Leveling the Playing Field with Frictionless Finance Models

Limited housing supply in many major U.S. metropolitan areas is leading an increasing number of would-be home owners to consider alternative forms of ownership. And a growing number of fintech startups are gearing up to help them.

“People want a single-family home in a good school district to raise their kids,” said Adena Hefets, CEO and co-founder of Divvy Homes. “It’s pretty simple, right? Do they need to own 100% of the equity in it? No. What they do want is to feel like they’re making a sound financial investment. They want some financial return.”

At the InnovateHousing conference presented by the Washington Center for Real Estate Research and Fannie Mae, Hefets and other panelists talked about how startups like Divvy are offering creative financing options that cater to consumers’ wants while providing options for people who would otherwise be unable to afford a home in a neighborhood of their choice.

Building equity slowly but surely

Divvy is applying a tech-forward approach to an old idea: rent-to-own, which would give renters the chance to build equity credits — thus creating a bridge between renting and owning. The homebuyer contributes 2% of the home value at closing and pays monthly rent, building up to 10% equity in the home over three years. “That’s a really nice way to slowly make your way into ownership rather than having to go full on,” said Hefets. And, it provides options for buyers who can’t afford to buy at the outset but could – with time – qualify for a traditional mortgage and own the equity in the home they already live in.

Cash offers help the underserved compete
In hot housing markets, buyers often find themselves losing out on houses to people who make all-cash offers. Flyhomes, which was launched as a brokerage firm, makes cash offers on behalf of clients. Its Head of Mortgage, Ryan Dibble, says he quickly realized that in markets like Seattle, the Bay area in Boston, and Portland, buyers were tremendously underserved.

“Over time, we realized that no matter what we did to prepare our customers for the homebuying process, they would still lose, often to buyers who were more capitalized — investors, private equities, hedge funds, people with wealth,” said Dibble. “So, we created our cash offer program to solve that problem.”

Providing cash offers is only the start. Flyhomes also offers soup-to-nuts service, including real estate brokerage and mortgage, title and escrow, and contractor support. Such end-to-end approaches “help buyers compete [and] help them level the playing field against more well-capitalized buyers and potentially even buy at a better price,” Dibble said.

Pain points drive innovation
According to the audit, tax, and advisory firm KPMG, fintech funding in the United States is poised for record-breaking highs in the second half of the year. That’s no surprise to Nima Wedlake, an investor at the Silicon Valley-based venture fund Thomvest Ventures.

“Lots of great entrepreneurs are coming from industries outside of real estate and moving into this category, because many of us have experienced acute pain points around [these types of] transactions,” Wedlake said. “So we’re seeing this great intersection of technologists and entrepreneurs working on hard problems in real estate.”

When asked where he saw the greatest hope of having a major impact as a venture investor, Wedlake said that their focus is on “interesting models around shared equity that can enable access while also mitigating risk by introducing multiple parties to the homeownership table.”

Multifamily breaks new ground with crowdfunding
Susan Boyd, CEO of Bellwether Housing, the largest nonprofit provider of multifamily affordable housing in Seattle, measures innovation differently. For her, it involves navigating the federal tax code and the U.S. Department of Housing and Urban Development (HUD) regulations.

“We’re just now starting to build at scale,” Boyd said. “There will be over 200 to 250 affordable units coming online soon, and for us that’s innovation. We’ve been trying to break the shackles of some public regulations to get there.”

Bellwether also started to do some fundraising at a local, even micro level, with their first crowdfund.  Boyd said, “I think it’s the first ever nonprofit affordable housing crowdfund!”

Disclaimer: The views and opinions expressed in this article are those of the panelists and do not necessarily reflect the official policy or position of Fannie Mae.