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Thread: Would you trade price appreciation for a chunk of your down payment?

  1. #1

    Default Would you trade price appreciation for a chunk of your down payment?

    I recently came across the scheme at Landed.com that is a twist on traditional CLTs. Essentially, they're a new matchmaker that sets up private capital to fund local housing as an investment. The idea is that they'll fund up to half of a 20% downpayment (i.e. 10% of the purchase value) and you won't owe them a dime. But when you sell, they get back their money along with 25% of the appreciation in the home value in the meantime.

    It's currently aimed at teachers in California but they're looking to expand and I know that some people in my neighborhood are talking of setting up something for a broader array of young professionals because of the utter dearth of affordable housing. What do you guys think? Would you trade a quarter of your real estate appreciation in exchange for help on your downpayment?
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

  2. #2
    SEÑOR Member Aimless's Avatar
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    In reality: no. We own 85% of our home and will likely own 70-80% of our next home if/when we move. The solution you describe isn't lucrative.

    In theory: no.

    In the event that your home depreciates in value, unless the investor actually pays you back 25% of that, he isn't really sharing much of the loss as the website claims, but definitely taking a substantial cut of the profit in the alternative scenario. The investor is taking a minimal risk. He might lose 10% of the value but you're the one with with a larger mortgage than you probably want to have. In the event that the value of your property goes up, if other properties see a commensurate appreciation of value, you'll be at a greater disadvantage than you would've been otherwise.

    The site isn't very clear about this but it looks like it may be the investor who has the final say on when/if the property is sold. This is a problem if the investor's and the buyer's interests aren't aligned. For an investor to break even, the price would have to rise a great deal, which may be longer than the buyer can wait.

    On top of these problems, there is the possibility of perverse incentives if the investor happens to have some influence on planning policy etc. eg. a municipal/County/state govt.

    So it's a no for me. Obviously there are some situations where this would be good for all parties, but the risk is definitely not shared fairly.
    “Humanity's greatest advances are not in its discoveries, but in how those discoveries are applied to reduce inequity.”
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  3. #3
    This only sounds like its worth it for people who are coming from nothing but moving into an extremely well paying job. Sign up for this program, make bank, pay off home asap, sell to family member for pennies, pay off minimal appreciation.
    "In a field where an overlooked bug could cost millions, you want people who will speak their minds, even if they’re sometimes obnoxious about it."

  4. #4
    Administrator Dreadnaught's Avatar
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    Maybe there's some appeal for senior citizens? Some may care less about home appreciation and more about the price stability and configuration flexibility offered by owning a home versus renting (I realize this is not necessarily always the case and is highly depending on a lot of factors, including local market conditions).

  5. #5
    Quote Originally Posted by Ominous Gamer View Post
    This only sounds like its worth it for people who are coming from nothing but moving into an extremely well paying job. Sign up for this program, make bank, pay off home asap, sell to family member for pennies, pay off minimal appreciation.
    I think this is explicitly forbidden. They have various (somewhat vague) safeguards in place to prevent abuse. While they don't in any way control when you sell your house, I think they have some control over things like selling an artificially discounted home to a conspirator.

    I think this actually makes sense for two kinds of homeowners: either modestly paid professionals who have good long term career prospects but are short of capital now - it will take them forever to get enough capital for a down payment in an expensive area, but their steady income is enough to cover a decent mortgage. The other category is similar to what you suggest, the HENRY (high earner, not rich yet) who doesn't want to wait a few years before being able to afford a house. Here the argument is that you save a few years of rent and lost appreciation by buying now what is likely a starter home, so your lost 25% of appreciation doesn't sting as much when you sell in 5 years.

    The thing that sticks for me is that 80% of a lot is still a lot. Sure, you get help on the down payment, but my fundamental dilemma where I live is that even if I had a 20% down payment, covering the mortgage payments on a home that costs well over $1 million is pretty challenging, even with two reasonably well paid professionals. In that case, the only real option is to start small and move up the housing ladder by using appreciation and (modest) principal payoffs every ~5 years to upgrade. While taking the 10% to jump start the process is nice, it cuts into your ability to quickly upgrade without paying the investors off early.

    On a whim I put our income information into their calculator, and they claimed I could afford a ridiculously expensive home with their service. It was an obvious overstatement of reality - the mortgage payments alone would have crippled our budget and left no room for, say, childcare. Combined with a lot of uncertainty about some handwaving in the small print (e.g. they do valuations to determine how much improvements you put in change house value, the details of early payoff are quite unclear, etc.) it leaves me less than excited.


