Buying a first house through equity sharing program?

[Kaytee]

Background – we live in a high cost of living area, as it is where my job is located, and currently rent a <700 sf 2-bedroom apartment for $825. DH is diligent about fixing things and we have rarely ever called the landlord for issues, so our rent has stayed the same for the 7 years we’ve lived there. Comparable apartments rent for >$1000 minimum, so with our apartment, large backyard, storage and w/d, we have a pretty sweet deal. In 2012, 2 became 3, and the size of our apartment is tight but okay (it’s poorly laid out) with the 3 of us. However, the area has been slowly becoming less safe and less desirable, since when we moved in. We aren’t in a position to purchase a house intelligently, on our own.

Our area has a non-profit outfit called the Champlain Housing Trust (http://www.champlainhousingtrust.org/index.htm), that holds houses and apartments in stewardship to keep housing affordable, and provides downpayment grants to people who meet their criteria, of which we do. When you sell the house, the equity and such reverts back to them, so you don’t make money at the sale (unless you have paid off the mortgage already). At the prices of these places, the mortgage would be slightly higher than our rent, but comparable and would still allow us to continue our debt repayment schedule. Has anyone had experience purchasing a home through a program like this and can share their experience? Thanks!

[Spork]

I have no experience with this, so I'm probably not the answer you're looking for...  Maybe this is me not fully understanding.  Maybe it's me just being a cynic.  But something feels wrong here.  It feels like you're on the hook for the risk (if the mortgage or insurance or taxes don't get paid) and don't get your equity back when you sell.

Maybe that's not hugely different than renting, assuming you're really sure that you can make the payments.... but something just feels wrong there.

[TLV]

If I read their site correctly, you get your paid principle back, plus 25% of the appraised value appreciation.

Example: $100k house, you put down $5k, they put down $15k.

Say you live there 9 years, the house goes up to $120k in value, and you've paid off $12k of principle, and you're ready to sell to move somewhere else. They get first dibs to buy the house, and their price will be $90k - paying off the remaining $68k of mortgage, your $5k down payment, your $12k principal, and giving you $5k of the appreciation. They keep the $30k difference (part of which is paying back their down payment).

Compared to putting 20% down yourself, the advantage is you don't have to put up that extra $15k. Compared to putting 5% down on a mortgage that allows it, your payments will be lower because the mortgage balance will still only be 80% to start, and no PMI.

The disadvantage is you only get $5k of the appreciation, instead of all $20k.

It doesn't seem like a good deal to me, especially if you still have to pay transaction fees (closing costs, realtor fees), since you'll have much less possible appreciation to offset them. It may still be worth it if renting is quite expensive compared to buying, and it would take you a long time to save up the down payment, but definitely run the numbers.

[Kaytee]

In this area, renting and buying are about pretty equal, I'd say. We are lucky to be where we are in our apartment, as we are paying 1-bedroom rates. To rent a house is anywhere from $1600 on up to $3000/mo, depending on the fanciness of the house and which town it's in (ie - closeness to the interstate). To buy an affordable house, you need to leave the county - and make up the difference driving. A cosmetic fixer-upper is usually around $225k. The average sale price in my town is $325k, for single family houses. Property taxes are are $2500/year for condos, to $5000/year for houses. Homeowners' association fees, if applicable, are generally $150 - $300/mo depending on the ritzyness of the neighborhood.

For comparison's sake, a 934 sf condo we are looking at is listed at $147k, property taxes are $2900 annually, association fees are $145/monthly.

It will take us a long time to save for a 20% downpayment and something in me just curdles at a quarter million dollar sticker price for a house. Plus the interest over the life of the loan? Ghastly! The prices of the houses through this house equity sharing program would be comparable to our rent now, plus $200-$300 dollars, monthly. This would allow us to continue to live on 2/3rds of my income and when DH goes back to work, save his income  - he's currently a SAHD until our spawn is old enough for school. I'm not so much viewing this as an investment, but more as a potentially affordable way of purchasing a first home in a safer area than our current location, yet continue to meet our other financial goals.

[slugsworth]

I haven't reviewed this particular program, but generally one of the other advantages of these sort of programs is that in the event of a drop in home prices you are protected in a loss to a degree. The down payment program rats the loss.

[Kaytee]

Since posting this question, I had the opportunity to sit in on a seminar for the shared equity program. I'll just post the highights here, in case anyone else comes across this in the future, but TLV was spot on.

This particular program in our area has been around for 30 years and the purpose is to keep housing affordable, plus some other feel good language.
-Houses enter their program and receive down payment grants that stay with the property.
-Grants always exceed 20% of the property price, so purchasers don't pay PMI.
-Any appreciation of the house is split 25%/75% (homeowner/program). The program appreciation stays with the house and is added to the downpayment grant.
-Any work performed by the homeowner that adds value to the propery, the homeowner receives full appreciation value for. So if the I re-do the kitchen and it adds $5000 to the value of the property, then I keep that $5000 at sale time, plus the 25% mentioned above.
-You enter into a "lease" of the grounds surrounding the home with the program, so they need to be listed on any permits and made aware of any changes done to the building or grounds. The monthly lease is $35 for houses and $25 for condos, paid to the program.
-If the house depreciates, then the homeowner is out of luck, those the program did step in and help out a few unlucky people who were trying to sell at the height of the housing bust.

After careful consideration and running the numbers, we decided to do it and we're signing the purchase and sales agreement tomorrow. The place we are looking at is listed at $250,000 and has a downpayment grant of $82,500; so the cost to us is $167,500 for a LEED accredited house built in 2011. It's more than we are paying now in rent, but in a much better area with more room that we can afford on my income alone. In 4 years when our toddler goes to school, we'll be saving/investing/paying off the mortgage early with DH's income (he's a SAHD presently).

[slugsworth]

Congratulations, I hope it works out for you.