Moving America Forward

Can’t Afford a Down Payment? Let Investors Help You Buy Your Home

April 4, 2014
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Can’t Afford a Down Payment? Let Investors Help You Buy Your Home
Steve Cinelli created the world’s first residential real estate exchange — and hopes to transform the way housing finance works.

During the buildup to the great housing bubble of the 2000s, I watched the dream of owning a home slip from my grasp. Prices were growing more unreasonable by the day, and I knew I’d collapse under the wacky mortgage plans available to a reporter, on a reporter’s salary, possessing neither the discipline nor the extra scratch to scrape together a down payment.

Thankfully, the bubble eventually burst, prices plummeted and I wriggled my way into the market. But there are millions of other aspiring homeowners in America who are still shackled to their landlords because they either don’t have the money for a down payment or can’t afford a mortgage in situations where the loan can represent up to 97 percent of the purchase price.

Enter PRIMARQ, the world’s first residential real-estate equity exchange — a soon-to-launch venture of San Francisco entrepreneur Steve Cinelli. Can’t afford a down payment? Let investors put together the capital you can’t, without relinquishing all your clout as a homeowner. By letting “co-owners” buy shares in your home, you’re able to put down a bigger down payment, which means you end up carrying less debt and can get a loan free of mortgage insurance, which is commonly tacked on for down payments of less than 20 percent. “I think the market is overly dependent on mortgage-debt financing,” Cinelli says. “The application of debt has gone way too far.”

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Investors can bet on housing without having to deal with the actual house. They’ll get their money back (plus profits if there are any), under one of several circumstances: when you sell your home, when you decide to buy back your shares, or when the investor sells his shares back to the PRIMARQ exchange itself, which offers a “liquidity guaranteed” 90 percent of their value. So, if an investor puts up $10,000, and then wants to cash out for any reason before you sell your home, they’ll walk away with no less than $9,000 (unless the home price drops) — and it doesn’t affect you either way.

Not all homebuyers and not all houses can qualify for PRIMARQ funding. If there’s a mortgage involved, the buyer has to meet strict credit-score criteria, and the home has to have a certain expected price appreciation — meaning it’s got to be a decent property in a good location. That doesn’t necessarily rule out homes in lower-income neighborhoods, but it does stand to reason that unless those neighborhoods are deemed “up-and-coming,” the homes there might not qualify for PRIMARQ.

But once those burdens are met, the company has designed a program that Cinelli says complies with existing regulations and is working to convince banks that more equity in the mix makes a better-quality loan — and that it’s not necessarily a risk for borrowers to invest less of their own money in their home. If mainstream lenders get on board, it should mean more people have greater access to the housing market, which has only in the past year or so begun to rebound from the Great Recession it helped cause.

So how does this work, exactly? Without getting too deep in the weeds, PRIMARQ has created investment units, or shares, known as “Q’s”; each one is valued at $10,000. Through a broker, you, the potential homeowner, would list shares for sale in your desired property. Investors then make bids for them (minimum $25,000), based on a variety of factors, including the amount of equity capital being sought versus ownership to be shared, and how much the property is expected to appreciate in value. Then, PRIMARQ works with you to apply those funds to your purchase, and provides quarterly portfolio management reports to the investors.

Q’s are bought and sold just like shares on the Nasdaq, so investors can trade them anytime during your ownership. Once you sell, you hand over your investors’ share of the profits and pocket the rest. Or, if you sell your home at a loss, investors take their share of the hit as well.

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Cinelli hopes this kind of “liquidity in a historically illiquid market” will not only beef up America’s less-than-impressive rate of home ownership (65 percent) but also help prevent the next crash, by deleveraging some of the many debt-crushed mortgages out there. Back before the New Deal in the 1930s, buyers put 50 percent down on a house and paid the rest of it in two years. But in a push to expand ownership to more Americans, President Franklin D. Roosevelt established the Federal Home Loan Bank System, government-backed banks that paved the way for the onslaught of home lending that commenced in the coming decades. This worked fine, until the frenzy that was the housing bubble of the 2000s came along. Global investors flooded the market with easy cash. Complicit lawmakers, mortgage brokers and real estate agents rammed exorbitant home loans down the throats of hapless (or irresponsible) Americans who by that time had grown so comfortable with borrowing up to their eyeballs that many didn’t stop to consider how they’d actually make the payments on a half-million-dollar house in the ’burbs. The crash was both inevitable and colossal. “We saw the result of the overleveraged problem, over the last handful of years,” Cinelli says. It got him thinking, “Why is housing devoid of [outside] equity?”

To be sure, the PRIMARQ model involves risks for both investors and homeowners — not the least of which is a gaming of the system by nefarious investors, says David Reiss, a professor of law at Brooklyn Law School in New York who researches and writes about the American housing-finance sector. While Reiss calls PRIMARQ a “supercool idea” for all the aforementioned reasons, he could imagine various ways for unsophisticated homeowners to get fleeced without proper consumer protection regulations (the program has not yet been reviewed by a government regulatory agency). Unscrupulous investors could demand fees or increased equity in exchange for agreeing to help fund a second mortgage, for example. By participating in PRIMARQ as a homeowner, “you are not the master of your own destiny,” Reiss says.

Indeed, PRIMARQ homeowners aren’t exactly as free as they would be on their own. For one thing, they’re generally not allowed to rent out their place. Certain kinds of refinancing would also require the sign-off of the investors. They also get some say in the choice of homeowner’s insurance, how the property is marketed for sale, and the final sales price that is accepted. Investors further have the right of first refusal for a home at market value, which may discourage a seller who thinks he or she can get more than that. (Homeowners, too, have rights of first refusal for the equity.) Beyond that, there are ample ways for the deal not to pan out for either party. The homeowner could trash the place or fail to fix the leaky roof, tanking the value of the property (which PRIMARQ’s contract would label a “default” of the agreement). Or the market could again take a dive, which means investors take a loss just as if they’d bought Facebook stock.

But the system also provides a way for investors to get in on what can be a hugely lucrative bet, without taking on the same level of risk involved in actually purchasing a home. Investors don’t have to pay insurance, property taxes, homeowner dues or repair costs. Instead, they’re “passively” partnering with the owner-occupant, who — in theory — has a vested interest in keeping the property in good shape.

At this point, PRIMARQ’s entry into the $17 trillion market is too small to make much of a dent. There are currently some 350 to 400 investors on the platform and about 30 transactions in progress about a month out from the company’s formal launch. If it grows substantially, Cinelli sees the equity-over-borrowing model becoming a stabilizing force, helping homeowners avoid getting sucked into big mortgages, making them less likely to wind up in foreclosure, should financial problems arise. “Our goal is to really change the overall paradigm of housing finance,” Cinelli says. “The fundamental problem is that with debt as the only third-party capital available, lenders overlend.”

There is inherent value in bringing outside capital into an arrangement now monopolized by the banking industry, Cinelli says. It spreads out the players and the risks and those with stakes in the game, which at least in principle should strengthen the whole system.

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