    Quote Originally Posted by Dreadnaught View Post
    Maybe there's some appeal for senior citizens? Some may care less about home appreciation and more about the price stability and configuration flexibility offered by owning a home versus renting (I realize this is not necessarily always the case and is highly depending on a lot of factors, including local market conditions).
    Honestly it sounds like a really bad idea for senior citizens. I really don't think it makes sense for senior citizens to take on a lot of debt to finance their housing. I'm actually well disposed toward reverse mortgages, but that's kinda the reverse.
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

  6. #6
    Senior Member RandBlade's Avatar
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    To me this sounds like an intriguing scheme for First Time Buyers who are struggling to get a deposit and want to get off the property ladder and stop paying rent.

    Don't just look at the cost and opportunity cost of losing the appreciation ... but also look at the opportunity cost of years of paying off somebody else's mortgage by renting in order to build or deposit (or never being able to and a lifetime of renting).
    Quote Originally Posted by Ominous Gamer View Post
    Being upset is understandable, but be upset at yourself for poor planning, not at the world by acting like a spoiled bitch during an interview.

  7. #7
    Quote Originally Posted by RandBlade View Post
    To me this sounds like an intriguing scheme for First Time Buyers who are struggling to get a deposit and want to get off the property ladder and stop paying rent.

    Don't just look at the cost and opportunity cost of losing the appreciation ... but also look at the opportunity cost of years of paying off somebody else's mortgage by renting in order to build or deposit (or never being able to and a lifetime of renting).
    Not disagreeing, but actually in a lot of expensive areas (where this is most valuable), the price-to-rent ratio tends to favor rentals over even relatively long periods.
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

  8. #8
    Senior Member RandBlade's Avatar
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    Interesting, not in this country it doesn't.
    Quote Originally Posted by Ominous Gamer View Post
    Being upset is understandable, but be upset at yourself for poor planning, not at the world by acting like a spoiled bitch during an interview.

  9. #9
    Its been brought up a few times over the years on this board. Dread's original refusal to believe it is what I marked mentally as the starting point for his downfall into whatever he has become.

    While I don't have the original fancy research we shared before, this is a quick video from a basic google search.
    https://www.cnbc.com/2017/04/07/here...-us-state.html
    Last edited by Ominous Gamer; 12-07-2017 at 05:59 PM.
    "In a field where an overlooked bug could cost millions, you want people who will speak their minds, even if they’re sometimes obnoxious about it."

  10. #10
    Senior Member RandBlade's Avatar
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    Not got time to see the video but I'd be curious to see the working out and especially if they've included capital repayments as a cost in home ownership.

    I know my mortgage is ~£340 per month with interest of about £100 in that, but to rent my house would cost ~£700!
    Quote Originally Posted by Ominous Gamer View Post
    Being upset is understandable, but be upset at yourself for poor planning, not at the world by acting like a spoiled bitch during an interview.

  11. #11
    Senior Member GGT's Avatar
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    I'd be leery. What if the home doesn't appreciate but loses value? You'd still be on the hook for paying back that initial 10%, plus the mortgage, even if it's underwater. And I wonder if a bank would be eager to approve a large mortgage, if the down payment comes with a lien like that?

    It's a shame that "the utter dearth of affordable housing" leads to financial schemes like this....instead of more affordable housing.

  12. #12
    Quote Originally Posted by RandBlade View Post
    Not got time to see the video but I'd be curious to see the working out and especially if they've included capital repayments as a cost in home ownership.

    I know my mortgage is ~£340 per month with interest of about £100 in that, but to rent my house would cost ~£700!


    You spend $460/month on housing? Damn.

    As for price-to-rent ratios, there are fairly sophisticated models that take the total cost of homeownership (including taxes, maintenance, mortgage, etc.) and compare it to the cost of a rental, minus the forced savings caused by paying down principal. Obviously the numbers are variable, especially because of the mortgage interest deduction that varies with your tax bracket and unknown property appreciation and inflation, but given reasonable assumptions quite a number of cities in the US have unfavorable price-to-rent ratios. The longer you hold onto your home, the better chance you have of coming out ahead, but in many models you always end up behind no matter how long you hold it.

    Quote Originally Posted by GGT View Post
    I'd be leery. What if the home doesn't appreciate but loses value? You'd still be on the hook for paying back that initial 10%, plus the mortgage, even if it's underwater. And I wonder if a bank would be eager to approve a large mortgage, if the down payment comes with a lien like that?

    It's a shame that "the utter dearth of affordable housing" leads to financial schemes like this....instead of more affordable housing.
    They share in the loss as well - they get 25% appreciation, but subtract 25% of any depreciation from the initial 10%.

    Oddly enough, I actually agree with your last point. I think that addressing financing is a bandaid for the real problem, which is constrained supply. I think that the relatively wealthy members of my community should work on lobbying the local government to ease planning restrictions.




