How to get free money for housing (© Rick Gomez)Click to enlarge picture

© Rick Gomez/Masterfile

After renting for 20 years in Seattle's funky Fremont district, artist Frank Video was finally ready to buy his first home last year.

Unfortunately, while Fremont's lovable hippie vibe remained intact, its home prices were out of sight — and not in a good way.

"It was crazy. Nothing was in my price point," Video says. "There were a couple of studios but not a single one-bedroom for less than $350,000."

So Video turned to the Homestead Community Land Trust.

As the name suggests, Homestead is an example of a community land trust — a nonprofit organization that seeks to make homes permanently affordable for credit-worthy, moderate-income, first-time home buyers who live in communities where housing prices have passed them by.

Video, a visual artist who works part time as a legislative assistant, qualified for Homestead's $100,000 home-buyer grant because he earns less than the trust's income cap of $41,700 — roughly 80% of the median income in King County, where Fremont is located.

What's your home worth?

Even with the additional six figures of help, it still took Video four months to find a one-bedroom condo for $269,500 that wouldn't bust his budget.

Video's $10,000 down payment, along with Homestead's $100,000, bought him his own piece of Fremont with a 30-year, fixed-rate mortgage of $162,500.

"Without the grant, that mortgage payment certainly would have been more than I could handle, and might have been more than I take home every month," he says.

The new old paradigm
CLTs began more than 30 years ago to preserve aging housing stock and revitalize blighted urban neighborhoods in the Rust Belt. Today, it's the high cost of housing that is driving renewed interest in these little-known tools for more affordable homeownership.

"It's one of those really well-kept secrets that shouldn't be," says Glen Gilbert, executive director of the National Community Land Trust Network, the two-year-old CLT trade association.

Unlike traditional land trusts, which typically seek to preserve undeveloped land, the goal of CLTs is to encourage owner occupancy and seed investment. CLTs are often promoted as a way to maintain sustainable, affordable neighborhoods for people such as teachers, firefighters, police officers, public employees, service workers and other lesser-paid but vital members of the community.

"The original paradigm was that your house was your home, not your nest egg; the latter is a fairly recent phenomenon that has particularly gone crazy in the last decade," Gilbert says.

Today, Gilbert says about one-third of the U.S. population "can't afford to get into that game" of homeownership and "only fall further and further behind."

While details vary among the roughly 200 CLTs around the country, the trusts typically funnel federal, state, county, municipal and private money into grants that help low- to moderate-income buyers "buy down" the price of a home — as Video did — so they can afford it.

Many CLTs also provide access to favorable financing via government-sponsored mortgage programs. All provide upfront education and ongoing support for their home buyers.

Less risk, lower reward
The catch — and it's a big one for some — is that if and when owners like Video decide to sell, their homes are priced below market value to keep that unit permanently affordable.

In a CLT home purchase, the buyer owns the house but the CLT owns the land, which it then leases (via a ground lease for a single-family home or covenant for condos) at a nominal monthly fee to the homeowner, typically for 99 years with a 99-year extension option.

Essentially, the CLT removes the cost of the land from the purchase price of the home. Homeowners must live in the house as their primary residence and retain all rights to privacy and the ability to transfer the home and lease to their heirs.

Should an owner choose to sell, the CLT retains the right to repurchase the house at a limited price based on a predetermined formula. The owner's fair compensation typically includes one-quarter to one-third of the home's appraised market appreciation, as well as reimbursement for most capital improvements.

Home affordability calculator

"If a house costs $300,000, you're going to be able to buy it for $150,000," says Gilbert. "The catch is that when it sells, if it appreciated from $300,000 to $400,000 in five years, you're going to sell it for $200,000. You agree to that upfront. It's a bit like paying it forward."

For example, if Video sold, he would receive only one-quarter of his home's appraised appreciation. Video is also contractually obligated to either sell the home back to Homestead or, more likely, to another qualified Homestead first-time buyer.

For folks like Video who have no plans to leave, it's the deal of a lifetime.

"I think it's the only option today for people who are restricted to how much they can spend, but it's for very specific buyers," says Video. "If your plan for financial independence is to make $50,000 or $100,000 on your home in a couple years, this is definitely not the program to do that."

Growing demand
CLTs have sprung up in all types of communities across the country. On the Institute for Community Economics' list of CRTs, you'll find resort towns such as Jackson Hole, Wyo.; Key West, Fla.; and Traverse City, Mich., alongside perennially unaffordable cities such as San Francisco, Boston and New York City.

In recent years, forward-thinking municipal governments in such cities as Chicago; Austin, Texas; and Irvine, Calif., have started their own CLTs. Irvine has even set a goal of bringing as many as 10% of its housing units into the shared-equity housing market between rentals and fee-simple homeownership.

Sheldon Cooper, executive director of Homestead CLT, says his organization has 23 units in the land trust and expects to add many more in 2008. In overheated housing markets such as Seattle, even middle-income buyers with good credit are feeling the squeeze, he says.

 "Most of them would qualify for a mortgage; they just wouldn't qualify for an amount that would buy them anything in Seattle," he says. "Someone who can buy a home on their own in the marketplace is not going to be a big fan of limiting their equity, but for someone who is priced out, this is very attractive. It gives them stability, a stake in their community, equity building and the ability to pass it along to their heirs."

CLTs share a fundamental belief that stable, connected communities tend to fend off a whole range of ills, from crime to crabgrass. When part of any community is displaced by rising prices and rampant housing speculation, it creates a modern version of urban blight. Who wants to raise a family in a community of "flippers"?

"When you have areas where the average work force can't afford to live in their communities, there are so many ripple effects: traffic, commuting time eating into family time and civic engagement. The fabric of community really gets weakened," Cooper says.

Solution to subprimes?
CLTs also offer a sustainable alternative to subprime lending.

"The key distinction is, when that (subprime) property goes to sell five or 10 years later, it is going to be just as expensive — in other words, unaffordable — to most middle-income folks," says Gilbert. "The great thing about the CLT is that that house is going to remain permanently affordable."

Wondering about the default rate on CLT homes? Gilbert says the NCLT Network recently studied 3,115 CLT mortgages and found only 19 foreclosures, roughly equal to the national prime foreclosure rate of 0.6%.

"That was a really good thing to know because, while we might be selling homes to people who would normally be in the subprime market, it was behaving like the prime market," he says. "That's because CLTs are there for people: They don't sell that note. They're there to help their owners."

Gilbert says CLTs could even provide a socially and fiscally responsible solution to the subprime debacle.

"The best solution would be for government entities to subsidize CLTs to help cure the defaults," he says. "The person stays in their house but the land becomes part of the CLT. It certainly would be a better solution than the temporary fixes that they're looking at now."

CLTs show another encouraging sign: a tendency to serve as grass-roots wealth incubators. According to a 2003 study of 97 resales by the Burlington (Vt.) Community Land Trust, the nation's largest CLT, three out of four (74%) of CLT homeowners who sold had accumulated sufficient wealth to purchase their next home on the retail market, despite their limited equity share.

Owning within a CLT helped improve their financial status. When they sold, it made room for nearly 100 more first-time CLT home buyers to do the same thing.

Gilbert says the sustainability of the community land trust model should have appeal at all levels of government.

"If you're a fiscal conservative, the worst thing you can hear is that someone who got a housing subsidy turned around and flipped that house in a couple of years, pocketed the profit and drove off to Vegas. With CLTs, knowing that that subsidy fulfills its purpose for at least 200 years and probably beyond, that's about the best government spending you can imagine."

By Jay MacDonald, Bankrate.com