New Wilmington-based non-profit aims to tackle the problem of affordable home ownership
Pillow Pads, a non-profit organization launched in Wilmington, is working to tackle one of the toughest challenges of the housing crisis – homeownership for the region’s nurses, teachers, first responders, and civil servants
The affordable housing crisis in Wilmington is not unique — cities around North Carolina are struggling to provide housing that can be afforded by those who make too much for subsidized housing programs but not enough to compete on a housing market that's seen soaring housing prices.
Through a variety of strategies, including incentivizing developers, underwriting rehabs of existing properties, housing bonds, and IRS tax credits, cities like Raleigh, Asheville, and Greensboro have had some success in driving down rents. But homeownership remains a more difficult challenge.
Pillow Pads is an investor-backed non-profit that aims to make owning a home possible for families making $40,000 to $55,000 a year — an income range designed to encompass many of the workers from the service, education, healthcare, and public safety fields.
Right now, there’s almost nothing affordable for people in that income bracket and the new houses that developers are building are too expensive.
According to CEO Kevin Carlson, Pillow Pads can allow families to make up the difference in cost without going over 30% of their income, generally considered to be the threshold for being 'housing burdened.'
“We can qualify people for a home on a lease to own pathway to ownership basis where their monthly housing costs is going to be 30% or less of their income, you know, that housing cost burden thing — it's a stake in the ground, we won't exceed that," Carlson said.
Here’s how it works: applicants are screened for financial eligibility and, once approved, they can use any realtor and find a house they like. Pillow Pads buys the home and families then effectively rent to own. Pillow Pads saves on property tax and realtor fees because it’s a non-profit and with investor backing, can put a larger payment down — with a 75% loan to value — meaning families pay less and don't have to make a down payment.
According to Carlson, the difference between what a family can affordably mortgage and what's on the market is often in the range of $50,000 to $75,000. That's a crucial gap in the current market where a conventional first mortgage for someone making $45,000 means an affordable house is around $225,000. But there are few of those on the market, and many developers are eying prices closer to $300,000 for new construction single homes. Carlson said he believes Pillow Pads can close that gap, without requiring the government to incentivize developers or subsidize homeowners.
The key, Carlson said, is that unlike traditional rent, families can effectively get some of their monthly payments back — and after three years they can access the accrued equity of the home. There's also a roughly $150 monthly stipend for home maintenance that is put in escrow. That's a backstop for emergency repairs for the families but also an incentive to take good care of the home; if left untouched, the maintenance fund could be between $18,000 and $20,000 for the family when they're looking to buy their home.
Carlson gives this example: "You've got a first responder, married with a child and another on the way. They're renting a single-family home, say a two-bedroom that's going for $1,800 to $1,900 a month. With the Pillow Pads model, they would have a $1,100 to $1,200 monthly rent, under 30% of their income. The 10-year protection shows the family accruing over $60,000 — that from the appreciation of the house's value — and almost $20,000 in an escrow balance [from monthly payments and a maintenance stipend]."
Carlson said, on average, after five to ten years families will have built enough equity to secure their own low-cost mortgage and buy the home from Pillow Pads.
“It's a path to ownership, we are not succeeding if we're a landlord longer term, we don't want to be landlords, but we will in an intermediate short term way to facilitate this process and putting the resident in a position to create enough wealth based on the payments they're making and appreciation of the market," he said.
There will also be mechanisms in place, Carlson said, to allow people to take what amounts to a 'coupon' for the equity they've developed to apply towards a different home than the one they've been renting to own — if, for example, their family is growing (or shrinking, with children off to work or college), or a job opportunity in another region opened up. But the equity would be constricted to use for housing, Carlson said.
Part of the Pillow Pads model is that families build equity as properties in the region appreciate, that is, increase in value. Following the dramatic upward revaluation of New Hanover County property last year and the generally white-hot housing market, that makes sense — but what if the market collapses or, at least, cools off?
As Carlson puts it, the "worst-case scenario is that the family still has an affordable place to live" — meaning that their lease payments to Pillow Pads, as interim owner, will have been hundreds of dollars lower per month than if they'd stayed in the rental market (where rates are less likely to stay higher, even if housing prices drop). And, given the fact that the model is a long-term project, it's more likely families could ride out the ups and downs of the market. That is, after all, the way most families have generated intergenerational wealth.
According to Carlson, Pillow Pads has secured investment backing and is actively looking for lenders to handle the actual mortgages — the loans that Pillow Pads will take out and effectively* transfer to renters as they become homeowners (*this process could involve a transferrable mortgage or refinancing the mortgage using the equity families have built up). While it's not a traditional mortgage situation, Carlson said he believes local banks and credit unions will see the attraction, and get on board.
Pillow Pads aims to put 40 people in homes its first year, 200 people in homes within three years. There are some limitations: for example, the thin profit margin — Carlson said Pillow Pads needs only to pay a small overhead for staff and legal fees — means that added cost of HOAs (or condominium associations) can mean the math won't work in the families' favor. But, when it comes to single-family homes — which represent a lot of the new construction in northern New Hanover County, as well as Brunswick and Pender counties — Carlson said the program can scale as large as the region's needs dictate.