    Tonight, I went to a session some people organized with a rep from Landed. It was a fascinating crowd - about a third of the crowd was my friends, all professionals in their 20s and 30s who are essentially hopeless about the chance of buying in our neighborhood. The other two thirds was an older crowd, mostly people I knew who were much more established and interested in this as an investment (as well as a community initiative to make it easier for people like me to buy). The funny thing, though, was that all of the young crowd ran the numbers and realized that even with 10% 'free', we still wouldn't be able to buy. There was some discussion of upping it to 20% - i.e. the fund puts in 20%, we put in 10%, and we take out a mortgage on 70%. But if we're talking about a million dollar mortgage (on a $1.5 million home, which is probably a smallish 3 BR here), then adding up property taxes and the like and you're talking nearly $8k/month. That's simply unworkable when you factor in that most of us are paying tuition for 1-3 kids (figure $25k/year/child), are saving for retirement (figure minimum $36k/year), and actually need to pay our taxes and insurance premiums and grocery bills. Figure a family of 4 would be easily clearing 30k a month in spending/taxes. That means you'd need a minimum of $360k annual household income, which while feasible for two professionals is awfully hard to swing for most people. If you cut that mortgage down to a $4k rental in a 3BR, you'd suddenly have a bit more breathing room - not much, but at least some.

    Long story short: it's not really the downpayment that's the problem - that just delays the purchase. It's the mortgage that can't be carried.
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

  13. #13
    Senior Member GGT's Avatar
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    I think the real problem is that owning a 'modest' home costs over a million dollars! That's not only unsustainable, it's practically obscene.

    Probably not ironic that the test market is for teachers in CA....where the housing market has been over-inflating for decades, public employee pension plans are underfunded, and property taxes can't fill the gaps. As a general rule, most people in your demographic (young professionals with young children) buy a home for the school district. But that just highlights the problems that come with coupling public education with home ownership....

  14. #14
    Senior Member GGT's Avatar
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    This is only anecdotal, but I recently sold my home (the place I bought for the best public schools for my kids). While the property gained value over time, after the money I put into it to keep it maintained, plus some updates, I basically came out even. And I'm okay with that - I wasn't looking to flip it for profit.

    The school taxes doubled in the 15 years we lived here. I watched as elderly home owners *had* to sell, because they could no longer afford the rising property taxes. Sure, there were always new buyers, and some didn't even care about the high school taxes, and sent their kids to private school. But there's a curve that becomes a limit, and we're getting there fast.

    I found a nice apartment where the rent is roughly what I paid in property taxes. Granted, it's 1/3 the size, with no garage or yard, but it's in the same damn school district! I will have the same public services at a much better price, as a renter. Looking back, I realize the reasons I bought a home were more cultural than financial. There was a stigma about being a renter vs an owner, even tho the real owner was a bank

  15. #15
    Senior Member RandBlade's Avatar
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    Quote Originally Posted by wiggin View Post


    You spend $460/month on housing? Damn.
    Is that good or bad? My house was £124k to buy.

    As for price-to-rent ratios, there are fairly sophisticated models that take the total cost of homeownership (including taxes, maintenance, mortgage, etc.) and compare it to the cost of a rental, minus the forced savings caused by paying down principal. Obviously the numbers are variable, especially because of the mortgage interest deduction that varies with your tax bracket and unknown property appreciation and inflation, but given reasonable assumptions quite a number of cities in the US have unfavorable price-to-rent ratios. The longer you hold onto your home, the better chance you have of coming out ahead, but in many models you always end up behind no matter how long you hold it.
    I'd like to see the working out. Do you have taxes that apply to homeownership? Here all property taxes are paid by the property occupier not the owner, do you tax the landlord there?

    One other factor to remember is that rent typically goes up every year whereas your mortgage (barring rate changes) is fixed at the time of purchase. If property doubles in value over a decade then ten years later you're holding an asset that's doubled in value but still paying based on the original price - if you're renting then your landlord will have asked for rent increases repeatedly over that decade. If you're looking at the interest-only part of the mortgage as the cost then as you've spent a decade repaying your interest part will have gone down.
    Quote Originally Posted by Ominous Gamer View Post
    Being upset is understandable, but be upset at yourself for poor planning, not at the world by acting like a spoiled bitch during an interview.

  16. #16
    I'm on mobile, and may have more to add later, but I own and I pay 1700 a month right now, including property taxes and insurance. It can, and has gone up, based on property taxes, in a few years I'll be able to get it down some when I drop the mortgage insurance I believe.
    "In a field where an overlooked bug could cost millions, you want people who will speak their minds, even if they’re sometimes obnoxious about it."

  17. #17
    Senior Member RandBlade's Avatar
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    Again do property taxes apply to the owner rather than the occupant there?

