Helping Homeowners Access Home Equity Without Debt

When it comes to purchasing a home or attempting to take equity out of a home in cash form — there aren’t an awful lot of options. Debt, by and large, is the option the vast majority of consumers have.

And this, Unison CEO Thomas Sponholtz told PYMNTS in a recent conversation has pretty much been in its terms of innovation in the world of homeownership financing since the mortgage was invented in 1192.  But he noted, Unison was founded under the belief that innovation could be incorporated — and that there should be options other than taking on debt when it comes to accessing the equity in one’s home.

“What Unison is really doing is exactly what has been happening in all other asset classes around the world, which is to offer customers an option to buy and own a combination of debt and equity when they finance and own the house.”

Unison offers its services to both potential homebuyers and homeowners with equity in their properties.  For homebuyers, Unison allows them to take on the level of debt they are most comfortable with and then turn to Unison as an equity partner or a co-investor that will pick up a piece of the purchase price of the house, in return for a share of its future value. For homeowners, he noted, Unison will purchase a share of the equity they have in their home already in return for a lump sum cash payment and the right to participate in the future change in the value of the house.

If the house goes up in value, Unison’s equity share increases in value; if it goes down, its share does too.  In either case, Sponholtz explained, unlike other home refinancing products that are essentially a loan, this is not. There are no payments, interest or obligation to repay the principal. The arrangement is built purely around the value of the house itself over time. And other than the standard restriction that homeowners can’t move to intentionally lower the value of their home — something no sane person does anyway — Unison is a silent investment partner who only reappears at the time the house is sold, or if the consumer chooses to buy it out of its stake after three years.

Unison makes it money day in and day out, he noted, because all of the equity stakes in the home market it has purchased, are organized into a fund it manages — one designed for hedge funds, pension funds and other long term institutional investors who, in Sponholtz’s description, have spent a long time trying “to figure out how they can get long-term exposure to this asset class called residential real estate.”

Unison offers them that access point at a time when the product they offer has become particularly relevant to the market’s needs.

Alleviating The Pressures Of The Present

Homes in the last three months have assumed a very different status in people’s lives than they held before. Once the place to go when the day ended, now houses are pulling multiple duties as where their owners work, live, eat, entertain themselves and educate their children. Unsurprisingly at present, he noted, people are looking around at their homes and realizing they need to invest in improving it and getting it up to the task of its current roster of duties.

At the same time, Sponholtz noted, consumers’ financial futures are looking less certain to them, as unemployment levels grow and the nation’s economic future looks increasingly precarious.

“That means that we’re certainly seeing homeowners, seeking other financing options, rather than just piling on a bunch of debt that they might not be able to afford because if they can’t afford the debt, they also lose the house and losing a house now, as painful as it was during the last crisis is now even more painful. There’s where your work is, where your shopping center is. Where you teach your kids and where you work out. All of that falls apart.”

Consumers, he noted, in this financial downturn were pegged by a black swan event in the form of a global health crisis. The last financial crisis was kicked off by structural flaws in the real estate market that left people underwater on loans they were unable to manage.

That has presented Unison with structural challenges in trying to bring its product to market — as the words “innovation” and “residential real estate financings” still tends to make people nervous. However, he said, Unison’s product is premised by the idea that consumers should be able to bring down that debt in a way that moves the risk in the investment to someone better equipped to handle it — namely a long-term investor. And at a time like this — when there is a host of reasons consumers might need to put their hands on the equity in their home, Unison can offer them a way to do that without putting their ownership of their most valuable asset in jeopardy.

“So we’re seeing a lot of that consumer behavior changing,” he said. “People being more conservative, but also needing more space and looking for ways to finance it. So that impacts our business, of course,  in a very positive way, because we really want to be that, that rational alternative to just taking on more and more debt and enabling the consumer to strike the right balance between debt and equity so they can do the things they really need to in their lives during this challenging time.”

But, Sponholtz noted, what has been an unexpected tailwind for Unison in its attempts to crack the residential real estate market with innovation, has on the whole been a headwind that has set the economy back on its heels.  And as they were studying the future of the real estate market — to better advise the clients that invest with their fund — they realized that the road to recovery is going to be much longer for some.

The Broader Outlook

Joining the discussion at this point was Unison’s Vice President of Research Brodie Gay, who noted that as an equity investment shop, Unison spends a fair amount of time making sure that the residential real estate they are investing in is going to perform. Which, he noted, means looking at and cross-referencing stunning amounts of data: local income levels, rate of income growth and data released by the Bureau of Labor statistics. And while that information is certainly valuable when it comes to evaluating investments — this incredibly granular view they have of areas and how people in those areas are employed by industry and income level — might just have “much more value to society beyond just investing in residential real estate.”

“We were thinking that this is something that, you know, public officials, people should know about, which areas are more vulnerable than others … potentially we can … constructively react to this, or be proactive in terms of investing and helping areas that are more vulnerable,” Gay noted.

Which is why, he noted, they’ve publicly released their report on regional “job resilience” and what its likely effect on recovery in those locations will be — dividing America’s cities into locales that are “resilient” and likey to recover more quickly,  and those places that are “vulnerable,” where the rebound will likely be slower.

Some of the data, Gay said, was unsurprising: cities like San Francisco, New York and Boston will be particularly resilient because of the high percentage of jobs in areas like technology, academia and medicine that have been fairly resistant to the economic downturn. Then there have been locales like Detroit, which have been hard hit and have seen a blossoming economic recovery disrupted just as it was hitting its stride, but as some areas of economic diversity that is pulling it through. However, he noted, there are also places like Las Vegas and Miami — both highly dependent on tourist dollars and incredibly economically vulnerable. The data shows some surprises like San Diego, which takes in far more tourist and event dollars annually than most people realize, that find themselves, and their large service sector employed populations, suffering from being very vulnerable given the current slowdown.

Merely being vulnerable, Gay noted, is not an omen of doom for a locale, so much as it is a call to action.

“Vegas, and  for example Miami, they can get ahead of this, if they react properly, but to invest as an investor — going in there right now you’re gambling on on a fast recovery because of proper policy and  good local investment.”

However, as both Gay and Sponholtz noted, the future for investors in real estate and beyond is, in some sense, a gamble now because so much is unknown, and so much of the economy is undergoing a fundamental shift. Before the current crisis ever began, the ability of consumers to purchase a home and access the equity in it was an issue. The global crisis and the way the home has shifted to be the central location of most of a consumer’s activity have only brought those issues to the forefront.