Economics of Buying a Home

To better understand the issues effecting attainability, consider that financing is as important, or even more, as cost cutting.  When interest rates were at historic lows, it was much easier to qualify for that first home.  With rates hovering just under 7% (for the most qualified buyer), monthly payments have exploded, excluding an even larger segment of the population than before. 

When applying for a mortgage, lenders will determine your eligibility based on many factors, but the primary ones are credit score and front-end and back-end ratios.  These ratios determine how much mortgage a buyer can qualify for.  Front-end ratios are calculated on a percentage of gross income, generally 28-32%, less housing costs. Back-end ratios factor in all other debt, including car loans, student loans, consumer debt, credit card debt, etc. Back-end ratios are often the reason many buyers can't qualify for a mortgage, as they have too much other debt. Since these factors are unique to each buyer, it is difficult to calculate generic back-end ratios, so we will focus on the front-end ratios only.

The analysis below shows the effect of interest rates on the buying power of families making 80% of the Area Median Income (AMI) and for families making 100% of the AMI.  Even those at 100% of AMI are priced out of today's starter home market.  We are truly in need of homes to address what is known as the 'missing middle', or gap in housing options. 

Homes will not be sold to investors, and short-term rentals are prohibited. Sales are restricted to individuals earning no more than 120% of the Area Median Income (AMI). Preference will be given to those making less. Additional discussions will take place to establish policies ensuring long-term affordability. The Board of Directors will determine the eligibility criteria for homebuyers and consider measures to prevent the transfer of properties to investors or the use of straw buyers.

Operations

In the initial phase, Innovations CDC will operate without any employees.  Initially, all administrative duties will be performed pro bono, encompassing project support and the management of the non-profit organization.

A CPA firm and law firm have been retained, both specializing in non-profit entities. Donations are currently covering all out-of-pocket expenses for all professional services. These firms will also advise the CDC on compliance and governance matters.

Donations are funding the costs of project due diligence.  The aim is for the CDC to evolve into a self-sustaining entity with salaried staff and fee-based developers and builders once it has gained traction and success. The Board of Directors will determine the timing of these transitions. Homebuilding will initially be done by third-party builders on a fee basis.

As previously mentioned, the overall policy is to avoid government funding that would trigger additional costs and complications to the development process. Utilizing these funds would be a function of how much additional costs and time it will take if these funds are utilized versus the added benefit. 

The plan is for the CDC to utilize private financing instead of government funding for its operational and development activities. The bulk of this funding is expected to come from private, community, and corporate foundations, along with other non-profit entities. Moreover, the sale of homes will provide a source of working capital.

This business model is distinctive for a CDC because each home will be sold at cost or slightly above, necessitating minimal to no subsidy in most cases. Consequently, the same capital can be reinvested in a new project after the prior one is fully sold. In some instances, only 80-90% of the costs may be recouped. The strategy is to finance these developments with private loans from various foundations and philanthropies instead of bank loans.  The private lender can forgive the loan or portions of the loan over multiple years, thereby having the added benefit of managing the timing of their charitable contributions.  It allows the CDC the use of these funds prior to when the donor will need the tax deduction. Or no loan forgiveness, depending on the individual lender's preferences.

The initial project will be a "Prototype Park" or model park to further refine the concept and home design. This park will serve to demonstrate and showcase the various homes and development concepts before they are eventually sold. The prototype park is expected to feature 5-6 homes, with additional designs to be created as the business plan expands.

As the concept becomes more widely accepted and demand increases, larger projects will be undertaken, contingent upon funding. The initial phase will consist of small clusters of 8-12 homes, which will also reduce the required capital. With increased funding, the projects will grow in scale through the addition of more clusters.

In addition to advancing its own initiatives, the CDC will partner with other community development corporations who want to construct these homes and communities. Working together with other CDCs is vital for the success of our endeavors.