    Council Tax is paid by the resident not the owner in this country. The owner is only liable for Council Tax (our version of Property Tax) if the property has been unoccupied for 6 months or more from memory.
    Quote Originally Posted by Ominous Gamer View Post
    Being upset is understandable, but be upset at yourself for poor planning, not at the world by acting like a spoiled bitch during an interview.

  18. #18
    Owner, fall behind on paying and you could lose your property to someone who pays them instead (after a long process).
    "In a field where an overlooked bug could cost millions, you want people who will speak their minds, even if they’re sometimes obnoxious about it."

  19. #19
    Senior Member RandBlade's Avatar
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    That changes the cost/benefit dramatically then. Since all taxes are paid by the occupant here the only ongoing cost other than mortgage interest is maintenance.
    Quote Originally Posted by Ominous Gamer View Post
    Being upset is understandable, but be upset at yourself for poor planning, not at the world by acting like a spoiled bitch during an interview.

  20. #20
    Quote Originally Posted by RandBlade View Post
    Is that good or bad? My house was £124k to buy.
    That is incredibly good. Median home cost in my state is $400k, and that includes all sorts of dirt cheap rural areas.

    I'd like to see the working out. Do you have taxes that apply to homeownership? Here all property taxes are paid by the property occupier not the owner, do you tax the landlord there?
    There are a variety of models out there. The better calculators allow you fine grained control over e.g. opportunity cost returns, property taxes, etc. Lots of media organizations do this as well - IIRC the Economist runs a house affordability index every few months for major cities and there are a lot of others out there.

    As for taxes, there are two basic kinds of taxes: The tax you might pay on capital gains upon selling your home (there are some exceptions for a primary residence, though) as well as annual property taxes you must pay irrespective of whether you live in the home. This typically comes out to ~1% of the assessed value each year, though there's a great deal of variation across municipalities in the US. If you're renting, you're not directly paying the tax though obviously it gets factored into the rent you pay.

    One other factor to remember is that rent typically goes up every year whereas your mortgage (barring rate changes) is fixed at the time of purchase. If property doubles in value over a decade then ten years later you're holding an asset that's doubled in value but still paying based on the original price - if you're renting then your landlord will have asked for rent increases repeatedly over that decade. If you're looking at the interest-only part of the mortgage as the cost then as you've spent a decade repaying your interest part will have gone down.
    The calculators account for this as well as net present value arguments. In many cities in the US it still isn't 'worth' it.

    There are still intangibles that can make it a good idea rather than just looking at the dollars and cents, and it's possible to find bargains. I certainly plan to become a homeowner at some point, mostly because the availability of decent rentals in the larger sizes I'll need eventually just aren't that easy to find - that and it's nice to be able to modify (or build) a home to meet your particular needs, rather than feeling unable to change even small things without getting approval from a landlord.
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

  21. #21
    Senior Member RandBlade's Avatar
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    The tax system there is what makes it seem like a completely different system. Here there is no capital gains tax on your primary residence (a complete blanket exception) as well as our version of property tax being levied on the resident not the owner.

    "An Englishman's home is his castle" still has a very big ring to it here, the current government lost its majority due to a very unpopular "dementia tax" that would have taken money from people's home to pay for their care only after they died.

    Our homes are somewhat equivalent to your guns. A government that tries to touch them does so at grave danger and unpopularity.
    Quote Originally Posted by Ominous Gamer View Post
    Being upset is understandable, but be upset at yourself for poor planning, not at the world by acting like a spoiled bitch during an interview.

  22. #22
    Most people don't pay capital gains tax on their homes because there's a pretty big exemption on the size of the profit that is untaxable from the sale of your primary residence - $250k for single filers, $500k for couples. There's some rules about what constitutes a primary residence, though, and how things work out for multi-unit dwellings that you live in. And if you live somewhere expensive for a good long while, you might fall afoul of the exemption limits.

    I'm not really sure I understand how the English/British attitude towards homes translates into levying property tax on residents vs. owners...?
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

  23. #23
    Senior Member RandBlade's Avatar
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    There's no cap on primary residencies here, it could appreciate by millions of pounds and there'd still be no CGT.

    I'm suggesting that putting taxes (or even things perceived to be taxes) on homeowners here would be about as popular as gun control is over there.
    Quote Originally Posted by Ominous Gamer View Post
    Being upset is understandable, but be upset at yourself for poor planning, not at the world by acting like a spoiled bitch during an interview.

  24. #24
    Administrator Dreadnaught's Avatar
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    Quote Originally Posted by RandBlade View Post
    Is that good or bad? My house was £124k to buy.
    We still have massive housing inflation in many parts of the US. Much of this is driven by bad government policy that subsidizes housing debt. This is why we need tax reform; to deflate housing prices in high-tax areas.

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