Private home living room, decorated in brown and blue colors

Is Silicon Valley Making Home Ownership More Affordable?

I am always following new technology entering the real estate space to see how it will help our clients or assist my team to do our jobs better (I hope to have more opportunities to write about real estate and technology in the future). Recently, I came across a unique online platform that local Silicon Valley venture capital firm, Andersson Horowitz, invested in called Point.

The basic premise of this start-up is that people don’t have to own their entire home to live in it. By owning a fraction of your home (i.e. 85%) you’ll lower your down payment and monthly mortgage expense. Point will buy the remaining equity and make money on the home’s appreciation when sold. Point’s “ownership” isn’t on the home’s title, but rather recorded as a Deed of Trust and Memorandum of Option on your property and in the event of default, Point can exercise the option and initiate a sale. As Point explains, this tool will be beneficial for both homeowners and investors, that can diversify their real estate holdings:

“Using technology, Point brings diversification to residential homeowners (diversify out) and investors (diversify in). It’s not like a home equity line of credit (HELOC) or a mortgage with monthly payments; it’s an aligned investment — that is, equity. It’s rethinking the fundamentals of residential real estate ownership — making single-family residential real estate a liquid, tradeable asset class.”

In theory, this concept is a very good idea. It is a win-win for everyone. Though equity sharing isn’t a new concept, it is probably the first on-line platform available to homeowners and investors. Since I’m not familiar with Point’s actual policies and underwriting practices, several issues come to mind:

1. Appraisal – before an agreement is complete, both Point and the homeowners must agree on the value of the home. The price paid by the owner doesn’t mean that’s what the house is worth. If the owner “overpaid” for their home, will Point buy a portion of the sales price or the market value price? On their website, Point sends their appraiser, which already questions their objectivity. Additionally, they would adjust the home’s value based on assessed market risk. So automatically, any homeowner will be selling a portion of their home at a discount.

2. Value-Add – If the owner decides to expand or remodel the home, does Point get a pro-rata share of the added value? Per their website, their percentage of ownership will include any value-add projects done on the home. Basically, Point will benefit from the upside without paying any additional money.

3. Point doesn’t pay their pro-rata share of insurance, property tax, and maintenance. It is all up to the homeowner to make sure the property is well managed. Conversely, if the property is rented out, the owner will reap all the benefits from the income the property produces, without sharing with Point.
Currently, Point doesn’t have a product for purchasing a home but are working on it. When buyers can start using Point to purchase homes the number of eligible buyers increases, pushing up demand.  Though this will help many first-time home buyers with their down payment, more buyers in the market will increase home prices. Essentially, people will be paying more for less home.

Despite some drawbacks of using Point, there are times where Point could be beneficial–particularly for first time home buyers trying to participate in the benefits of owning real estate (capital appreciation, tax incentives, etc.) It allows first time home buyers to get in the action and to build wealth without putting themselves in burdensome financial commitments. Second, it is a good way to enter prestigious school districts without paying exuberant housing prices for a particular city. For example, entry-level home prices in Palo Alto are about $2 million. A family can now buy and live in Palo Alto for a lot less money and send their children to the top-rated school district.

I’m interested to see how this company will be accepted by current homeowners, particularly in the Silicon Valley. And when a product for first-time buyers comes out, I’m curious to see how the market will respond.

If you’d like to understand the economics of home ownership feel free to visit our website to learn more about how we can help you buy or sell your Silicon Valley Home, as well as build your passive income real estate portfolio for retirement. Also, please join us for our real estate seminars held each month in Palo Alto. Don’t forget to look at our Yelp page to see what clients are saying behind our backs!

urban_admin 2017/02/23 0


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