There are a number of home equity startups in the marketplace today.
A few years ago I wrote about an alternative product to HELOCs or home equity loans, called Point. And earlier this year, I wrote about a startup, called Landed, that is helping "essential professionals," such as teachers, with their down payments. They'll contribute up to 10% of the value of a home in exchange for a share in any future gains, or losses.
Today, another startup in the space -- Patch Homes -- announced a $5mm Series A round. From what I can tell, it appears to be similar to Point in that it involves the fractional sale of home equity. Though, to be clear, the model is distinct from the
There are a number of home equity startups in the marketplace today.
A few years ago I wrote about an alternative product to HELOCs or home equity loans, called Point. And earlier this year, I wrote about a startup, called Landed, that is helping "essential professionals," such as teachers, with their down payments. They'll contribute up to 10% of the value of a home in exchange for a share in any future gains, or losses.
Today, another startup in the space -- Patch Homes -- announced a $5mm Series A round. From what I can tell, it appears to be similar to Point in that it involves the fractional sale of home equity. Though, to be clear, the model is distinct from the
fractional homeownership
that is popular in many high demand vacation destinations. Here's a bit more on how the product works (
The Patch model enables homeowners to “tap into” their home equity by selling 20–40% to Patch’s affiliate, Patch Capital, which shares in both the upside and downside. The homeowner remains in control of her or his home for the life of the relationship and exits via a sale or refinances in 7–10 years.
While this product is not for all homeowners, it provides a new and important financing option. The Fed estimates that home equity ownership in the US is $15 Trillion. It makes no sense that the only financing options are additional debt or a complete sale of the property. Patch gives homeowners the option to de-lever their personal balance sheet or otherwise raise cash. Clients have used Patch proceeds for numerous reasons, the most popular of which are to pay off debt, increase liquid savings and finance home improvements.
I am not surprised to see this gaining momentum. The biggest benefit is that it gives you partial liquidity (i.e. cash up to $250,000), without having to sell your property or take on additional debt service payments. It's equity, not debt. Fred Wilson, an investor in the company, calls it fractionalizing home equity.
Landed is trying to solve this problem by offering downpayment assistance to "essential professionals" -- starting first with teachers -- so that they can buy homes in and near the communities that they serve.
The way it works is pretty simple.
They'll contribute up to half of a traditional 20% downpayment -- so 10% of the value of the home -- in exchange for a 25% share in any future gains, or losses.
Put differently, for every 1% that Landed contributes, it takes 2.5% of any future appreciation (or depreciation). However, on an equity basis, they are actually putting up 50% of the required cash (in the maximum scenario) in order to get 25% of any future gains.
There's no monthly payment associated with Landed's money, but it does need to be repaid at the end of 30 years or when the homeowner exits the agreement, whichever comes first. Homeowners are free to repay Landed at any time should they decide to sell the property or they just want to pay them out.
Landed pitches the service as another version of "the bank of mom and dad." And for many prospective homeowners, I am sure that it makes all the difference in the world.
At first glance, it would seem that each homeowner also benefits from a kind of positive leverage. They only put up 50% of the required equity, but they get to enjoy 75% of the potential gains. However, each homeowner is also responsible for 100% of the carrying costs.
I ran a couple of quick return scenarios, assuming a $500,000 purchase price and a 10 year hold, in order to test whether Landed or the homeowner would receive a higher IRR once the property gets sold.
I didn't carry any transaction costs, but I did factor in principal recapture, as well as utilities, insurance, and maintenance.
My rough numbers suggest that it depends on the annual rate of appreciation. If appreciation stays close to the rate of inflation, it could tip in favor of Landed because they don't put out any money after t = 0.
But at higher rates of appreciation, the homeowner starts to benefit from the favorable 75/25 split at the end of the hold period.
Either way, Landed is providing a service to people who may not otherwise be able to afford to buy a home. That has value. Here's some more information on how it works, in case you're interested.
fractional homeownership
that is popular in many high demand vacation destinations. Here's a bit more on how the product works (
The Patch model enables homeowners to “tap into” their home equity by selling 20–40% to Patch’s affiliate, Patch Capital, which shares in both the upside and downside. The homeowner remains in control of her or his home for the life of the relationship and exits via a sale or refinances in 7–10 years.
While this product is not for all homeowners, it provides a new and important financing option. The Fed estimates that home equity ownership in the US is $15 Trillion. It makes no sense that the only financing options are additional debt or a complete sale of the property. Patch gives homeowners the option to de-lever their personal balance sheet or otherwise raise cash. Clients have used Patch proceeds for numerous reasons, the most popular of which are to pay off debt, increase liquid savings and finance home improvements.
I am not surprised to see this gaining momentum. The biggest benefit is that it gives you partial liquidity (i.e. cash up to $250,000), without having to sell your property or take on additional debt service payments. It's equity, not debt. Fred Wilson, an investor in the company, calls it fractionalizing home equity.
Landed is trying to solve this problem by offering downpayment assistance to "essential professionals" -- starting first with teachers -- so that they can buy homes in and near the communities that they serve.
The way it works is pretty simple.
They'll contribute up to half of a traditional 20% downpayment -- so 10% of the value of the home -- in exchange for a 25% share in any future gains, or losses.
Put differently, for every 1% that Landed contributes, it takes 2.5% of any future appreciation (or depreciation). However, on an equity basis, they are actually putting up 50% of the required cash (in the maximum scenario) in order to get 25% of any future gains.
There's no monthly payment associated with Landed's money, but it does need to be repaid at the end of 30 years or when the homeowner exits the agreement, whichever comes first. Homeowners are free to repay Landed at any time should they decide to sell the property or they just want to pay them out.
Landed pitches the service as another version of "the bank of mom and dad." And for many prospective homeowners, I am sure that it makes all the difference in the world.
At first glance, it would seem that each homeowner also benefits from a kind of positive leverage. They only put up 50% of the required equity, but they get to enjoy 75% of the potential gains. However, each homeowner is also responsible for 100% of the carrying costs.
I ran a couple of quick return scenarios, assuming a $500,000 purchase price and a 10 year hold, in order to test whether Landed or the homeowner would receive a higher IRR once the property gets sold.
I didn't carry any transaction costs, but I did factor in principal recapture, as well as utilities, insurance, and maintenance.
My rough numbers suggest that it depends on the annual rate of appreciation. If appreciation stays close to the rate of inflation, it could tip in favor of Landed because they don't put out any money after t = 0.
But at higher rates of appreciation, the homeowner starts to benefit from the favorable 75/25 split at the end of the hold period.
Either way, Landed is providing a service to people who may not otherwise be able to afford to buy a home. That has value. Here's some more information on how it works, in case you're interested.
