This Startup Wants to Help Teachers Buy Homes—But There's a Hitch
By now, it's old news: Many teachers can't afford housing on their salaries. Their options generally include finding cheap housing far away from school and suffering a long-distance commute, getting a second job, or leaving the profession.
For West Coast teachers who can't afford to buy homes, a San Francisco-based startup called Landed has another option: The group will foot up to half of the down payment on a home for a teacher. The hitch? The teacher must come up with the other half—10 percent of the sale price in a high-cost area—and pay that back plus 25 percent of the profit upon selling the home.
The startup has partnered with 35 school districts and counting in the San Francisco Bay area, Los Angeles, and Denver, and is expanding thanks to financial backers like the Chan Zuckerberg Initiative, as reported in this Education Week article highlighting housing benefits for educators ranging from tiny homes to teacher villages.
Home prices in the areas where Landed operates are nothing to sneeze at. The median price for a home in the San Francisco Bay area last month was $825,000, up 15 percent from the same time last year, according to the Mercury News. The median public teacher salary in San Francisco is about $68,000, according to Salary.com. Over the summer, the median home price in Denver hit $424,500, up nearly 8 percent percent from the previous year, according to the Denver Post, while the median salary for a Denver public elementary teacher is about $57,000.
For the teacher who can manage half of a 20 percent down payment, here's how Landed works. A teacher wants to buy a home priced at $800,000. Landed puts up $80,000, half of the down payment of $160,000. Down the road, when the teacher sells the home, she'll repay Landed its half of the down payment. But she will also fork over to Landed 25 percent of the profit earned in the sale.
If the home loses value, Landed shares in that loss. Let's say the home loses $100,000 in value. Landed shoulders a quarter of the loss, or $25,000. So if Landed put down $80,000 for the initial downpayment, the company will only recoup $55,000.
Now let's say the teacher never plans to sell the home. In that case, she'll have to repay Landed before the end of the investment term, between 10 and 30 years, usually by taking out a new loan, according to the company.
Landed puts the repaid down payment and the 25 percent profit into a pool that will be used to fund future teachers' down payments.
So how does Landed make money to pay its investors? Real estate agents representing the buyers pay Landed a part of their sales commission as a sort of "finder's fee," according to Alex Lofton, the startup's cofounder. That's the company's main source of revenue. Landed also charges its investors up to a 1 percent fee to cover the accounting and auditing costs of setting up a fund, but Lofton said this fee doesn't net the company a profit.
"Our goal isn't to be a hedge fund," he told Education Week. "We aren't trying to make all of our money off of the investment. Our interest is to operate more as a brokerage and focus on the relationship to the homebuyer. The more homebuyers we can support, the more we can grow the company, which then makes us more interesting to our corporate investors."
So far, Landed has helped 25 teachers cover down payments. Lofton sees the company as just now taking off, since by mid 2017 it had only helped five teachers. But Lofton expects that by the end of the year Landed will be in several other cities like Seattle; Boston; New York City; Austin; Washington, D.C.; and several others.
Still, not everyone is convinced of the virtues of mortgage-assistance companies. As Liana Loewus reported in this Education Week article on teacher-housing incentives, some worry that privately funded teacher-housing initiatives like Landed end up benefiting investors rather than actually helping teachers. Michael Hickey, president of United Teachers of Santa Clara, said these kinds of companies are "trying to find a way to make money off a situation that's wholly unjust in the first place" because teachers are underpaid.
One commenter on a Mercury News article took offense to the idea of teachers having to share the profit on their home in exchange for the down payment help: "Come on, the ultra-rich getting a 25 percent ownership stake in a house for a 10% investment???? While I applaud their stated intent this seems to be put together by people not used to doing the right thing for others. Why not simply take the 10 percent ownership they are paying for in the down-payment? REALLY bad optics and taking advantage of the working class to further their own image."
To be fair, Landed's help allows teachers to avoid paying monthly mortgage insurance (PMI), the penalty for fronting less than 20 percent of the down payment on a home. And just as Landed shares in the profit, the company also agrees to share a portion of the losses in the sale, should there be any. (It's worth noting, though, that the cities the company is planning to operate in are all pretty safe bets for housing investments.)
Landed's impact investors see themselves as doing a service, according to Lofton. "[The investors'] main metric," he says, "is 'I am interested in retaining great talent and that helps schools. If this fund performs as it is supposed to then I am meeting my impact goals. On the financial side, the fund can keep growing with appreciation and I'm getting a fee paid by Landed to us for borrowing this money.'"
For Hickey all of this talk of down-payment assistance misses the larger point: educators should be paid more rather than receive subsidized housing or mortgage help. Some of the commenters on news articles on Landed agree, calling for teachers to get salary bumps instead. Others questioned how teachers could possibly benefit from the Landed program, considering that even a 10 percent down payment could prove too heavy a lift on a teacher's salary.
Even some in the business agree. Jacalyn Gallegos, a loan officer at Hallmark Home Mortgage in Colorado posted this comment on an article about Landed on Colorado Public Radio's website: "Most teachers that are clients of mine aren't able to come up with the 10 percent. Most fall into our lower down payment option programs. So while I do think this is a great idea in theory, I'm not sure it's a viable option for a lot of clients. Ten percent down on a $400K house is still $40K, plus closing costs and prepaids is conservatively another $5K."
Lofton acknowledges that for many teachers saving even just the 10 percent down payment is a burden. "One hundred percent, there is no way of getting around that this is hard," he said. "But the reality is we do have buyers, single- and dual-earner educators. They're able to do it. Homeownership has been their goal for a while, so they've been saving for their down payment and working to get to a debt-to-income ratio that will qualify them for a mortgage, paying down car loans and their student-loan debt. Some, even with all that, have to seek financial help from family members."
So what's your take on Landed's mortgage assistance for teachers? The comments section is open.
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