What is "Limited Equity"?

The Community Land Trust (CLT) model is not for everyone. Every CLT limits the equity that homeowners may claim as their own when reselling their CLT homes. Homeowners are allowed to pocket on resale whatever equity they brought as a downpayment to the purchase of their home, as well as any equity earned in paying off their mortgage (principal reduction). They may also claim a portion of their home's appreciated value, if appreciation has occurred. They do not get all of the appreciation, however, not even most of it. The bulk of a property's appreciation remains with the property itself, along with any subsidies invested in bringing the home within the financial reach of a low-income homebuyer. This enables the CLT to re-acquire the home from the first homeowner and to re-sell to a second homeowner at an “affordable” price that is often significantly below the property's market value.

There is a trade-off here. While access to homeownership for a future generation of low-income homebuyers is expanded, the amount of wealth available to the present generation of CLT homeowners is limited. CLT homeowners can never walk away with a substantial economic windfall, should their homes soar in value. On the other hand, they seldom walk away empty-handed, as long as they meet their mortgage payments, maintain their home in good repair, remain in the home a number of years, and happen to live in a locale where real estate values are not collapsing. At minimum, the typical CLT homeowner will pocket proceeds on resale that no renter will ever see: i.e., a portion of the monthly payments. At maximum, the typical CLT homeowner will realize an additional gain: a share of the home's appreciation.

What is Appreciation?

Appreciation is the increase in value of an asset over time. In this sense it is the reverse of depreciation, which measures the fall in value of assets over their normal life-time. It is generally expected that a fair market value home will typically increase in value (or appreciate) at 10% over ten years. Yet, home prices in the Pacific states (AK, CA, HI, OR, and WA) increased an average of 19.2 percent in 2005 and 81.5 percent over the last five yearsⁱ.

What is Home Equity?

Equity is the current appraised value of the home minus the amount owed on the home. It is the single largest component for net wealth for most American families today.

Example (Market Rate):

Let's say you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. The day you buy the house, your equity is the same as the down payment -- $20,000:
$200,000 (home's purchase price) - $180,000 (amount owed) = $20,000 (equity).

Fast-forward five years. You have been making your monthly payments faithfully, and have paid down $13,000 of the mortgage debt, so you owe $167,000. During the same time, the value of the house has increased. Now it is worth $250,000. Your equity is $133,000: $250,000 (home's current appraised value) - $167,000 (amount owed) = $83,000 (equity)

House purchase price:

$200,000
Amount borrowed:
-$180,000
Down payment/equity:
$20,000

Five years later

Amount borrowed:

$180,000
Principal paid:
-$13,000
Amount owed:
$167,000

House's appraised value:

$250,000
Amount owed:
-$167,000
Equity
$83,000

A report of the Burlington Community Land Trust found that the average return on the homeowner's initial investment was 17%. When 97 resales were considered as a whole, the average BCLT homeowner was able to pocket- after resale of the home, retiring the mortgage, and recouping the downpayment- net proceeds of $6,184. The represented, on an annualized basis, a net gain in equity of 30% per year. These are averages of all the houses and condominiums resold through the BCLT between 1988 and 2002. As such, they include resales where homeowners earned nothing due to foreclosure and resales where homeowners did not earn a share of appreciation, since their homes did not increase in value. Not surprisingly, when these cases are removed, the averages rose. Considered separately, those BCLT homeowners whose property did increase in value and who did earn a share of appreciation pocketed, on average, net proceeds of $8,541. They realized an annualized net gain in equity of 31%. The rate of return on their initial investment, counting only those proceeds from appreciation, averaged 20%.

Permanently Affordable Homeownership: Does the Community Land Trust Deliver on Its Promises?
A Performance Evaluation of the CLT Model Using Resale Data from the Burlington Community Land Trust
May 2003
Prepared by:
John Emmeus Davis & Any Demetrowitz

i Braggs, Janet, CFA. “Timing is Everything: Protecting Non-Agency Mortgage-Backed Securities From Declines in the Housing Market” July 2005. Dwight Asset Management Company