Sharing their appreciation

“All my savings would go to the down payment, so I gave up thinking I could buy,” she said. 

One morning, while listening to the radio, Chan heard about the Dream for All program, the statewide program run by the Department of Housing and Community Development. The program first rolled out in 2023 and is known as a shared appreciation plan. While the state and some local governments provide down payment loan assistance, the shared appreciation model started gaining more traction several years ago and provides interest-free assistance in exchange for receiving partial appreciation in the home. 

The program is for first-time buyers, within certain income limits, offering up to 20% of the housing costs, $150,000 at most, to go toward down payment or closing costs. Upon sale or transfer, the buyer repays the original loan amount, in addition to 20% of the appreciation of the home. 

“It’s meant to go toward a large chunk of the down payment or closing cost assistance because that’s what a lot of people really need to make that jump from renting to home ownership,” Eric Johnson, spokesperson at California Housing Finance Agency, said.  

In San Mateo County, however, a 20% down payment could easily reach $400,000. Even though Chan and her husband were selected as one the Dream for All participants, they had to leave the Peninsula, eventually settling on a 1,500-square-foot, two-bedroom, two-bathroom townhome in Dublin, which also happens to be closer to her husband’s job. 

“It was a little challenging to find a house,” Chan said. “I tried to look at condos in San Bruno, but the HOA fees are so expensive, and I thought, ‘If I get this chance, I really want my dream house.’”  

Various programs

The state, along with many municipalities, offer various homebuying assistance programs, including for down payments, however, equity sharing is extremely rare in the public sector, in large part due to the high upfront costs. But they tend to allow for a higher amount of down payment assistance, compared to traditional loans, and it also tempers risk, which can be appealing for middle-income earners.

“If something catastrophic happened, and if we had a huge downturn in home prices in California, like what happened back in the late aughts, then that might be a challenge for some people,” Johnson said. 

About $300 million was allocated for the first phase of the program — which went to about 2,000 homebuyers — with $220 million and $300 million allocated for the second and third phases, respectively. Demand was so high that the state had to greatly narrow its eligibility criteria starting in the second phase. Now, participants must also be a first-generation homebuyer, meaning their parents do not currently own a home in the United States. 

While the large scale of the program is unique, the shared appreciation model is not new. Several health care and academic institutions in the area, including Stanford University, offer similar benefits, including shared equity, to current and prospective employees to boost recruitment and retention.

“For a lot of high-value physicians or faculty, it’s part of the compensation package to retain the talent, just because the cost of housing is so high and it’s important to these institutions that they have the best people working there,” Compass Realtor Raziel Ungar said, who has worked with several clients who have used housing assistance tied to their employers. 

While such employees may earn substantial income, their salaries don’t tend to increase at the same rate as other lucrative and dominant industries in the area, such as technology.  

Private interest waning

More private companies also started selling shared-equity programs around 2018, peaking around 2023. Companies like Landed offered equity shares to public school teachers, funded largely by institutional investors, including small- to medium-sized pensions and endowments. But as interest rates started rising in 2023 and investors became more wary of allocating too much capital into the national real estate market, interest waned. For those investors still interested in real estate, the focus shifted more toward single-family home rentals, in part to be more adaptive to economic and market fluctuations.

After several years of offering the shared appreciation program directly to homebuyers, Landed now only offers it directly to employers that are less focused on return on capital and more on employee retention and recruitment. 

Homebuying assistance programs touch on a key concern as the state pushes to build more housing in recent years. The new housing development is crucial, but it hasn’t focused as much on the increasingly narrow access to homeownership — especially for middle-income households — as most of the new units built in places like the Bay Area are rentals. 

“There are so many people in their 20s and 30s that are making $200,000 or $300,000 a year that can make the high mortgage payments, but they have no savings,” Veronica Mora, senior loan officer at New American Funding, said. “It’s such a good thing, because it’s getting you into a house today with a good down payment that’s going to give you a lower mortgage payment, and the equity is starting to build from day one.”

But running such programs are extremely capital intensive, and the returns are oftentimes not worth private investors’ while. And at the same time, one expert, who preferred to remain anonymous, said public entities don’t have the capital needed to sustain these types of shared equity programs long term, stating they often die out after several years when agencies realize the scale of the operation.  

Benefit for government

California’s Dream for All is considered the most ambitious, publicly-run program of this kind in the country and has already gone through different iterations, as funds were quick to run dry during the first round.

“In the first round, all the funds were allocated in about 11 business days,” Johnson said. 

Leading the charge on such a big undertaking naturally comes with risk. The idea is that the program eventually becomes self-funding as the state starts receiving payments, which it can then use to reinvest and expand to more prospective homeowners. But that depends on how long it takes for program participants to start selling or refinancing in some cases. Chan, for instance, plans to be in her townhome for a long time, with no plans to sell any time soon. 

Robert Pedro, owner of Signature Realty, said he’s confident that while there are many who see the houses as their forever home, enough participants use it as a way to finance their second house, as the Dream for All Homes tend to be on the smaller side.

“The product itself will force them out, in a good way. Many times, they’re going to stay there long enough to get a down payment for the next place,” he said. “Some will stay forever, but as long as 10% a year are turning over, it doesn’t matter how many stay forever.” 

Even if the shared equity programs don’t yield high returns for the public or private agencies running them, Pedro added there is immense value in the state generating more home sales, given the lack of supply in the single-family home market.

“It’s not a huge money maker but it’s creating those transactions, and the transaction is where the government benefits,” Pedro said. 

Private interest could rekindle

If more of these types of programs start showing promise, private investors could start to reassess interest in the coming years. After all, while investing in rental homes provides the flexibility to respond to market changes — as owners can adjust rates based on real time supply and demand — it also involves steep operational costs, he added.

“If the entity is invested in California real estate, they get the appreciation, and they pay none of the bills,” he said. “If they were a typical real estate investor, they’d have management expenses and all kinds of taxes to pay to run a regular operation.”

For homebuyers, sharing the appreciation isn’t appealing at first glance, especially in areas that have consistently high appreciation rates. But for many middle-income residents, it provides an “in” to homeownership where it otherwise wouldn’t exist.

“This is my dream come true,” Chan said.