The average salary of a teacher in the United States was approximately $61,730 last year. This can make homeownership in high cost areas a challenge.
Here is a chart from Curbed:
Landed is trying to solve this problem by offering downpayment assistance to “essential professionals” — starting first with teachers — so that they can buy homes in and near the communities that they serve.
The way it works is pretty simple.
They’ll contribute up to half of a traditional 20% downpayment — so 10% of the value of the home — in exchange for a 25% share in any future gains, or losses.
Put differently, for every 1% that Landed contributes, it takes 2.5% of any future appreciation (or depreciation). However, on an equity basis, they are actually putting up 50% of the required cash (in the maximum scenario) in order to get 25% of any future gains.
There’s no monthly payment associated with Landed’s money, but it does need to be repaid at the end of 30 years or when the homeowner exits the agreement, whichever comes first. Homeowners are free to repay Landed at any time should they decide to sell the property or they just want to pay them out.
Landed pitches the service as another version of “the bank of mom and dad.” And for many prospective homeowners, I am sure that it makes all the difference in the world.
At first glance, it would seem that each homeowner also benefits from a kind of positive leverage. They only put up 50% of the required equity, but they get to enjoy 75% of the potential gains. However, each homeowner is also responsible for 100% of the carrying costs.
I ran a couple of quick return scenarios, assuming a $500,000 purchase price and a 10 year hold, in order to test whether Landed or the homeowner would receive a higher IRR once the property gets sold.
I didn’t carry any transaction costs, but I did factor in principal recapture, as well as utilities, insurance, and maintenance.
My rough numbers suggest that it depends on the annual rate of appreciation. If appreciation stays close to the rate of inflation, it could tip in favor of Landed because they don’t put out any money after t = 0.
But at higher rates of appreciation, the homeowner starts to benefit from the favorable 75/25 split at the end of the hold period.
Either way, Landed is providing a service to people who may not otherwise be able to afford to buy a home. That has value. Here’s some more information on how it works, in case you’re interested.
Options for Homes does the same thing in Toronto and it’s offered to everyone + they only take 10% equity if they lend 10%. With the City of Toronto further topping up Options’ program for first time home buyers the down payment available for every unit at The Humber Condos is now 20-24% for those who qualify and need help closing the gap between their mortgage pre-approval and the price of their home. This helps secure a conventional mortgage that saves hundreds in monthly carrying costs. Would love for you to run the numbers on the Canadian model. Full disclosure I’m the Director of Sales and Marketing at Options 😉
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Thanks Mary! Can you email me some more info? I’ll run the numbers 🙂
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