People who don’t want to take out a loan on their house may opt for co-investment offered by a startup specializing in real estate. (Shutterstock)

People who don’t want to take out a loan on their house may opt for co-investment offered by a startup specializing in real estate. (Shutterstock)

Beware of investment trends that may threaten homeownership

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Everybody’s got their hang-ups. Here’s one of mine: I don’t like big investors. When they start snapping up real estate, I get nervous.

Have you heard? Big investors are snapping up all the real estate. I’ve heard that the new paradigm says renting is freedom, but I’d be careful what you wish for.

First, the obvious: according to Redfin, institutional buyers, which include Big Bads like BlackRock but also darlings like Zillow and OpenDoor, spent $77 billion on residential property during the first six months of 2021. That’s $22 billion more than they spent during the second half of 2020 which, even if you adjust for COVID limitations and freakouts, is still eye-opening.

They weren’t just buying apartment buildings, either; approximately 65 percent of that dough was used on single-family residences.

Meanwhile, Jeff Bezos just tossed $37 million at a company called Arrived Homes, a start-up promising to “expand home ownership” by offering minority ownership in rental properties for as little as $100. It’s a very interesting concept for investors, giving almost anyone the chance to become a minority landlord, but if it works, if Arrived Homes is a smash hit and everyone involved gets rich, what’s that do to small landlords?

They’re already strapped because of COVID. What happens if Arrived buys enough properties in one city to control the market? What’s to stop them from manipulating rents to undercut small property owners and force them out? Or pushing up rents to create more profits for investors (who are basically shareholders)?

I’m not saying they’ll do that. Arrived might be conceived as a force for good. I hope so.

Then last week, a new angle: Unison, a San Francisco-based start-up specializing in real estate “co-investing,” announced that it had secured $210 million in funding. Apparently, when I wasn’t looking, co-investing became all the rage in real estate and I kind of get it. It’s a pretty intriguing concept.

Here’s how it works:

If you already own a house and you’ve got equity — and Unison says rising home values have created an extra $7 trillion of homeowner equity in the U.S. — but you don’t want to refinance because you either missed the low interest rates or you don’t want to make mortgage payments, Unison (and other co-investment companies like Noah and Haus) will step in and offer up to 17.5 percent of your home’s assessed value, but not as a loan — as an investment.

Unison has not offered you a loan; it has purchased 17.5 percent of your property. There are no payments. You pay them back when you sell your home.

If this sounds like free money to you, pump the brakes. There are always risks, and co-investing comes with plenty of them. Almost all of them are on the back end.

Ah, yes. The back end. When it’s time to sell your house, Unison is the ultimate silent partner. You foot all the sales costs. You pay the taxes. After that, you pay Unison, anywhere from 20 to 70 percent of the difference between what your home was worth when you took on a co-investor and what it sells for, however many years later. That can add up in a place like San Francisco.

There are other caveats. If you fail to maintain your home, the loss in value is on you; your original agreement includes a Deferred Maintenance Adjustment. If you go into foreclosure, “Protective Advances” (Unison essentially pays to keep your home out of foreclosure) add to what you’ll owe when you sell. Other scenarios — if you die, if you live in your home for more than 30 years after taking on a co-investor — are similarly tricky. The good news, though, is if 2008 happens again, and the market tanks just as you’re ready to sell, your co-investor shares the losses with you.

I don’t mean to make co-investing sound like something that happens between Paulie Cicero and the owner of the Bamboo Lounge. Unison isn’t going to eventually torch the place. I really do think co-investing is an interesting idea that can work for some homeowners. But I’d advise anyone entering into a co-investment arrangement to be very aware that this isn’t a loan. You’re taking on a partner and giving up part of your investment. Eventually you’ll be paying that partner a total that may or may not be more than you’d have owed if you’d taken out a loan.

Ultimately, the part that gives me pause has nothing to do with whether Unison, Arrived Homes, OpenDoor or even BlackRock are ethical companies or grifters. It’s not who they are, it’s what they are. I’m not waving the flag in celebration of any trend that gradually takes home ownership away from individuals and gives it to investors.

Larry Rosen is a San Francisco-based writer, editor, podcaster and recovering former Realtor. He is a guest columnist and his viewpoint is not necessarily that of the Examiner. The Market Musings real estate column appears every other week.

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