How to Break Into the Housing Market, Even Now
It was about as far as you could get from Jeff Langholz's and Karen Lowell's idea of a dream house and still have four walls and a roof: a ramshackle double-wide on a weed-infested lot in rural Monterey County. A trailer for $169,000. Was this a joke? Had real estate grown so cartoonish that two Ph.D.-packing graduates of Cornell were scrambling to move into a green-shag-carpeted mobile home in a community nicknamed "Prunetucky"?
Well, yes, it had. It was 1999, the beginning of the real estate boom, and with just $7,000 from Karen's parents for a down payment and prices on the coast edging toward $500,000, the couple realized the Prunedale property was their only way in. So they bought. Three years later, with two kids in tow, they traded up to an 1,100-square foot house on 2 acres on a sunny hillside a mile away.
It was a critical step up. With a white-hot market on their side, they were well on their way to realizing the kind of wealth that real estate brings to those lucky enough to get a piece of it.
That might have been the end of their concern with the brutality of the California housing market. But at the Monterey Institute of International Studies, where Langholz teaches environmental policy, he was hearing housing horror stories from far beyond the West Coast. Newly minted graduates who'd landed highly prized jobs in New York, Washington and Geneva were facing even more hostile conditions than he and Karen had.
"They're destined to be renters for life," Langholz says. "And it's just not right. If you're a hard-working, educated person with decent credit, you should be able to buy a house."
What was missing, he reasoned, was the leg up to the bull's back -- the down payment. In most Bay Area markets that had become a formidable barrier to entry. To get an 80 percent loan on a $500,000 condo meant pulling together $100,000 -- which was flat-out impossible for most first-time buyers. Langholz knew real estate has always been viewed by investors as an attractive bet, although one that generally requires more time and effort than other types of investments, not to mention tenant-induced headaches. Couldn't something be worked out between the people with no cash for a down payment and those looking to invest a little money in a relatively hassle-free way?
The concept already existed in a little-used financing tool called equity sharing. The problem was nobody knew about it. Langholz arrived at a seemingly obvious solution: the Internet. What if a priced-out buyer in Oakland could log onto a site and find an investor from Palo Alto -- or Miami, for that matter -- who could supply the down payment in exchange for a piece of the equity down the road?
Thus was born the idea for www.homequityshare.com, what Langholz calls "a housing affordability program for the middle class." It started in March with a matchmaking database for buyers and investors.
"All of life's big transitions usually come in stages," he says. "Before you get married you get engaged; before you get your driver's license you get your learner's permit. Well, with real estate there's no stepping stone between 0 percent ownership and 100 percent ownership. We're creating that intermediate stage."
Ordinarily, people get the down payment for a first house in various ways: They inherit it, they cash in stock options or they scrimp and save for years. Equity sharing is a way around the waiting, the penny-pinching and the role of luck.
"It's people helping people," says Frank Ricci, who started putting together equity-sharing deals in the Sacramento area in the early '90s before moving to Oregon to continue the process. He says it pays intangible dividends for investors tired of the adversarial landlord-tenant dynamic. "You talk about humanitarian feelings. It just goes on and on."
When Sharon Lunn stepped into the three-bedroom condominium in Martinez overlooking the pool and tennis courts, she knew immediately it was the place for her.
"The color of the tile they'd put in blends in with the colors in my dining set," she says. "All my furniture is oak; the cabinets were oak, the door was oak, the railings are oak. It was as if my furniture belonged in here."
A former homeowner, Lunn had the money for a down payment on the $500,000 condominium. But having recently divorced, she was reluctant to spend it all and leave herself without a financial cushion.
One day over lunch her friend Denise Holley suggested she call Ken Beasley, a partner with the Danville-based Home Equity Group. In short order, Lunn had entered an equity sharing arrangement with an investor who put in 10 percent down to match her own 10 percent contribution. They agreed to revisit the deal after three years.
"If the market is good at that time, then I'll refinance," she says. "If it's not so good, then we'll extend the agreement so it benefits both myself and the investor."
Denise Holley had firsthand experience with equity sharing. She and her husband Mike had bought a house in San Ramon with Beasley's help 15 years earlier. Back then, as newlyweds with a blended family, they were eager to leave behind their old towns -- Antioch in her case, Hayward in his -- for what they were convinced was a better community.
"Basically, it allowed us to live where we wanted to live and have a home we would not have been able to afford otherwise," Mike Holley says.
As he watched the value of his house skyrocket during the late '90s and early 2000s, Holley became so enamored of the equity sharing concept that he became an investor himself. He's chipped in on eight properties in the last five years, he says.
"I was able to buy my wife a new Lexus, right? I paid for the car with cash. I bought myself a new Harley-Davidson. And I got no complaints."
