Home equity co-investing pioneer Unison cut almost 50% of its team Friday, and no, this doesn’t mean housing and fintech doom for two reasons.
First, cost-cutting is crisis leadership 101.
React fast and smart. Job and budget cuts are extremely painful for all souls involved. And fear is the first reaction among team members, investors, boards, counterparties, and customers. But nerves calm down as people digest smart rationale.
Second, survival is job No. 1 in a crisis.
We started March 2020 evangelizing industry visions from bright conference rooms and ended it triaging careers and companies from crowded kitchen counters. Vision means nothing if you don’t survive, and the bigger your vision, the faster you must adjust in a crisis.
Fast adjustments buy you time to weather today’s coronavirus storm.
Two weeks ago, category-leading iBuyers made hard, fast decisions to win the long game.
Friday, co-investing (aka shared appreciation) category leader Unison cut 89 sales and marketing employees, contractors, and consultants for the same reason.
Is Shared Appreciation Your Coronavirus Home Equity Solution?
Unison created the shared appreciation category in 2004.
Companies like Unison, Point and Noah (formerly Patch Homes) give a homebuyer about half their down payment in exchange for about a third of the appreciation.
Homebuyers who give up some future appreciation conserve cash now and don’t take on the extra monthly cost. But the more interesting play right now is shared appreciation for homeowners.
Let’s say a homeowner with some equity loses their job because of coronavirus.
A lender can’t do a home equity or cash out deal for them, but they may qualify for a shared appreciation deal.
Unison and the other players look at debt-to-income ratios, but they’re not making a loan, they’re making a co-investment.
So they may do a deal like this if the equity profile works long-term (and they may require their cash to pay off other debt at funding).
Here’s Noah CEO Sahil Gupta on helping coronavirus impacted homeowners:
“Today, the coronavirus is shutting down entire industries; we are already seeing more homeowners turning to Noah for help,” Gupta said. “Noah is dedicated to being a long-term partner to homeowners by making our products more accessible during this time so we can put even more money in their pockets.”
Like everything in a crisis market, it’s case by case, but lenders should keep an eye on this for clients who need to tap home equity at zero monthly cost.
It could be a great niche-y solution in a tough market phase.
And shared appreciation companies that survive have huge potential later because about 65% of U.S. home equity is owned by folks 55 or older –– these people need a way to tap equity without breaking monthly budgets.
Can Shared Appreciation Companies Win The Long Game?
So will shared appreciation companies survive?
Many of you mortgage folks reading this are saying “Nope, the model won’t weather a down cycle.”
That’s your transactional revenue brain talking.
Unison makes transactional revenue as each deal funds, plus they make recurring revenue by managing a shared equity portfolio for the investors who fund their deals.
But their investors aren’t warehouse lines like mortgage banks use to fund deals.
Pension plans and other institutional money managers who want housing exposure give Unison money to manage.
Unison invests that money in people’s homes using these shared appreciation deals and takes an investment management fee for doing so.
This fee revenue continues even as home buying transaction revenue slows to a trickle. So they trim sales and marketing until transaction revenue comes back.
Who Will Survive The Short Game?
It’s another story if the coronavirus causes massive home price declines over the years.
And there’s certainly strain right now. Here’s Point CEO Eddlie Lim on stark realities:
“The growing number of necessary shelter-in-place orders has had a widespread effect on many people and industries,” Lim said. “It affects our ability to order appraisals, notarize documents, and record crucial documents with the county, causing delays throughout our process. The changing economic climate is also dramatically impacting home valuations. We are seeing valuations drop significantly and continuously.”
But it’s still early to accurately predict home price impacts and when home transactions resume a normal pace. Which brings us back to where we started.
It’s tempting for some to predict doom for fintech models like shared appreciation and iBuyer when they see stark adjustments to stark reality.
But cost-cutting is crisis leadership 101, and survival is job No. 1 in a crisis.
Mortgage lenders learned how to fight this kind of fight in August 2007. Now it’s the fintechs’ turn. And I predict we’ll see some true warriors emerge.
Good luck out there.