Dy Nguyen, Jen Foxworth and their children enjoy their new home bought through a shared appreciation deal. Mx. Nguyen recently helped Mazzi, 5, play piano, while Mx. Foxworth and Enzo, 4, listened.Credit…Jason Henry for The New York Times
The housing market was maddening for first-time buyers, even before the pandemic spurred a crush of sales last year. The median U.S. sale price reached $346,900 in 2021, up almost 17 percent from the previous year and the highest on record, according to the National Association of Realtors, a trade group. And more existing homes sold last year — 6.12 million — than in any year since 2006, with nearly one in four going to all-cash buyers. Now a number of companies ranging from billionaire-backed tech firms to nonprofit housing groups are competing in a small but quickly growing segment of the market with a shared pitch: Don’t go it alone. A wide mix of partnership models offer potential home buyers deals that lie somewhere between ownership and renting. One or more parties (besides the mortgage company) has a stake in your home. For the person buying a home under these agreements, the end goal is the same — full ownership — but the paths vary, and can come with a number of trade-offs and risks. The models include shared appreciation agreements, in which you borrow part of the down payment in exchange for a share of the home’s future value; rent-to-own leases, in which the tenant makes payments toward ownership; and limited-equity co-ops, a nonprofit approach for lower-income buyers with limits on the resale price of the home. While they represent perhaps just 1 or 2 percent of the market, both private investors and nonprofits say they could soon become far more common as a means for first-time buyers to overcome their biggest obstacles: costly down payments, tight credit and bidding wars. But some consumer groups worry that buyers may not fully grasp what they’re giving up in these partnerships, particularly with some of the private start-ups. Here is what to know about these models.
Jen Foxworth and Enzo, 4, in the kitchen of their San Francisco home. Mx. Foxworth credits Landed with helping them afford a down payment in one of the most expensive markets in the country. Jason Henry for The New York Times
“It feels like a dream,” said Janese Scott, who bought a townhouse in Lithonia, Ga., through a rent-to-own company. Kelly Blackmon for The New York Times
In 2020, Janese Scott, 29, who works for a telecom company and is also a part-time mortgage loan officer, had a credit score of 560, too low for most lenders. So she entered a lease contract with Divvy, in which the company bought her a two-bedroom townhouse in Lithonia, Ga., for $129,000, and she became their tenant. She was given three years to qualify for a mortgage to buy the house back, at a premium — $138,000 if she bought after the first 18 months. But Ms. Scott got a mortgage in just five months, and bought the home for $133,500, an early-buyer discount. To qualify for the rent-to-own contract, she paid a 2 percent down payment to move into the home, and also paid an above-market rent of $1,520, which included $255 toward home equity. Working with financial coaches through Divvy, Ms. Scott said she paid down her debt, which mostly came from her previous marriage. After saving about $11,000, including the cash put toward the equity, she financed the home with a conventional 30-year loan.
Divvy Homes, a rent-to-own company, bought this Lithonia, Ga., home on behalf of Ms. Scott for $129,000 in 2020. After renting the home for five months, Ms. Scott qualified for a mortgage and bought the house for $133,500. Kelly Blackmon for The New York Times
The mortgage for the two-story home was $850 a month, cheaper than the apartment Ms. Scott had been renting for $1,200 a month Atlanta area for her and her 7-year-old daughter, Gabrielle. “It feels like a dream,” she said. But her outcome has not been typical in the industry, said Abigail Staudt, a lawyer with the Legal Aid Society of Cleveland, where several in the rent-to-own businesses operate. “They think they’re investing long term in something that ends in homeownership, but it often ends up as tenancy,” she said if the renter cannot qualify for a mortgage at the end of the contract. Adena Hefets, a co-founder and chief executive of Divvy, said that about 47 percent of clients become homeowners at the end of the contract, while another 30 to 35 percent extend their lease. She would not say how many homes they have purchased but said they have “helped thousands” of potential homeowners. They operate in nine states: Arizona, Colorado, Florida, Georgia, Minnesota, Missouri, Ohio, Tennessee, and Texas. In the event that a tenant does not buy the home at the end of the contract, Divvy returns the extra payments made toward the equity, minus a fee equal to 2 percent of the purchase price — a significant change from older models, where tenants could stand to lose most or all of their investment. But unexpected hardship could eat into that nest egg — unpaid rent may be collected from the tenant’s equity payments. Landis, a competitor, said that 80 percent of their clients become homeowners, but declined to provide sales data.
