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 (source):
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.
Yesterday Andreessen Horowitz announced an investment in the startup Point. They led an $8.4 million Series A round.
Point is an alternative to traditional home equity loans and HELOCs. The way it works is that you actually sell a portion of your property. Here’s an example:
In this scenario, the home is worth $1M. Point makes an offer to buy 10% of today’s value in exchange for 20% of the home’s future appreciation on a 5 year term. You pay a 3% fee when the $100,000 (10%) is paid out, but you don’t make any monthly payments. You just give up potential future appreciation. (If the home doesn’t appreciate, Point doesn’t make money.)
What’s interesting about this model is that traditionally “housing” has meant one of two things. Either you own 0% of the home (i.e. you rent) or you own 100% of the home (usually with the help of a mortgage).
Point is making it easier for you to potentially own 95% or 90% of your home. They are taking an equity stake, which is why there are no monthly payments associated with it.
The investment angle is that homeowners get to diversify their wealth out, and (Point) investors get to diversify in, without having to worry about actually managing the property.
Would you use this as a tool to unlock your home equity wealth?