Company will chip in $250K to help you buy a home ... but there’s a catch

The expansion of a real estate co-ownership" business into Hamilton is giving would-be buyers another path to home ownership by offering down payment help in exchange for a large chunk of equity.

Ourboro will kick in up to $250,000 toward a down payment and, in turn, they profit by taking a big cut of any increase in value of the house the next time it is sold.

Experts say the additional liquidity can be the difference to purchasing a home in the city or neighbourhood they want, but they also warn that the investment model is skewed in favour of the investors.

The Toronto-based company manages a fund of real estate investors that would rather help people become homeowners than be landlords," according to the company's chief product officer, Alex Kjorven. Ourboro, which is expanding from its home market across Ontario, including Kitchener, Waterloo, Guelph, and London, takes investors funds to deploy them in down payments," Kjorven says. So far, about $5 million has been invested by the company into real estate purchases in the GTA since January 2022, according to a recent media release.

How it works

Homebuyers who need down payment help could turn to Ourboro to invest between 25 and 75 per cent of their down payment - five to 15 per cent of the purchase price - up to $250,000. In return, Ourboro gets an equivalent share, 25 to 75 per cent, of the equity of the home.

The benefit, according to Ourboro, is that it helps buyers boost their down payment to 20 per cent, providing savings on default insurance and interest, while lowering monthly payments.

When the home is resold down the road, the buyer gets back all the money they spent on mortgage payments. But the funds spent on the down payment and the value that the home has appreciated is split, relative to the percentage each party spends on that payment.

For example

Buyers Freddie and Fannie are looking to purchase a house for $600,000 and they have a five per cent down payment of $30,000. They could ask Ourboro to invest $90,000, bumping that down payment up to 20 per cent and lowering the mortgage amount from $570,000 to $480,000. In five years, after paying off $50,000 of their mortgage, they decide to sell. Freddie and Fannie's house appreciates in that time, hits the market and sells for $750,000.

In this simple, hypothetical case: the buyers walk away with the $50,000 they paid into their mortgage, $30,000 from their down payment, and $37,500 in capital gains from the value the home has appreciated, minus fees and taxes. Ourboro gets back their $90,000 investment on the down payment plus - because they paid three-quarters of the down payment - the rest of the $112,500 in capital gains for their share of the sale proceeds.

Why not CMHC?

The federal government has a similar program offering down payment contributions to first-time homebuyers, run by the Canada Mortgage and Housing Corporation (CMHC).

They're trying to leap frog" on CMHC's first-time homebuyer incentive, says local mortgage agent Steve McKay, however there are a few key differences.

When CMHC gives you five per cent toward the purchase, they are asking for five per cent of the growth," McKay said. In a 50-50 deal, McKay says the private investment firm is taking 10 times the stake of what CMHC is doing."

A major issue with the CMHC model is that it is difficult to meet all the restrictions, said McKay, who works at the Personal Mortgage Group. CMHC only offers assistance to those with an annual income under $120,000 and for houses priced lower than the local average. I have not been able to get that program to work with a single person yet," he added.

In the case of CMHC's shared-equity mortgage, like a reverse mortgage, the loan goes against the property as a registered lien.

The catch

McKay calls co-ownership a very confusing term, because co-ownership means you own the property with somebody else and that's not actually what's happening. They're not going to maintain the property. They're not going to live there."

If I co-bought' with somebody and we were pooling our resources we would be co-responsible' for all of the afflicts of co-ownership and all of the costs and everything," he added.

The devil would be in the contract that comes with it," says Marvin Ryder, an associate professor of marketing at McMaster University's DeGroote School of Business. Buyers also have to anticipate when bad thing happen to good people," Ryder says.

Kjorven says Ourboro has programs to help buyers who are in acute financial distress ... to help them avoid situations (where they would) default on their mortgage."

The downside makes our model more valuable," she says, because the buyer is sharing in the potential equity, (Ourboro is) also sharing in that loss" if the house drops in value.

However, Kjorven says, they don't anticipate the houses they've invested in dropping in value.

Ourboro only invests in properties they believe have long-term appreciation potential," Kjorven says. And she said, they work with buyers looking for a starter home, not a forever home."

Intrinsic to our product is that as soon as the buyer knows they want to stay in that home longer, it is in their best interest to buy out Ourboro's share as soon as possible. The longer they wait to buy us out, the more expensive it's going to be to finance that buyout."

For buyers, McKay, the local mortgage broker, says, having the ability to buy a place for $650,000 instead of $500,000 is the difference between neighbourhoods. It's the difference between school catchments. There is a real benefit there."

Buyers going into a deal looking for a long-term home have to go in with their eyes open, Kjorven says, knowing they have the capacity to buy Ourboro out, for example, if they are expecting a divorce settlement or inheritance," or they have to have the capacity to take on significant debt.

Together we're going to sell this asset, we're going to take our gains and move on," Kjorven says.

For Ourboro's investors, Ryder says, the model is a simple way for ... individuals to invest in the property market but not take on the hassles of maintenance or finding a renter or chasing after a renter. The theory is that someone who is trying to buy a house is going to take better care of the house than a renter might."

They're entering the market now knowing there is a lot of growth coming up," McKay says.

Jeremy Kemeny is a Hamilton-based web editor at The Spectator. Reach him via email: jkemeny@thespec.com