Divvy Homes needs to change the best way you purchase your own home. It additionally needs to change the best way you lease your house. And within the course of, it needs to change one of many housing market’s oldest enterprise fashions – one which’s been fraught with pitfalls prior to now.
San Francisco-based Divvy, which on Tuesday introduced a $30 million funding spherical from famed enterprise capitalists Andreessen Horowitz, calls itself a “fractional homeownership company.”
To many housing advocates, it appears just like the acquainted “rent-to-own” mannequin that has stumbled earlier than, both by ensnaring shoppers in clearly predatory schemes, or by failing to make work for anybody what’s typically described a “win-win.” Still, Divvy and its backers consider new know-how, and classes discovered from the aftermath of the housing disaster, will assist it succeed the place others have failed.
Divvy, which launched earlier this yr, permits certified clients to choose any house that’s on the market on the open market, so long as it’s in affordable form and meets the suitable pricing profile. If clients meet sure standards – together with having a minimal credit score rating of 550 and being employed for the final 12 months – they’ll probably qualify to take part.
Divvy will purchase the house for the client, and permit that buyer to lease it for up to three years. Every month, the tenant will make a month-to-month cost that Divvy’s underwriting fashions decide the client can “comfortably afford.” About 70% of that month-to-month cost is lease, about 5% are upkeep funds, and the remaining is what it calls “equity credits” – monies held in escrow and which can belong to the tenant, whether or not or not he ultimately turns into the proprietor of the house.
Divvy has helped shut to 100 clients up to now, co-founder and CEO Brian Ma informed MarketWatch, and is fielding almost 2,000 purposes a month. Right now it’s up and operating in Cleveland, Atlanta, and Memphis, however is evaluating further markets.
The firm’s approach is designed to reply to ache factors which have tripped up earlier rent-to-own makes an attempt. Divvy makes use of massive knowledge to work solely with clients “who have a high likelihood of conversion” from renter to proprietor, in Ma’s phrases.
“We make more money if you convert,” Ma stated. “We want to treat people like co-owners.”
While that feels like a worthy aim, it makes shopper advocates wince.
“These hybrid options where you’re renting to own or where it’s implied that you have a path to ownership carry a lot of risk and come with a lot of potential problems,” stated Sarah Mancini, an lawyer who splits her time between the National Consumer Law Center and an Atlanta-based authorized help group.
That might embrace having to pay a lot of cash out of pocket, Mancini stated. “They make a tenant take on additional expenses with the expectation that they’re going to become owners. While you’re in the lease period, you are responsible for taking care of the house. That’s not legal in most states. When you’re in a lease, the landlord has the obligation to make the repairs.”
Any of the accrued Divvy upkeep funds that a buyer doesn’t use are returned on the finish of the three-year tenancy, Mancini acknowledged, however she thinks it’s nonetheless arduous to decide whether or not any given family can be higher off pursuing Divvy’s mannequin or renting, permitting a landlord to fear about repairs, and saving a specific amount every month towards a conventional residence buy.
For its half, Divvy says it has dozens of pleased clients, and it’s studying as it goes. It hit an early high-profile stumble, when an Atlanta tenant’s residence turned out to have main structural issues requiring hundreds of dollars of repairs. That tenant additionally turned out to be a local progressive media journalist with a particular interest in housing issues. The case began out in courtroom, however then Divvy “ended up paying for all of it. It worked out great – we still talk,” Ma stated.
For Ma, who was an early Zillow worker, that incident exemplifies what he thinks Divvy brings to the housing market. “Homeownership is incredibly emotional, it was a lot of work on both of our ends. It’s much easier when a company does this at scale than when a family does.”
Andreessen Horowitz companion Alex Rampell agrees. Rampell sees Divvy because the antidote to the huge Wall Street buyers that scooped up hundreds of homes within the aftermath of the monetary disaster and have become landlords on an institutional scale.
Companies like Blackstone
transformed owner-occupied housing stock into renter-occupied, Rampell famous. He believes Divvy can reverse that development, leaving tenants not simply on the trail to homeownership, but in addition having accrued some fairness.
“This exact thing has been tried by people who I deeply respect and have deep roots in housing,” stated Julia Gordon, government vice chairman of the National Community Stabilization Trust. One current instance is Home Partners of America, a Chicago-based rent-to-own firm initially funded by housing securitization pioneer Lew Ranieri. Home Partners didn’t reply to a number of requests for remark.
“This doesn’t work if you’re aimed at a lower-income population,” Gordon stated. “The economics don’t work. If they can make the economics work for low- to moderate-income families, that would be new. If they can make it work in the affordable space, that’s great.”
Gordon and different advocates consider that anybody involved in a program like Divvy’s is both prepared – and “could get into ownership now” in the event that they worked with a housing counselor – or not. While Divvy’s mannequin differs vastly from earlier predatory packages that may do nothing for these within the latter class, it’s nonetheless unclear what is going to occur on the finish of the three-year tenancy interval.
It’s additionally not clear what is going to occur if house costs decline, or if a residence doesn’t appraise for the quantity Divvy and the tenant have been relying on on the finish of the rental interval.
Divvy’s Ma says in response that the corporate needs to have “a long-term relationship” with its clients, and can make each effort to make the conversion course of work for them.
“There’s still this disconnect between homes available for purchase and available mortgage credit,” Mancini stated. “We haven’t solved that problem and people are still taking advantage of that. Most of the financial models that have been developed have been extremely predatory. This one seems less problematic. There’s potential for upside for most parties but there’s also potential that most of the profit would go to the investors. I’m just not sure that being in this contract makes it any more likely that you’d be a homeowner in three years.”
Divvy – and its high-profile buyers – consider it’s value a shot.
“We really feel co-ownership is here to stay,” Ma stated. “We fundamentally believe that rent to own was a good idea but executed poorly. We want to be the modern rent to own.”