In another typical arrangement, Dottie and William Mattos contributed a 20 percent down payment of $35,000 on a new house in Portland for Michael and Tina Ferguson. Listed as co-owners with the Mattoses, the Fergusons lived in the house and paid the mortgage. Per the terms of the contract, after three years they reassessed: Refinance and buy out the Mattoses, or sell the house and split the profit? In either case, the Mattoses stood to triple their money and the Fergusons stood to gain full ownership of the house they were in or about $40,000 cash for a new down payment. Like most people who have bought through equity-sharing agreements, they've decided to try to refinance.
Equity sharing works best, of course, when the market is strong and both parties can realize a considerable return on their investment. But because lending practices have been so loose, equity sharing hasn't been that popular in the most recent boom cycle.
San Francisco real estate attorney Andy Sirkin says home equity sharing becomes more attractive when the buying gets tougher, like it is now with the zero-down hangover.
"When down payments are higher and underwriting guidelines are stricter, then buyers who are financially weak need more assistance," he says. "In those periods we see higher volume with equity sharing."
Trouble comes when the market is too hot or too cool. When prices are climbing too rapidly, homebuyers can't afford to buy out investors and are forced to sell instead -- in which case they almost certainly cannot afford to buy in the same neighborhood. That can be disruptive, especially with kids in the picture.
On the other hand, if homes are appreciating too slowly, a homebuyer will find insufficient equity in the house to buy out the investor, while selling yields too small a return to be of much use.
In the absolute worst-case scenario, housing prices fall, leaving homebuyer and investor yoked together in misery.
Langholz acknowledges that buying a house with a stranger and hoping to ride the market to riches in tandem is hardly a risk-free venture. But in almost all cases it beats the alternative.
"Even if they equity share for five years and the market stays flat and they get zero price appreciation, they're breaking even," he says. "That would still be better than if they were losing it on rent."
The newly divorced, the self-employed, buyers with shaky credit, renters who want to buy the house they're in and homeowners who face default are prime candidates for home equity sharing. What they all have in common is that their limited incomes or credit histories make banks nervous.
Those things make individual investors nervous, too. So a watertight agreement that protects both parties is key.
Marilyn Sullivan, a Pismo Beach (San Luis Obispo County) attorney and partner in Langholz's venture, has done 5,500 successful equity-sharing agreements since stumbling onto the concept in 1981 as she was trying to buy her own first home. A loan calculator she created, plus a model contract, are available at homeequityshare.com.
Sullivan has long been a big believer in home equity sharing, but she feared it wasn't getting the attention it deserved. When Langholz called her last November with his idea for the Web site, she was ecstatic.
"I said, 'Oh, my God, this is exactly what I needed to do,' " she recalls. "I felt I had taken this to a certain place, but people were missing out on the whole marketplace of being able to hook up with each other."
Langholz compares his Web site to Prosper, the person-to-person lending Web site that started in February 2006. It allows people, regardless of credit rating, to post the amount they'd like to borrow so lenders can bid on it, eBay-style. Prosper has facilitated more than 11,000 loans totaling $61 million.
Prosper co-founder and Chief Technical Officer John Witchel says these community-based models of doing business have important implications for the economy.
"The thing we talk about internally, it's kind of schlocky, but we talk about that great scene in "It's a Wonderful Life" where Jimmy Stewart is at the teller window and there's a run on the bank, and he's saying, 'The money's not in a safe or in a vault or in the basement, it's in your neighbor's house, it's in the farm down the road, and we all have to work together to make it work. And if not, Mr. Potter's coming to town.'
"We'd like to see a return to a way of life where people are standing up for each other," Witchel says, "and they're not naïve about it and they're not idealistic about it. We believe people are good."
Truthfully, it doesn't take a heart of gold to lend a stranger a hand when it's going to double or triple your money. One of the more slippery aspects of equity sharing is its contribution to the rich-get-richer cycle; it works disproportionately in favor of investors simply because it takes money to make money, and they have it. They can compound their advantage by playing hardball in negotiations with desperate first-time buyers; for example, by demanding a 60 percent share of the house and equity. Indeed, 50 percent is quite common.
So it comes back to the agreement, hammering one out that rewards the investor for taking a risk and rewards the homebuyer for taking on the burden of fixing toilets and maintaining a lawn.
Langholz warns that even under the best agreement, homebuyers might wince when it comes time to split the equity on a house where they've been living, decorating and gardening. But as a first step it's worth it, he says: Statistically, people who buy real estate are worth seven times as much money at the end of their lives as those who don't.
It's his way of trying to bridge the widening gap between the classes.
"We want to democratize real estate wealth," he says, "because we're becoming a country of haves and have nots."
