Companies will buy a stake in your home

A new breed of financial technology firms is pitching American homeowners on a different way of tapping into home equity: If you’re sitting on a pile of it, these investors will buy a piece of your house.

The co-ownership arrangement isn’t cheap, but it presents an alternative to furloughed or laid-off workers who no longer qualify for home equity loans or cashout refinances.

You get the cash now, and your new co-owner shares in the rise — or perhaps fall — in the value of your home when you sell.

“This is a true risk-sharing product,” says Eoin Matthews, co-founder of Point, one of the home equity investors.

Other players in this new niche include Noah, Hometap and Unison. The upstarts are keyed into a financial reality that has emerged over the past decade: While many American homeowners have seen their housing wealth grow, turning that wealth into cash isn’t always easy.

“Most Americans are asset-rich and cash-flow sensitive,” says Noah founder Sahil Gupta.

U.S. homeowners held a record $18.7 trillion in home equity at the end of 2019, according to the Federal Reserve.

But, “When they want to get a bank loan or a home equity loan, it becomes challenging,” Gupta says.

First, you’ll need plenty of equity in your house. Point requires 30% or more, while Noah requires at least 25%.

You’ll also need to live in a place where the companies are doing business. Point and Noah are not local, but Hometap operates in Massachusetts and other states.

Bad credit generally isn’t an obstacle. Point requires a credit score of only 500 — although it seems unlikely that a homeowner sitting on a cache of home equity would have a score that low.

Point and Noah both will write checks for amounts ranging from $35,000 to $350,000.

This concept has become popular in the fintech world. Investors in Point include Silicon Valley venture capital firm Andreessen Horowitz and former Citigroup chief executive Vikram Pandit.

These home equity investments aren’t loans, so there’s no monthly payment. Instead, your new partner gets a claim on the appreciation in your home, an obligation that comes due when you sell.

Point offers one scenario based on a $50,000 investment in a $500,000 home. In this example, Point sets what it calls a “risk-adjusted home value” of $425,000, and it keeps 20% of any appreciation above that number.

Say the owner sells in five years, and the home has appreciated to $608,300. That’s an increase above Point’s value of $183,300, so the homeowner gives Point 20% of that, or about $36,700.

The owner would repay Point the original $50,000, plus a chunk of the home’s value increase for a total payoff of $86,700. That equates to an annual percentage rate of more than 12%. In other words, it’s not cheap money.

In the event a home’s price soars, Point’s return is capped at somewhere in the range of 15% to 20%.

There are also upfront costs. Homeowners pay a fee of 3% of the home equity investment, plus appraisal fees and other closing costs.

Joe Zeibert, managing director at Nomis Solutions, says there’s an obvious disadvantage.

“You’re absolutely giving up upside,” he says. “If you’re going to be in that house for 20 years, you need to know you’re giving away a chunk of appreciation.”