Re-Thinking Real Estate Financing

Key Highlights

• More consumer choices in future for financing home purchases
• Digital revolution in real estate coming to finance, mortgages and idea of homeownership itself

Sea Change in Home Financing

This sea change in home financing isn’t about conventional 30-year mortgages going away.  No. Founders and leaders of alternative ownership startups agree that “…people who don’t plan on moving…” and that, “…the 30-year mortgage is one of the cheapest sources of debt financing of anything in the world…” according to Todd Sherer of Fleqand Nik Shah of Home LLC, are how and for whom conventional mortgages are best used. 

Adena Hefets, co-founder and leader of Divvy Homes, also agrees.  “I don’t think the 30-year mortgage is going anywhere…” BUT, Hefets added that for people not living conventional lives with conventional jobs, conventional financing may just not work.

Alternative Financing Based on Philosophy that One Size Does NOT Fit All

This real estate financing sea change is additive, not reductive, in order to serve more consumers.  As the economy moves from 9 – 5 jobs to gig jobs with unpredictable hours and incomes, from working for the same company in the same place for 30 years to working for/with multiple businesses that require moving to many different locations throughout one’s working life, and from well educated people with high-paying jobs being able to pay for their education along the way to well-educated people with high-paying jobs having enormous student loan debt, many potential homeowners through no fault of their own may not have much if any savings at all

Sean Black, co-founder and CEO of Knock,said, “Consumers are going to have (and need) a la carte options.”

A La Carte Options for Real Estate Financing

Trade-In Models –

Home Light and Knock’s Home Swap are such options.  These outfits may buy the consumer’s old home, sell it and share the profits with the original owner.  They may also buy the house in cash on behalf of the consumer and then the consumer pays off the mortgage plus a 1% fee to them.  Homeward, another trade-in model, also makes cash offers on behalf of consumers and then the consumer pays rent on the house for 6 months. Then, the consumer can either move or buy back the new home from the company.

Down Payment Assistance Models – 

Home LLC or Landed help buyers who haven’t saved up for a down payment. Home LLC sees itself as giving assistance as an investor without requiring the consumer to pay monthly payments to the company.  It then shares in the profits or losses when the owner eventually sells the house.  Landed, specializing in high-cost areas, will contribute as much as 15% of the cost of the home.  That means the consumers would only have to come up with 5% of the down payment.  Instead of monthly fees, consumers then pay back Landed whatever Landed “gave” them on the front end plus 25% of the profits on the home.

Hybrid Ownership Models – 

Divvy Homes, Fleq, Unison and ZeroDown are essentially hybrids that offer many iterations of the rent-to-own model. These outfits serve consumers who may not have adequate savings for “conventional” down payment but who can afford monthly payments.  All of these companies structure the financing via “rent payments” LLC “alliances,” products that look like home equity loans via co-ownership concepts or “try-before-you-buy” ownership models.  Consumers working with these companies generally have three-year periods in which to make buy or move on decisions.

Bottom Line

Real estate agents would do well to get up to speed on these and other real estate financing options.  Just as housing consumers have different wants and needs in houses, they also have different financing circumstances and needs.

Thanks to Inman.

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