Traci Hukill is the managing editor of Metro Santa Cruz. She lives in a rented house in Monterey with her boyfriend and their cat.
BY:Traci Hukill
VIA:www.sfgate.com
Well, yes, it had. It was 1999, the beginning of the real estate boom, and with just $7,000 from Karen's parents for a down payment and prices on the coast edging toward $500,000, the couple realized the Prunedale property was their only way in. So they bought. Three years later, with two kids in tow, they traded up to an 1,100-square foot house on 2 acres on a sunny hillside a mile away.
It was a critical step up. With a white-hot market on their side, they were well on their way to realizing the kind of wealth that real estate brings to those lucky enough to get a piece of it.
That might have been the end of their concern with the brutality of the California housing market. But at the Monterey Institute of International Studies, where Langholz teaches environmental policy, he was hearing housing horror stories from far beyond the West Coast. Newly minted graduates who'd landed highly prized jobs in New York, Washington and Geneva were facing even more hostile conditions than he and Karen had.
"They're destined to be renters for life," Langholz says. "And it's just not right. If you're a hard-working, educated person with decent credit, you should be able to buy a house."
What was missing, he reasoned, was the leg up to the bull's back -- the down payment. In most Bay Area markets that had become a formidable barrier to entry. To get an 80 percent loan on a $500,000 condo meant pulling together $100,000 -- which was flat-out impossible for most first-time buyers. Langholz knew real estate has always been viewed by investors as an attractive bet, although one that generally requires more time and effort than other types of investments, not to mention tenant-induced headaches. Couldn't something be worked out between the people with no cash for a down payment and those looking to invest a little money in a relatively hassle-free way?
The concept already existed in a little-used financing tool called equity sharing. The problem was nobody knew about it. Langholz arrived at a seemingly obvious solution: the Internet. What if a priced-out buyer in Oakland could log onto a site and find an investor from Palo Alto -- or Miami, for that matter -- who could supply the down payment in exchange for a piece of the equity down the road?
Thus was born the idea for www.homequityshare.com, what Langholz calls "a housing affordability program for the middle class." It started in March with a matchmaking database for buyers and investors.
"All of life's big transitions usually come in stages," he says. "Before you get married you get engaged; before you get your driver's license you get your learner's permit. Well, with real estate there's no stepping stone between 0 percent ownership and 100 percent ownership. We're creating that intermediate stage."
Ordinarily, people get the down payment for a first house in various ways: They inherit it, they cash in stock options or they scrimp and save for years. Equity sharing is a way around the waiting, the penny-pinching and the role of luck.
"It's people helping people," says Frank Ricci, who started putting together equity-sharing deals in the Sacramento area in the early '90s before moving to Oregon to continue the process. He says it pays intangible dividends for investors tired of the adversarial landlord-tenant dynamic. "You talk about humanitarian feelings. It just goes on and on."
When Sharon Lunn stepped into the three-bedroom condominium in Martinez overlooking the pool and tennis courts, she knew immediately it was the place for her.
"The color of the tile they'd put in blends in with the colors in my dining set," she says. "All my furniture is oak; the cabinets were oak, the door was oak, the railings are oak. It was as if my furniture belonged in here."
A former homeowner, Lunn had the money for a down payment on the $500,000 condominium. But having recently divorced, she was reluctant to spend it all and leave herself without a financial cushion.
One day over lunch her friend Denise Holley suggested she call Ken Beasley, a partner with the Danville-based Home Equity Group. In short order, Lunn had entered an equity sharing arrangement with an investor who put in 10 percent down to match her own 10 percent contribution. They agreed to revisit the deal after three years.
"If the market is good at that time, then I'll refinance," she says. "If it's not so good, then we'll extend the agreement so it benefits both myself and the investor."
Denise Holley had firsthand experience with equity sharing. She and her husband Mike had bought a house in San Ramon with Beasley's help 15 years earlier. Back then, as newlyweds with a blended family, they were eager to leave behind their old towns -- Antioch in her case, Hayward in his -- for what they were convinced was a better community.
"Basically, it allowed us to live where we wanted to live and have a home we would not have been able to afford otherwise," Mike Holley says.
As he watched the value of his house skyrocket during the late '90s and early 2000s, Holley became so enamored of the equity sharing concept that he became an investor himself. He's chipped in on eight properties in the last five years, he says.
"I was able to buy my wife a new Lexus, right? I paid for the car with cash. I bought myself a new Harley-Davidson. And I got no complaints."
