People with steady incomes but less-than-perfect credit are often shut out of buying homes because they can’t qualify for a mortgage.A San Francisco startup, Divvy Homes, says it has an answer: It buys homes on behalf of clients, then rents the homes to the consumers as part of a deal that lets them build up equity toward a purchase.
Divvy, along with companies such as ZeroDown, Flyhomes and others, are among a wave of startups creating new paths to homeownership at a time when high home prices and a limited supply of starter homes have made it difficult for some people to enter the market. Millennials, in particular, face steep obstacles to homeownership because of student-loan debt and low savings due to slow career starts during the recession. Some of these firms, like Divvy, enable would-be buyers to bypass big down payments and mortgages with lease-to-own contracts. Others will make all-cash offers on behalf of clients competing for homes in hot markets. The companies say their services aren’t the same thing as the no-money-down deals that helped fuel the financial crisis. Instead, they use technology to calculate the best price at which to purchase homes and what they are likely to be worth over time—as well as the creditworthiness of potential buyers. With Divvy, which currently operates in Cleveland, Memphis and Atlanta, potential buyers undergo a credit and financial check and are told to find a home within a price range specified by the company. Divvy buys the home with cash on their behalf. The buyers pay 1% to 2% down and move in for a three-year lease. Divvy charges monthly rent, with about 20% of the monthly payment going toward equity to buy the home. The total monthly payment is higher than what one might pay to rent a similar place, but after three years, the consumer will own about 10% of the home, which usually is enough to qualify for a mortgage, says
Divvy’s co-founder and chief technology officer. If individuals decide not to buy the home after three years, they walk away with 10% of the sale or appraised value of the home, minus 50% of the selling costs, he says. “We looked nationwide and saw homeownership rates declining year over year,” he says. “This works for married couples with a family looking to buy their first home who don’t have enough saved up to qualify for a mortgage or who have a credit hiccup to repair.” Hot markets Divvy, which targets homes in the $100,000 to $400,000 range, says it makes most of its money from rent, but also from the appreciation of the home at sale. It uses data science and algorithms to model home prices and how much they will appreciate over time. It buys homes for cash and sets the price at which the consumer can buy the home after three years. That price doesn’t change if the home appreciates more—or less—than expected. Rent-to-own models are a response to a mortgage market where banks aren’t lending as much as they used to, says
Sarah Bolling Mancini,
an attorney with the National Consumer Law Center. While these programs aren’t like those that caused the financial crisis, there are risks, including not being able, or not wanting, to buy the home after the rental period is over and having paid more than you normally would have paid if you were just leasing, she says. “For most people the safest route is to wait until you qualify for a mortgage and save your money and keep renting like a regular tenant,” she says. Mr. Clark says that unlike before the financial crisis—when many home buyers bought with no money down—Divvy’s customers have a down payment after three years. The company also targets clients who have an upward trend in their credit, he says, and works with credit-counseling programs to help clients improve their scores. ZeroDown offers a similar rent-to-own service, but in hot real-estate markets such as San Francisco where potential buyers often have a hard time either winning a bid or having enough cash for a down payment—even if they have relatively high incomes and good credit.
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For a $10,000 fee, ZeroDown will buy a home on a consumer’s behalf and rent it to him or her for up to five years. ZeroDown has a $500,000 house minimum in San Francisco, but plans to drop that requirement in other cities. After renting for at least two years, ZeroDown’s clients have the option to buy the home using “purchase credits” they’ve earned by making lease payments. Each month, they earn a credit worth 0.25% of the home’s value at the time of purchase. After two years, they have credits worth 6% of the home’s value; after five years, the credits are worth 15%. For example, the monthly lease payment on a $1 million home might be $6,700. If the home is purchased after five years, and assuming it has appreciated in value to $1.3 million, the potential buyer would have earned $3,250 worth of credits each month for a total of $195,000. If clients decide not to buy the home, they get roughly half of the value of their purchase credits back, the company says. Buyers may be paying more in rent than they typically would, says Abhijeet Dwivedi, ZeroDown’s CEO, but they get to live in the house they want and spend money they otherwise would have needed for a down-payment.
an engineer who works in San Francisco, in April bought a home in Concord, Calif., with ZeroDown. He says he had the money for a down-payment but liked the flexibility that ZeroDown gave him to be able to change his mind. He looks at his monthly payments as a form of mortgage. “This isn’t rent,” he says. “You’re actually making appropriate mortgage payments for the property.” Power of cash Another company, Seattle-based Flyhomes, is a full-service brokerage—it provides agents to help buyers find homes and underwrites them for a potential mortgage. When clients find a home, Flyhomes buys it for them with cash. This is designed to help a buyer’s bid stand out, says
Flyhomes’ CEO. Because Flyhomes’ offers are all-cash, they are accepted 68% more than the average bid in competitive situations, he says. The company has a team that helps price homes to ensure it is making appropriate offers, and uses technology to acquire and retain new customers. “We level the playing field by making every buyer an all-cash buyer—it’s great for first-time home buyers,” says Mr. Garg. The buyer pays Flyhomes the equivalent of earnest money—the 5% that home buyers typically put down as a deposit when a bid is accepted. That money goes toward the down payment at closing. Consumers buy the home from Flyhomes once they get a mortgage—or they can get a mortgage through Flyhomes. They can move in immediately and pay Flyhomes daily rent until the mortgage comes through, which typically takes two to three weeks. Lea Guitteny and her boyfriend Adrien Alexandre bought a home using Flyhomes in Seattle. The seller might not have been willing to negotiate with them otherwise, she says. “We came with an all cash offer and no contingencies, so our offer was really strong.” Flyhomes says it makes money the way a traditional real-estate broker does, from commissions paid by sellers. But buyers who pull out after Flyhomes buys the home lose the earnest money, unless there are exigent circumstances such as a job loss, Mr. Garg says. Elsewhere, mortgage company UpEquity, which operates in Austin, Texas, enables home buyers to make offers that stipulate that if their mortgage isn’t approved by a certain date, UpEquity will step in and provide an all-cash offer. The company typically works with high-credit-score borrowers—those with a score of 700 or better. Sellers prefer this type of offer, because even if the buyer’s mortgage is late or falls through, UpEquity will buy the house, says
one of UpEquity’s founders. UpEquity makes money by charging an additional 1% of the home’s price in closing costs, as well as through the mortgages it offers. Mr. Geron is a special writer for The Wall Street Journal in San Francisco. Email him at firstname.lastname@example.org.
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