How they work, advantages and disadvantages

  • Home equity splitting involves selling a portion of the future appreciation in your home to an investor.
  • These agreements have no monthly payments or interest.
  • You can use them to leverage the equity in your existing home for cash or to cover the down payment to buy a home.

Home equity can be a valuable financial tool. You can borrow against it using traditional products like home equity loans, cash refinances, or home equity lines of credit. Or, with new tools called home equity split agreements, you can even sell part of it if you need the cash. Home equity sharing can even cover some of the costs of buying your home in the first place.

What is home equity splitting?

Home equity sharing is when you agree to share in the appreciation of your home’s value. In exchange, you receive a lump sum payment that you can use to cover expenses or, in the case of first-time buyers, use as your


advance payment

.

The idea of ​​shared equity is not new, but it has become more popular in recent years. Several companies offer home equity sharing agreements that can be used to leverage home equity, buy a home, or both.

“Although equity sharing has been around since 2005, it has grown in popularity over the past five years,” said David Shapiro, founder and CEO of equity sharing company EquiFi. “The most widespread use of equity splitting products is for existing homeowners looking to access some of the equity in their home.”

Home equity sharing agreements do not require payments and do not charge interest. This sets them apart from other home equity products, such as home equity loans and home equity lines of credit (HELOC).

“Equity share products are used to finance a home and are an alternative to borrowing,” says Shapiro. “These products aren’t loans, don’t charge interest rates, and don’t have monthly payments. Instead, they share the home’s savings with the homeowner when the contract ends.”

How does home equity splitting work?

The specific process for sharing equity in a property depends on the company you are working with. Typically, they will appraise your property and then make you an offer: X amount of money in exchange for X amount of equity, plus a percentage of the future appreciation of the home.

“We have a third-party appraiser who looks at the home and determines its value,” says Matt O’Hara, head of portfolio management and research at Unison, a home equity sharing company. “Based on that, we offer up to 17.5% – or up to $500,000 – of that value to the owner. If they accept, they can use the money as they see fit.”

Homeowners don’t make any payments until they sell the house or their contract term ends (30 years in Unison’s case, 10 years for some others).

“They pay us back that initial amount plus a percentage of the change in value of the house,” says O’Hara. “If the house goes down in value, the payment to us goes down as well. We only win when our owners do.”

Which companies offer home equity splitting?

You won’t find home equity sharing arrangements at your local bank or credit union, but many private companies offer them. Some call themselves “co-investors”, since they are investing in the future growth of your home.

Here are some of the companies that enter into home value sharing agreements:

  • Unison: Based in San Francisco, Unison is a home value sharing company in business since 2013. It operates in 28 states and Washington DC.
  • EquiFi: In business since 2015, EquiFi offers home equity splitting for both buyers and existing owners. The company is based in San Jose, California, and serves customers in that state of California (although 16 more states are in the works). It offers home value sharing agreements with no set repayment terms.
  • Welcome: Hometap is a new Boston-based home value sharing company. The company has been in business since 2019 and offers stock split agreements in 18 states.
  • Indicate: Offering equity sharing options for buyers and owners as well as HELOCs, Point operates in 17 states and Washington, DC. It is based in Palo Alto, Calif., and has been in business since 2015.
  • Open: Launched in 2021, unlocking is one of the latest home equity sharing options. The San Francisco-based company also offers partial buyouts, which allow you to spread your repayment over 10 years.

Not all companies operate in all states, but most allow you to check property eligibility on their website. As O’Hara explains, “Homeowners can enter their home address on our website and see whether or not they qualify and receive a free estimate – with no risk to their credit or obligation to upgrade. ‘next step.”

Advantages and Disadvantages of Splitting Home Equity

The biggest advantage of home equity sharing is that it’s not debt. There are no monthly payments, no interest, and you can use the funds as you wish.

Equity sharing agreements may also be easier to qualify than a loan. For example, home equity sharing company Unlock allows credit scores as low as 500. With a home equity line of credit, you can expect to need at least a 620 score to qualify.

On the other hand, sharing the future value of your home could be costly, especially if your home appreciates a lot during the term of your contract. Also, most stock-sharing companies require you to pay them back in a single payment at the end of your term. This can result in a large expense all at once.

Home equity splitting is also not available everywhere. And many companies won’t get involved with rental properties, second homes, investment properties, multi-family homes, or more unique homes.

“Have you ever seen one of those ‘House Hunters’ episodes where one of the houses has an artificial grass putting room or a huge hot tub in the middle of a hot pink carpeted room? The owners in possession such unconventional residences may not be able to partner with us,” says O’Hara.

Example of splitting home equity

Here’s a look at what getting a home equity split deal would look like as a homeowner:

You complete an application with the home equity sharing company of your choice. They would send a professional appraiser to appraise your property and then make you a formal offer.

If your home was valued at $500,000, for example, they might offer you 17.5% (Unison’s maximum investment) – or $87,500. At the end of your 30-year tenure, they’ll want that $87,500 back, plus a percentage of the net worth you’ve gained during that time. If the deal was 20%, for example, and the value of your home went from $500,000 to $700,000, you would owe them an additional $40,000 (200,000 x 0.20).

You can also choose to sell your house before the end of this 30-year period. If so, you will need to repay the equity sharing company in your property from the proceeds of your sale.

Maria D. Ervin