In another typical arrangement, Dottie and William Mattos contributed a 20 percent down payment of $35,000 on a new house in Portland for Michael and Tina Ferguson. Listed as co-owners with the Mattoses, the Fergusons lived in the house and paid the mortgage. Per the terms of the contract, after three years they reassessed: Refinance and buy out the Mattoses, or sell the house and split the profit? In either case, the Mattoses stood to triple their money and the Fergusons stood to gain full ownership of the house they were in or about $40,000 cash for a new down payment. Like most people who have bought through equity-sharing agreements, they've decided to try to refinance.
Equity sharing works best, of course, when the market is strong and both parties can realize a considerable return on their investment. But because lending practices have been so loose, equity sharing hasn't been that popular in the most recent boom cycle.
San Francisco real estate attorney Andy Sirkin says home equity sharing becomes more attractive when the buying gets tougher, like it is now with the zero-down hangover.
"When down payments are higher and underwriting guidelines are stricter, then buyers who are financially weak need more assistance," he says. "In those periods we see higher volume with equity sharing."
Trouble comes when the market is too hot or too cool. When prices are climbing too rapidly, homebuyers can't afford to buy out investors and are forced to sell instead -- in which case they almost certainly cannot afford to buy in the same neighborhood. That can be disruptive, especially with kids in the picture.
On the other hand, if homes are appreciating too slowly, a homebuyer will find insufficient equity in the house to buy out the investor, while selling yields too small a return to be of much use.
In the absolute worst-case scenario, housing prices fall, leaving homebuyer and investor yoked together in misery.
Langholz acknowledges that buying a house with a stranger and hoping to ride the market to riches in tandem is hardly a risk-free venture. But in almost all cases it beats the alternative.
"Even if they equity share for five years and the market stays flat and they get zero price appreciation, they're breaking even," he says. "That would still be better than if they were losing it on rent."
The newly divorced, the self-employed, buyers with shaky credit, renters who want to buy the house they're in and homeowners who face default are prime candidates for home equity sharing. What they all have in common is that their limited incomes or credit histories make banks nervous.
Those things make individual investors nervous, too. So a watertight agreement that protects both parties is key.
Marilyn Sullivan, a Pismo Beach (San Luis Obispo County) attorney and partner in Langholz's venture, has done 5,500 successful equity-sharing agreements since stumbling onto the concept in 1981 as she was trying to buy her own first home. A loan calculator she created, plus a model contract, are available at homeequityshare.com.
Sullivan has long been a big believer in home equity sharing, but she feared it wasn't getting the attention it deserved. When Langholz called her last November with his idea for the Web site, she was ecstatic.
"I said, 'Oh, my God, this is exactly what I needed to do,' " she recalls. "I felt I had taken this to a certain place, but people were missing out on the whole marketplace of being able to hook up with each other."
Langholz compares his Web site to Prosper, the person-to-person lending Web site that started in February 2006. It allows people, regardless of credit rating, to post the amount they'd like to borrow so lenders can bid on it, eBay-style. Prosper has facilitated more than 11,000 loans totaling $61 million.
Prosper co-founder and Chief Technical Officer John Witchel says these community-based models of doing business have important implications for the economy.
"The thing we talk about internally, it's kind of schlocky, but we talk about that great scene in "It's a Wonderful Life" where Jimmy Stewart is at the teller window and there's a run on the bank, and he's saying, 'The money's not in a safe or in a vault or in the basement, it's in your neighbor's house, it's in the farm down the road, and we all have to work together to make it work. And if not, Mr. Potter's coming to town.'
"We'd like to see a return to a way of life where people are standing up for each other," Witchel says, "and they're not naïve about it and they're not idealistic about it. We believe people are good."
Truthfully, it doesn't take a heart of gold to lend a stranger a hand when it's going to double or triple your money. One of the more slippery aspects of equity sharing is its contribution to the rich-get-richer cycle; it works disproportionately in favor of investors simply because it takes money to make money, and they have it. They can compound their advantage by playing hardball in negotiations with desperate first-time buyers; for example, by demanding a 60 percent share of the house and equity. Indeed, 50 percent is quite common.
So it comes back to the agreement, hammering one out that rewards the investor for taking a risk and rewards the homebuyer for taking on the burden of fixing toilets and maintaining a lawn.
Langholz warns that even under the best agreement, homebuyers might wince when it comes time to split the equity on a house where they've been living, decorating and gardening. But as a first step it's worth it, he says: Statistically, people who buy real estate are worth seven times as much money at the end of their lives as those who don't.
It's his way of trying to bridge the widening gap between the classes.
"We want to democratize real estate wealth," he says, "because we're becoming a country of haves and have nots."
Traci Hukill is the managing editor of Metro Santa Cruz. She lives in a rented house in Monterey with her boyfriend and their cat.
BY:Traci Hukill
VIA:www.sfgate.com
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