The Wall Street Journal - 13.03.2020

M6| Friday, March 13, 2020 THE WALL STREET JOURNAL.

A

host of alternative
home-finance start-
ups are targeting as-
piring home buyers
who are either unable
to qualify for traditional mort-
gages, lack a 20% down payment,
or can’t compete with buyers of-
fering cash. The downside is that
the companies use new, untested
systems, ask some customers to
give up tax-deductible interest
payments and demand a piece of
the potential price appreciation in
the home.
One such company is Haus, a
San Francisco-based startup that
has been testing its concept since
July 2019 and will officially launch
in March. The firm was co-
founded by Garrett Camp, one of
the two founders of Uber.
“We’ve essentially built a 401(k)
that you live in,” said Jonathan
McNulty, Haus’s chief executive.
Like several of the new financing
companies, Haus offers buyers a
way around the difficulty of com-
peting with cash offers or making
a big down payment. But Haus’s
primary innovation, Mr. McNulty
said, is that it lets the homeowner
pay more to buy more equity
when they are flush and sell eq-
uity back to Haus for cash when
they need it.
Here’s how it works: A buyer
using Haus puts down 10% of the
purchase price on a home. Haus
provides the rest of the purchase
price and pays in cash. The buyer
now has the title to the property,
while Haus maintains a deed of
trust, which means that the buyer
has to pay the taxes and insurance
on the home. The homeowner then
gives Haus a monthly payment
that is up to 30% less than the
cost of a traditional mortgage pay-
ment plus private mortgage insur-
ance, which most lenders require
if buyers have less than a 20%

down payment. Roughly a third of that payment goes toward pur- chasing equity in the home from Haus. The homeowner could pay more and build up equity faster. Conversely, if they miss a payment, they can exchange the equity that have for that payment, as long as they maintain at least a 10% position in the house, Mr. Mc- Nulty said. Benjamin Keys, associate pro- fessor of real estate at the Whar- ton School of the University of Pennsylvania, sees downsides. “A big one is what happens at the end of the term,” which Haus sets at 10 years, he said. Though the homeowner could sell, if they want to remain they either have to renegotiate with Haus—at whatever terms it offers—or bor-

row from a lender to buy Haus out. “They would be subject to whatever the rates are, and how- ever their house appraises,” said Mr. Keys. Monthly Haus payments aren’t tax deductible. For some taxpayers, any savings Haus offers relative to a traditional mortgage would be offset by the loss of the mortgage-interest tax deduction. ZeroDown, another San Fran- cisco-based company that launched in June 2019, focuses on the down-payment problem. With ZeroDown, a homeowner picks out a home and the company buys it with cash, then rents it back to the client for up to five years. The client also signs an option agree- ment that gives them the exclu- sive right to buy the house from ZeroDown. Each month, a portion

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of the rent goes toward “purchase credits,” that allow the client to build up what is essentially equity in the property of about 3% of the home’s appreciated price a year. If the client then decides to buy the house, they apply for a traditional mortgage, using their purchase credits as their down payment. Alterna- tively, if they decide to leave the home af- ter two years, they get to keep half of their purchase cred- itsasa“walkaway credit,” said chief executive and co- founder Abhijeet Dwivedi. Thus far, ZeroDown has 53 clients, he said. The company currently operates only in the San Francisco Bay Area and Seattle. The downsides of ZeroDown include a nonrefundable $10,000 fee, due when ZeroDown makes an offer on the house (it is re- funded if the offer isn’t ac- cepted). If the resident decides to buy the home, ZeroDown calcu- lates a new price based on 3.3% annual appreciation, or as deter- mined by a third-party appraiser, whichever is higher. That means that during the renting years— during which time clients pay for most maintenance on the house, save HVAC and roof work—most of the appreciation ends up in Ze- roDown’s pocket. Divvy Homes, also San Fran- cisco-based, launched in 2018 and so far has bought homes (the company wouldn’t say how many) on behalf of customers in Memphis, Cleveland, Atlanta, Tampa, Dallas and St. Louis, said chief executive Adena Hefets. Like ZeroDown, it is a rent-to-own concept where Divvy buys the home a client wants for cash and then rents it to them.

Divvy serves “average Amer- ica,” said Ms. Hefets, buying homes that cost between $60,000 and $350,000. Divvy clients put down between 1% and 2%, which buys them that much equity. Then they pay rent to Divvy, roughly 20% to 25% of which goes toward building equity. At the end of the three-year term, the client will have accumulated 10% of the price of the home, now revalued at a buyback price set in advance by Divvy (on average, a 10% increase, said Ms. Hefets). If the market value of the house soars past that buyback price, the renter wins, because they get to buy the house for less than it would cost on the open market, Ms. Hefets said. If the home declines in value, the customer doesn’t have to buy it and can walk away. They still keep their 10% equity, but a “broker price opin- ion” by a third-party broker sets the new, lower market value. The customer must also pay a 2% fee to help defray the costs of sell- ing the home. “The tenant shares in the loss, but would lose less than if they owned the home outright,” said Ms. Hefets. Executives say their platforms encourage homeownership amid a national decline by giving people who wouldn’t qualify for mortgages a way in. Though many pro- grams require that homeowners share some home appreciation with companies, they wouldn’t have any market gains if they never became homeowners to be- gin with, executives say. Mr. Keys said that while down- payment help has value, buyers should calculate the cost of such features. He recommends explor- ing adjustable-rate mortgages, such as 5/1 ARMs, which are less popular than 30-year fixed mortgages but often better meet home buyers’ shorter-term needs. There is also the risk that these startups will go belly-up. Each company said that if they closed, contracts would be honored and fulfilled by a backup servicer or bankruptcy trustee.

‘We’ve essentially built a 401(k) that you live in.’ JonathanMcNulty, chiefexecutive,Haus

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The Wall Street Journal - 13.03.2020

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