Jeff Uter would have needed to sell stocks or pull cash out of his consulting business to afford the down payment on a $780,000 home in Orange County, Calif. Instead, he paid half of the 20 percent required and got the other $78,000 from San Francisco-based real estate investment companyFirstREX. In exchange, FirstREX will get 40 percent of any gains in the value of Uter’s four-bedroom condo in a golf course community when it’s sold. “I have stocks and my own business,” says Uter. “I’d rather invest in that than put it in a personal residence.”
As house prices rise and lenders want larger down payments, FirstREX started this year trying to profit by striking deals with home buyers who need extra cash. “Houses are really affordable right now because interest rates are low, even after the recent runup, but housing is not that accessible,” says FirstREX Co-Chief Executive Officer Jim Riccitelli. “If you can’t get the house, affordability doesn’t really matter.”
Backed by pension funds and endowments, the company is operating in high-end markets in California, Washington, and Oregon, where its customers’ average house price is $800,000. It also plans to find banks to work with in Massachusetts and Connecticut, according to Riccitelli, who declined to disclose how many deals FirstREX has made so far.
Housing prices in the U.S. soared 12.4 percent in July from the year before, the biggest gain in seven years, according to the Standard & Poor’s/Case-Shiller Home Price Index of property values in 20 metropolitan areas. They remain 21 percent below their 2006 peak. In San Francisco the median sales price from June through August was $850,000, and in New York City it was $1.1 million, according to real estate website Trulia.
Many banks won’t give mortgages to buyers who must borrow part of their down payments unless they get the money from a relative or certain nonprofit housing programs that help low-income buyers. FirstREX has persuaded several banks, including Pacific Trust Bank (BANC), First Republic Bank (FRC), and HomeStreet Bank (HMST), to let it participate in deals. Even those with very good credit and “very good cash flow” may have to make down payments of 25 percent or more, says Jeff Seabold, managing director of residential lending at Pacific Trust.
Loans known as shared-appreciation mortgages were available in the U.S. starting in the 1970s, according to a 2007 paper written for the Fannie Mae Foundation. The study suggests that such loans may offer investors poor returns because “the incentive to use these mortgages is highest among those expecting no price appreciation and those intent on” staying in their homes “as long as possible.”
FirstREX gives buyers a maximum of half of their down payment. The homeowner has the option to buy equity back from FirstREX before selling. The company gets its money back plus its share of any profits when the house is sold. It also shares in any losses.
Founded in 2004 by Thomas Sponholtz, a former executive at Barclays Global Investors, FirstREX previously offered existing homeowners a way to tap their equity without taking on new debt by selling a stake in their homes. The company ended the program after property values collapsed in 2008. Sponholtz sees the current approach as a more efficient way to invest in housing than buying homes to rent them out, a strategy Blackstone Group (BX) and other big investors are pursuing. “Operating costs are very, very low because the homeowner is really the property manager,” Sponholtz says. He declined to say how much money FirstREX has to invest in down payment deals.
Home buyers who want help from FirstREX go through a process similar to applying for a mortgage. Uter, who bought his California home in March, says he had enough money for a down payment after selling his previous property but preferred to go after higher returns. He’s not concerned that he’s sacrificing potential gains on his home: “We’re going to stay for a while,” he says.