Major corporations raise capital by selling shares in themselves. So do companies with little or no substance behind them. Even startups sometimes "go public" before they really start up. So why can't America's homeowners?
They can. In yet another new twist on the age-old concept of shared appreciation, they soon may be able to raise money for a down payment, or build up enough equity to jettison a higher-rate mortgage for a less expensive one, by "selling" shares in their homes.
Under the plan on the table from PRIMARQ, a San Francisco-based marketplace facilitator that acts much like a stock exchange, owners or buyers would decide what share of the gain in the value of a house -- or of the loss, if values tumble -- they would like to sell to investors.
If, say, you want to buy a $300,000 house, the requisite 20 percent down payment would be $60,000. If you were short half of that sum, you could sell "shares" in the place to raise the necessary funds. Or, if you are underwater and need $30,000 in equity so you can refinance into a loan you can afford, you could sell shares to investors willing to gamble that you can sustain yourself going forward.
Using the PRIMARQ platform, you would list your shares for sale at $10,000 each. And investors would bid on those shares -- each $10,000 unit of currency called a "Q" -- based on any number of variables, including location and anticipated rate of appreciation.
A good property in a sound location in a desirable part of the country would tend to draw more or higher bids than those in other places. And once PRIMARQ takes a 5 percent share for its troubles, you get the rest.
You can live in the property as long as you like; there is no minimum requirement. But once you sell, you fork over the investors' share of the profits -- maybe 40 percent of the gain for a 20 percent share -- and off you go. If there is a loss, you and your investor split that in the same way.
During the time you own the house, meanwhile, PRIMARQ intends to make a market for the shares you sold off, either to one individual or perhaps several, again at $10,000 a crack. The shares can and will be traded among investors, so the ones who were with you in the first place may not be there at the end.
An investor might want to cash out midway through your ownership. Maybe he's found a better place than housing to stash his cash, or perhaps his circumstances have changed. But no matter, you are not impacted in any way. Whether investors resell their shares or hold them, you can go on living in the place as long as you like.
PRIMARQ calls its program a market-based "fresh approach" to bringing private capital into residential real estate, which is perhaps the country's largest asset class. Founder and CEO Steve Cinelli calls it a "paradigm shift" in housing finance.
Whether that is true remains to be seen, for the company has yet to do its first deal. And it's not like there aren't plenty of low-down-payment loan products available on the open market.
Company spokespeople say the initial transaction with a yet-to-be identified "lending partnership" is imminent. But until that deal is announced, there are many unanswered questions.
For one thing, will mainstream lenders warm to the idea that borrowers have less of their own money invested in the property? When hard times hit, banks worry, it could be easier for borrowers to walk away.
Another concern: Will people use the concept to purchase more house then they can afford? And then, there's this: Giving away appreciation is an expensive way to obtain funds for a down payment.
On the flip side, though, you can save a lot of money if you allow investors in on your deal. Say, for example, you can come up with just a 15 percent down payment on the $300,000 house you truly covet. That's $45,000. Typically, with anything less than 20 percent down, you'd have to pay for private mortgage insurance (PMI). So your payment for principal, interest and PMI on a 30-year, $255,000 loan at 4.25 percent (including closing costs) would be $1,686.
Now suppose you use PRIMARQ to raise half of a 20 percent down payment, or $30,000. You'd save roughly $15,000 in cash out of your own pocket because you'll be putting up $30,000, not $45,000. Not only that, but your loan amount would be $240,000 and PMI would no longer be required. So your monthly payment would drop to $1,505. That's a difference of $180 a month.
For that $15,000 you needed from investors to make the deal happen, you might have to give away a 35 percent stake in any gain you realize during the time you own the house.
If you want to sell in five years and the place has grown in value at a 4 percent clip per year, the house would be worth roughly $365,000. You'd owe the lender $217,662. Less that and an estimated $21,900 in selling expenses and you'd be left with $125,500 or so to split with your investor.
Here's where it gets tricky, though, because first the investor would get back his $30,000 initial investment and you'd get back your $30,000 down payment. That leaves $65,000 to be shared, 35-65, or $22,900 to the investor and $42,100 to you.
Now add them together and that's $42,100 plus $30,000 to you, or $72,100. And it's $30,000 plus $22,900 to the investor, for a total of $52,900.
If there's a loss, meanwhile, you have the same percentage split. So if you sell your $300,000 house for $270,000, the lender still gets his $217,662 and you'd still have $21,900 in selling costs. That leaves proceeds of $30,438, or $19,800 or so to you and $10,638 to the investor.
As always, the devil is in the details. These are rough approximations based on an example supplied by PRIMARQ. But the big question is, should you -- can you -- bite the bullet now by making a larger down payment and living with a larger mortgage payment? If you can, you retain all of the gain on the eventual sale, not just a part of it.