What if, instead of taking out a home equity loan from a bank, you could ask Wall Street to invest in your house?
You’d get cash upfront, and if the value of your home went up, the investors would get their money back, plus a profit. If the value of your home fell, the investors would earn less or maybe even absorb a loss.
That’s the idea behind a new crop of venture-backed startups hoping to make money by betting real estate values will continue to climb in selected markets around the country. It’s called “equity sharing,” and the entrepreneurs behind these companies say it serves an unmet need for homeowners who want to capitalize on their biggest asset — without selling or taking on monthly loan payments.
“They’ve got this value, but they can’t touch it,” said Jeffrey Glass, a veteran tech executive and CEO of Hometap, a Cambridge startup that recently began offering equity sharing in Massachusetts. “People are house-rich and cash-poor like never before.”
But consumer protection advocates say selling a piece of your home to investors raises complex questions, for both homeowners and financial regulators.
The investments must be paid back when the home is sold or within a set time period — often 10 years. Homeowners who don’t have enough cash to repay the money could wind up taking out loans or being forced to sell their houses.
The deals could be complicated for consumers to understand and vary widely in their structure, with some companies taking a percentage of any gain — or loss — in value after they made their investment, and others entitled to a share of the overall home value at the end of the term.
But what they have in common is that, unlike with loans, their total cost is determined by unpredictable housing market forces. Homeowners who see big gains after taking an equity investment could wind up paying more than twice what they received.
Some industry observers worry that equity sharing could provide an end-run around the tight lending standards put in place after the 2008 subprime mortgage collapse, which help determine whether borrowers can meet the obligations they are taking on.
Because shared equity products are described as investments, rather than loans, purveyors argue that they are not subject to the huge array of licensing and reporting requirements that apply to home equity loans, home equity lines of credit, and reverse mortgages.
“When you’re dealing with primary residences, that’s a situation that could have potential lifetime repercussions,” said Scott B. Astrada, director of federal advocacy for the Center for Responsible Lending. “Some of the models I’ve seen raise a lot of questions and concerns that we don’t have answers to yet — and I don’t think anyone does.”
He also questioned what would prevent the companies from ignoring low-income, minority, and rural communities that have seen slow growth in real estate values following the Great Recession.
The state Division of Banks said it is reviewing the new products. The state Securities Division, which regulates investments, said shared-ownership arrangements may also fall under its purview, but it declined to comment on whether it had taken any action.
There is little data on how common equity sharing has become. But it is drawing considerable interest from financial backers. Hometap, which recently raised $12 million in venture capital, was launched last month. Point, based in Silicon Valley, said it has taken in $15.4 million, plus $150 million for investments. And Unison Home Ownership Investors in San Francisco has raised $40 million and plans to invest more than $300 million.
Eoin Matthews, cofounder of Point, said he believes the industry is carrying out thousands of transactions per year. And he expects that to accelerate quickly.
“I would say by this time next year there will probably be thousands of transactions a month, still not huge in the mortgage space, but it starts to feel like a real product at that point,” he said.
Investment firms say they can cut a check within weeks, with payments ranging into the hundreds of thousands of dollars. The size of the deals generally cannot exceed the amount of equity clients have in their homes — that is, the current market value minus the balance of their mortgages.
John Moses, 39, of Chelmsford, found Unison last year while he was looking for a way to free up about $50,000 to invest in a health care startup without going into debt. After a series of discussions with his wife, the two decided to sell a piece of their home to Unison.
The couple bought their 1970s gambrel-style house in 2010 for about $350,000. By the time Unison had it appraised, the value had risen by nearly 30 percent.
Moses estimates that he will make enough from the startup to pay the home investor back in three years — the shortest time allowed under his contract. Unison allows its clients 30 years before they have to repay the investment, longer than some of its competitors.
He said that when he repays Unison, the company will be entitled to its principal plus a 10 percent share of any change in the value of his house.
Moses realizes that the cost of the investment could potentially outpace any gains from the startup, but he said he’s confident he’ll come out on the winning end.
“It was a really big deal to own a house. And those are big things you think about when you’re making a financial decision and you’re leveraging capital in something you own and you have an emotional attachment to,” Moses said. “But at the end of the day, a home is still an asset.”
For Tyler Newcomb of Centerville, the calculation was simpler. The cash is more valuable to him now than it would be later. He used a Unison payment to pay off an unexpected tax bill and to have more cash on hand.
“I feel much more comfortable with extra money in the bank,” sad Newcomb, 69. “I should be retired, but I still work, and it’s nice to have that cushion.”
Hometap provided the Globe with the following example of how an investment might work:
The company invests $100,000 in a home valued at $1 million. If the home value rises to $1.3 million after 10 years, Hometap would get 15 percent of the sale price, or $195,000, nearly doubling its money. If the value declines to $900,000, Hometap would get 12.5 percent of the sale price, or $112,500.
Hometap said it arrives at the percentage rates when it makes the investment, and they are based on a variety of factors, including how much cash a client accepts, the type of property, and economic trends in an area. Like most of its peers, Hometap also charges closing fees when the investments are issued.
Holden Lewis, mortgage analyst at the financial site NerdWallet, said people
who try equity sharing are taking on a big financial risk because they cannot know the cost of the deal until repayment is due.
By contrast, the cost of a standard home equity loan is transparent: The interest on a 10-year, $100,000 loan at current rates would be about $36,000, Lewis said.
But home equity loans normally require monthly payments — shared equity does not.
Rick Sharga, a real estate industry veteran and the vice president of Carrington Mortgage Holdings in California, said regulators will soon begin to take a greater interest in the products, especially as they begin to grow more common.
“This could be the best deal ever,” he said. But Sharga said the uncertainty of a new industry could also lead to problems. “You don’t know what you don’t know.”