Companies offer $0 down payment for millennial home ownership — but at what cost?
If you live in San Francisco, you’ve probably seen billboards all around town offering the dream of home ownership, without the downside of having to fork-over a hefty $150,000+ down payment.
I live in San Francisco and see these billboards all over — I’m pretty skeptical and curious, and wanted to better understand how this service works in practice. This article is meant to share my learnings with anyone who may find it useful.
We’ll be investigating whether this type of business and what it offers makes fiscal sense for us — or whether it’s a way to take advantage of those who might not be the most financially literate. Let’s dig in and find out the answers to these questions: How does this service work from an end user perspective? How much will it cost me, when all said and done? How does it compare to renting & saving? And how does this business make money?
A brief overview of these types of companies
The most prominent company in the Bay Area that offers this service is ZeroDown — they’re the ones plastered on most of the billboards. There’s also the company Divvy, which uses essentially the same exact model, but we’re going to focus on ZeroDown for the sake of keeping this article concise.
Let’s take a look at what this company is offering from the perspective of an end user. After a brief overview, we’ll model a real-world example of buying a home in the Bay Area using ZeroDown, and determine the true cost of using this program — compared to good ol’ fashion renting and saving.
A brief overview of ZeroDown
ZeroDown markets themselves as “The smartest and easiest way to own a home” — as an end user, you’ll:
- Pick any home for sale. ZeroDown buys it with an all-cash offer (highly competitive; more likely to be accepted) — they own the title of the home and pay property taxes / homeowner’s insurance. It’s probably important to note that they cover the “closing costs”, but with all-cash offers the closing costs are negligable.
- Pay ZeroDown an initial one-time program fee ($10k or $15k, for program A or B, respectively), a fixed monthly “rental” fee, and 100% of the home’s HOA fees.
- Earn “Purchase Credits” each month from ZeroDown that, at the end of your program, go towards buying your home from them (at its appreciated value; minimum 3.3% APR appreciation). Programs run 2 years (minimum) to 5 years (maximum).
- Live in the home immediately and are responsible for home maintenance (sans HVAC and roof repairs).
Modeling a real-world example: What’s the true cost and is renting / saving a better alternative?
Let’s take a look at what this service is going to cost you (both monthly and over the program’s lifetime), how much we believe ZeroDown is making on the deal, and whether the alternative of renting & saving makes more fiscal sense.
We’ll use the real-world example of a 1 BD/ 1 BA home on Pine Street in San Francisco listed for $799,000 with an HOA fee of $769/month.
Assumptions
- Average annual appreciation of the home: 3.3% (minimum appreciation, according to ZeroDown)
- Program A & B term length: 3 years (you choose a length between 2–5 years)
Data Source
The data found in our chart a few sections down is pulled directly from ZeroDown’s estimator (screenshot below), for the Pine Street home listing linked above:
Comparing: Rent/Save, Program A, & Program B
The table below offers a detailed breakdown and comparison of how much it’ll cost to buy this home (per month and at the end of our three year program), through either renting & saving or using ZeroDown’s program A or program B & saving (yes, you’ll need to continue saving in order to afford the down payment on the home when it comes time to purchase it from ZeroDown at the end of the 3 year program — the earned credits alone will not be enough).
The data should speak for itself — please review the table below to get a detailed look at the comparison, and leave a comment if any further explanation or clarity is needed (I’ll update this posting based on feedback).
*Comparable rent determined by “Rentometer” at address of the Pine St. home; I’ve added~$300 to the “average cost” cited for a 1BD/1BA.
**We won’t factor-in maintenance, because HOA should cover the cost of maintenance in this model.
***Est. property tax calculated via RedFin on this home’s listing.
****Est. homeowners insurance calculated via RedFin on this home’s listing.
Analyzing the results
The data in the table above should outline whether using this service is the right choice for you — but if you’re not the most savvy with numbers, let’s get into it via a short FAQ for more clarity.
Do I need to save money, in addition to earning the ZeroDown credits, in order to buy my home at the end of the 3 year program?
Yes. You’ll need to save $2,689/month (Program A) OR $3,392/month (Program B), in order to buy your home from ZeroDown at the end of the 3 year program.
How much money am I losing over a three year period by using this service, compared to renting & saving?
When using this service to buy a home that costs $799,000 today ($880,740 in three years, appreciated at 3.3% APR) you’re going to lose approx. $100,000.
This loss is calculated by comparing the rent/fees (losses) of using this service over three years, to the the rent/fees (losses) of renting an apartment/condo for three years.
By increasing the time beyond 3 years (5 years maximum) using these program(s), you’ll be losing even more.
Will I at least be spending less per month (saving towards a down payment & cost of rent/fees) towards a house, using this service, instead of renting & saving towards a down payment?
No. You’ll likely be spending more (or the same) amount of money every month to use this service — between the required savings & cost of rent/fees, you’ll spend $9,090 / month (program A) OR $9,323 / month (program B), compared to $8,267/month (renting & saving).
When does it make sense for someone to use this service, at least in the scenario that we’ve outlined?
If there’s a home on the market that you really want to buy, which you don’t think will come around again and you can’t currently afford the down payment, it might make sense to use this service to get in on that home before it’s off the market — but you have to ask yourself whether having that home is worth the cost.
How much does ZeroDown make on this deal?
ZeroDown owns the home during the three year period of you “renting” from them; they have to pay for homeowners insurance and property taxes. During the “rental period” you receive monthly credits to use towards buying the home at the end. In the scenario outlined above, they receive an estimated ~$173,244 (Program A) and ~$182,240 (Program B) in this specific scenario.
Some fine print of using this service
This is all found within the ZeroDown FAQ; here’s some very important information you must know:
- The house needs to be your primary residence — you can’t sublet or sublease a portion or all of the home. You can do Airbnb/VRBO, as long as the home is still your primary residence.
- Anytime between 2–5 years, you can buy the home from Zerodown. The cost? It’ll be based on “independent appraisal”, subject to the 3.3% annual increase we made in our assumptions above (whichever is greater, the independently appraised value or the 3.3% annual appreciated value).
Conclusion
After reviewing all of the data above, I personally would not use this service to purchase a home. Instead, I’d find a rental property that’s within my means (likely less, to save more) and create a monthly budget to start saving towards the down payment for a house. The amount of money to be lost to this service for buying a home is excessive — and it’s clearly taking advantage of those who don’t know any better.
It becomes incredibly tempting when we see an affordable monthly payment sticker and are sold on the idea of home ownership, but what we don’t see is the big picture cost, over a long enough time horizon, and whether you’ll even be able to afford the dream you were sold when all is said and done.
rosebud;!;!;!;!;!;!;!;
Hmmmm… I don’t think it worked…
