think we are nearing peak in this slice of America), I would like to share the pain. No?
I am thinking about doing this Jon. Will let you know if I do and how it goes. This may be my best solution to being asset rich but cash broke. I don’t want to have to sell or refinance either of my properties as I am 8 years from the promised land (both homes, primary and investment property completely paid off). Then, I move to Costa Rica and live like a king.
Yes, would definitely like to hear your experience.
Terrific deal for them, in that they share none of the frictional costs of owning a home, including those that result in the increased value that their cut is based on.
Property taxes? 100% on you.
Insurance costs? 100% on you.
The 6% realtor fee paid when you sell? 100% on you.
That $50,000 in improvements you paid to get the $100,000 increase in value? You pay 100% of the cost, but get only 70% of the increased value.
Of course, when most people tell you about their real estate “profits”, they hand wave away all these costs, so folks will probably gloss over them in this case too.
Unison likes to say that it isn’t debt, but the amount paid to the home owner must be returned to Unison; to me that’s debt. Not only must it be returned, but returned in full, plus or minus a percentage of the increase or decrease of the homes value at termination. Did the home owner receive the full disbursement at contract start? No, the payment is split 25%/75% in the example above and there are fees to be deducted. So, in the example above, for Unison to own 40% of the home, the homeowner receives 24.25% of the value (including fees). Does that seem logical? Not to me. And the upkeep on that home is solely the homeowner’s responsibility. Unison is well protected in this contract and is absolved of a large amount of the risk and expense. Now, how do I joint Unison and become an investor?
This is basically a new spin on an old idea – Shared Appreciation Mortgages (SAMs). When SAMs first appeared in the 70s, the problem they were addressing was high interest rates (18% or so). Even with a 20% down payment, the monthly payments were simply too high. One approach was to offer 40 year mortgages. Another was to have the lender reduce the interest rate in exchange for a percentage of the profits.
That classic SAM is described by Bankrate here: https://www.bankrate.com/glossary/s/shared-appreciation-mortgage/
Today, high mortgage rates are obviously not a problem. The problem is making the down payment given soaring housing costs in some markets. So the newer SAM lenders give you money for part of that down payment, instead of a buyer going to relatives for help.
A possible problem, aside from the fees and the fairness of the split, is cap gains taxes. Unison is targeting 7 figure homes. (It gives an example of a $1.2M home in Danville, CA.) Single owner, ten years, easy to see a gain in excess of the $250K first home exclusion – there will be cap gains taxes. It looks like the borrower is on the hook for 100% of those taxes. I’m not as bothered by the owner paying 100% of the property taxes, since the owner is getting use of 100% of the property. But investment gain? If Unison “shares” in the gain, it should share in the the taxes on that gain.
Where it doesn’t make sense to me is as a substitute for a HELOC, or other existing ways to tap equity in a home you already own.