The companies emphasize free financial coaching for clients, to help them qualify for homeownership, which has rarely been the case in past models. Still, consumer protection groups are wary of past experience. “It’s a population that’s primed for exploitation,” said Reed Colfax, a partner at Relman Colfax, which is representing the plaintiffs in a class-action lawsuit against Rainbow Realty Group, a real estate company in Indianapolis. In a separate case, James Hotka, the head of Rainbow Realty, said in 2013 that 70 percent of customers in their rent-to-own program “fail in the first six months.” All rent-to-own models are not the same, but consumers need to consider negative outcomes, said Sarah Bolling Mancini, a lawyer with the National Consumer Law Center. “The question is, if you can’t get a mortgage now,” she said, “how can you be sure you can qualify in two or three years?”
Shared Equity
Shared equity refers to a number of lower-income homeownership models designed to keep a property affordable not just for the current owner, but also future buyers. (To the chagrin of nonprofit housing groups, the term is also used to market for-profit models, like shared appreciation contracts.) In one version, limited-equity cooperatives, buyers purchase homes at deeply below-market prices, and pay monthly fees to maintain and improve the property. In exchange, the resale price of the unit is restricted — based on inflation or other measures. New York City has a version of this called Housing Development Fund Corporation, or H.D.F.C. co-ops.
Nery Peña, who teaches first grade English, bought her apartment in Washington, D.C., through a limited-equity cooperative. “Honestly, I never thought it would be possible,” she said.Samuel Corum for The New York Times
Nery Peña, 27, a first-grade English teacher, bought a two-bedroom apartment in Washington, D.C., overlooking the Washington Monument, for $50,000 in 2021. Similar apartments nearby start at $350,000. n The building is part of the Douglass Community Land Trust, a portfolio of properties purchased by former tenants and nonprofit groups, where qualifying buyers typically make between 30 and 70 percent of the area median income. In D.C., that could mean a family of three making roughly $35,000 to $81,000 a year. The land trust also includes rental apartments. Ms. Peña, whose family rented the building before it converted to a co-op in the 1990s, cobbled together $15,000 from her savings and a gift from her mother and financed another $35,000 through a credit union. She pays $1,420 a month, including co-op fees; similar units nearby rent for twice that amount. If she decides to sell the home, the sales price will be restricted to her purchase price, $50,000, plus 3 percent for every year she stays. “Honestly, I never thought it would be possible,” she said. “‘The majority of people who live here have known me since I was 2.” One of the model’s biggest problems is scale. There are about 250,000 households living in shared equity units in the United States, said Tony Pickett, the chief executive of Grounded Solutions Network, a national organization in that space.
That includes about 1,200 H.D.F.C. co-ops in New York City. “That’s minuscule,” he said. Finding lenders who will finance the loans is a challenge because the mortgages are generally smaller than those for market-rate homes. Grounded Solutions is aiming to reach 1 million households in the next 10 years, pushing for legislative changes that could make underwriting such loans easier. The nature of limited-equity ownership also means that the buyers, often Black and Latino households, will gain less appreciation from their purchase than conventional homeowners. But that is a trade-off that can still create more wealth for a family that would otherwise have remained renters, said Brett Theodos, a senior fellow at the Urban Institute, a nonprofit policy group. In a 2019 study of 4,108 properties over three decades, the median wealth created for shared equity homeowners was $14,000, according to the Lincoln Institute of Land Policy, a nonprofit think tank. And nearly 60 percent of those buyers went on to purchase market-rate homes. Nonprofit models like community land trusts can also ensure affordability for subsequent buyers. Silvia Salazar, who works in research at the National Cancer Institute, has been a resident of another co-op in the Douglass Community Land Trust since 2001 when it was still a rental. y Since the building converted to a limited-equity co-op in 2011, she says management of the 83-unit building has improved, and units have remained affordable to a largely Latino buyer pool, many of whom work in restaurants and service jobs. Even after a surge in prices in the region fueled by the pandemic, sales at the building start at just $1,500 for a studio apartment, with monthly fees of around $1,100. “It’s the permanent affordability that means everything,” she said about the shared equity model. “No matter how much our community gentrifies, we don’t have to worry about displacement.”
