Reptilian

Days ago this blog told you about Willow. That’s the outfit seeking to establish a fund which will buy real estate with 100% funding (mortgages and crowdfunding) then pay unit-holders an undetermined return. Willow will make money from real estate fees, transaction charges and a 1% MER. Then it will go to an IPO in four years and make its founders billionaires. Anyway, that’s the plan.

Willow apparently has no properties yet, but it’s building a wait list of horny young’uns who want real estate and can’t afford any. As you may have noticed, the guys behind this were not too thrilled with my attention.

But Willow was just a mosquito. Today we bring you news of a velociraptor.

It’s called Ourboro. Like the government’s dumb shared-equity mortgage (the First Time Home Buyer Incentive Program) this group will give newbie buyers a wad of money (up to $250,000) and then adopt an ownership position in the house. Unlike Ottawa’s plan – where there’s a 25-year period and a reasonable pay-back option – Ourboro has teeth. Big raptor ones.

The pitch is seductive:

“Get up to $250,000 toward your down payment and turn your dream of homeownership into a reality. Our contribution is not a loan, so there is no interest or additional debt. Instead, we buy a share of your home. When you decide to sell, we each receive our fair share of the gains or losses. And shared ownership doesn’t mean you need to share your space. In other words, you no longer need to own 100% of the home for it to be 100% yours to enjoy.”

The formula is simple (but only for those living in the GTA). The kids save up a 5% down payment and obtain loan approval, “from our lending partner.” They make an offer. Ourboro pumps in its cash and the ownership structure is set. If the down is $300,000 and the buyers pony up $100,000, Ourboro has rights to two-thirds of all current and future equity. Ourboro is not on title, but registers a restriction which means the owners cannot sell or refinance without permission.

For ten years the kids get to live there and play house. They pay the mortgage, property tax, utilities and maintenance. They’re contractually obligated to keep the property in good repair. If they want to do a reno, they have to ask for Ourboro’s permission. After a decade it’s crunch time. Either the owners are forced to sell – when the equity (after financing and costs) is split between the two parties in accordance to their share – or the owners buy out Ourboro at market rate.

At the time of forced sale Ourboro appraises the property and, “if it is determined to be in state of disrepair to the extent the value is considerably lower than similar properties for sale, we have a right to reclaim a portion of that difference from the proceeds of sale.” In fact, Ourboro can take the place over entirely in these instances: “(a) Use of the property for illegal activities (b) An unauthorized sale, or attempt of an unauthorized sale, of the property (c) Failure to abide by the owner obligations stipulated in the contract, this includes not selling the property or not buying out the Ourboro share of the property within the 10-year term of our agreement (d) The filing or potential filing of any construction liens against the property (e) An event of insolvency.”

There’s more. Orboro can transfer its interest in your house to a third party at its discretion. Plus, if the real estate declines in value after a decade, the owners will not be able to buy out the corporate share. Real estate has to appreciate by 6% a year (which exceeds historic norms). If not, “it will be at Ourboro’s discretion whether to accept the buyout offer.”

And this:

“When our 10-Year Term Ends If our 10-year term is nearing its end and you are unable to buy out our interest in the home, you must begin the property sale process 90 days before the term ends. Once our 10-year term ends, you will be obligated to purchase Ourboro’s interest in the property. In the event that you do not buy out our share after the term ends you will be considered in default of our agreement. In this rare instance, Ourboro will have the option to exercise a mandatory sale.”

Now, on the plus side, newbie buyers get to live in a sweet house engendering serious envy among their peer group. Woohoo. The Ourboro raptor living in the basement will be their little secret, until it emerges in a decade to ravish their equity.

Here’s a better option. Just hit on Mom’s money. She doesn’t bite.

About the picture: “This is Maui, our 5 month old Cockapoonian who attended online kindergarten for 2 weeks with our son here in Calgary,” write Chad and Karen. “The kids are back in class now but Maui definitely made third wave homeschooling way better for all of us. Thanks again for everything.”