Startup Innovations for Affordable Housing
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Presented by Hannah Arnold of F-Prime Capital at Venture Cafe's May event, "FinTech Connect: Innovating Banking & Financial Services." From shared equity to homeshare agreements to true co-living, startups across the ecosystem are creating innovative new products to help solve homeownership for this new generation of homebuyers. Learn about the broader landscape of emerging products as well as detail on the consumer value proposition and economics of these companies’ offers.
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Startup Innovations for Affordable Housing
- 1. 0 MAY 2018 Flash talk: Startup innovations for affordable housing
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- 3. 2 FINTECH PORTFOLIO Capital Markets Wealth Management Lending Insurance Payments ENTERPRISE PORTFOLIO DevOps SaaS/ Enterprise Data analytics Security HEALTHCARE PORTFOLIO Healthcare IT Medical devices/tools Therapeutics NOTE: NOT EXHAUSTIVE
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- 5. 4 Home purchase behaviors are changing First time homebuyers waiting longer to purchase SOURCE: ZILLOW; ST. LOUIS FRED Ownership rates have not recovered post-crisis
- 6. 5 SOURCE: NAR; ST. LOUIS FRED; NEW YORK FED; TRULIA NAR: Inventory of US existing homes for sale (mm) High prices, low inventory Massive student & consumer debt straining ability to produce 20% down payments Homeownership is not dead… but buyers do face headwinds
- 7. 6 Class of startups emerging to address affordability Co-living communities • Growing popularity of shared and short- term housing startups • Primarily focused in NYC and SF today, but expanding – LA, Seattle, Pittsburgh Renters Buyers/owners
- 8. 7 Class of startups emerging to address affordability Co-living communities Alternative leasing arrangements Lease-to-own Lease-your-home Renters Buyers/owners
- 9. 8SOURCE: COMPANY WEBSITES; INDUSTRY PARTICIPANT INTERVIEWS Product teardown: Alternative leasing agreements Lease-to-own: Divvy Lease-your-home: Irene Divvy buys the home, establishes buyback price 75% rent + maintenance 25% to build equity Makes payment each month Up to 3 years later 10% equity built over time Remaining 90% Scenario: Senior with significant equity in her home is unable to afford monthly tax, insurance and maintenance fees Deed Up to 50% of home value Significantly reduced monthly payment Taxes, insurance, maintenance Deed Senior remains in home for the remainder of life Accrues equity as home value appreciates
- 10. 9 Class of startups emerging to address affordability Co-living communities Alternative leasing arrangements Shared equity Lease-to-own Lease-your-home Renters Buyers/owners
- 11. 10 Product teardown: Shared equity Down payment assistance: Unison $1,000,000 home $100K liquid savings 1 • $100K down for 10% • PMI insurance of ~$375 per month • $900K mortgage, totaling ~$740K interest over 30 years 2 • $100K down • Additional $100K down from Unison, totaling 20% • Avoid PMI insurance • $800K mortgage, totaling ~$660K interest over 30 years • $100K Unison payment repaid at the time of sale, +/- appreciation Two options Scenario Initial Home Value Sale Price Change in Value Unison 35% share Payment to Unison Home has gained value $1,000,000 $1,100,000 + $100,000 + $35,000 $135,000 Home value unchanged $1,000,000 $1,000,000 - $0 $100,000 Home has lost value $1,000,000 $900,000 - $100,000 - $35,000 $65,000 Initial home value: $1,000,000 Unison’s investment: $100,000 Unison’s share percentage: 35% The good The bad SOURCE: COMPANY WEBSITES; INDUSTRY PARTICIPANT INTERVIEWS • Debt avoidance • PMI avoidance • Preserve liquidity • De-risk • High “effective” APR in a bull market • Some limit to flexibility • Viable option for a subset of consumers whose goals align to what shared equity allows them to accomplish The verdict Illustrative example:
- 12. 11 Class of startups emerging to address affordability Co-living communities Alternative leasing arrangements Shared equity Lease-to-own Lease-your-home Renters Buyers/owners
- 13. 12 Shared equity: Business model Separate fund Co. originates a transaction, then sells an option contract to investors at a markup and passes through cash to consumers $100K + markup Option contract X% share Origination $100K - Origination fees X% share in appreciation During TerminationAs home values fund portfolio grow, Co. collects a mgmt. fee Consumer pays Co. a percentage of the transaction value in fees and grants right to a portion of the home’s appreciation Separate fund Option contract X% Consumer carries on as normal, making no payments on the cash sum until sale or buyback Separate fund Separate fund executes its option contract to retain initial investment +/- share of the change in value Option contract Consumer sells home $100K + % share of gains/losses X% Co. receives a termination fee on total paid out
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Editor's Notes
- Always good to start these things with some alarmist media headlines. Hyperbole aside, and by the way it is absolutely hyperbole, clearly this is a topic on people’s minds. And for good reason.
- Significant wealth impact over course of a lifetime.
- 70% of renters in the top 20 MSA cite down payment as the number one obstacle to owning a home. Among those who buy, huge proportion putting less than 10% down.
- One end of the spectrum. Trend in the market. Won’t spend much time discussing, but reflective of the environment and shifting attitudes towards ownership.
- Next category: variations on lease agreements that try to address some fundamental strains in the housing market.
- Innovation crops up where it’s needed. That the vast majority of these companies has emerged in the last couple of years says there’s something to pay attention to here.