When Erik and Rafaela lived in Colorado, and later Nevada, they occasionally looked at property listings and dreamt about buying a home. But it wasn’t until they landed in Seattle and closer to family that they decided to turn their dream into reality. The couple had had enough with their latest rental: First the water heater broke, and then the unit flooded, twice. After mold started to appear, and their landlord remained indifferent, they decided it was time.
“We know that problems happen,” Rafaela says. “But the way they treated us, it’s like you were going in there to ask for a favor.”
“The sad thing is that they don’t really have to do anything,” Erik adds. “It’s going to rent. The demand is so high.”
In competitive real estate markets like Seattle, where rents are soaring, prospective homeowners like Erik and Rafaela find saving for the recommended 20% down payment difficult. There are some established options, like Federal Housing Administration loans that push down payment requirements to as low as 3.5%. But the government-backed mortgages usually come with a lot more strings.
Sharing economy to the rescue
It was while researching FHA loans that Erik and Rafaela came across a creative new financing option. Loftium, a Seattle-based startup, will contribute to a buyer’s down payment in exchange for Airbnb income. By agreeing to welcome Airbnb guests for up to three years, a Loftium customer can augment their savings and get approved for a mortgage worth far more.
Loftium has so far closed on nearly 50 homes, says Yifan Zhang, cofounder and CEO. “One hundred percent of our homebuyers have been middle income compared to Seattle income, with fairly low down-payment savings,” Zhang says. “Loftium was essential to them purchasing a home.”
Other startups are taking a similarly innovative approach to the staid, highly regulated housing market. HomeFundMe, for example, helps homeowners crowdsource down payment funds from family members, friends, and employers. Point, based in San Francisco, buys equity from existing homeowners, and then cashes out when they sell–a homeowner-friendly twist on home equity lines of credit (HELOCs).
“What’s interesting for me is that these entrepreneurs are causing us to think completely differently about ownership in general,” says Jennifer Tescher, president and CEO of the Center for Financial Services Innovation. “We first started thinking about what ownership means with the sharing economy. And now, this is the next logical point.”
She adds: “Where you have to watch out is when it’s yet another ‘financial innovation’ that has no real benefit to the consumer.”
These new models could be a potential boon for would-be homeowners, and the mortgage market. After all, the national homeownership rate stands at 62.7%, down from 68.8% in 2005. Millennials appear to be driving the decline: In 2003, 42% of adults under age 35 owned a home; by 2017, the percentage dropped to 35%, according to Federal Reserve and U.S. Census Data. Startups like Loftium could potentially reverse the downward trend.
JPMorgan Chase Institute president and CEO Diana Farrell, who served in the White House during the housing crisis, recommends a healthy degree of caution. “To what extent is it appropriate to make it possible for people to stretch? Those arguments get made most aggressively during times of low interest rates when the economy is doing pretty well,” she says. “When things go awry, you see the aftermath.”
No Regrets–So Far
Today, Erik and Rafaela live in Burien, Washington, a Seattle suburb. For the next three years they will rent out the home’s mother-in-law unit, pocketing some of the Airbnb income while passing the bulk of it on to Loftium. Loftium manages bookings and communicates with guests, but Erik and Rafaela are responsible for cleaning and maintaining the rental space. Since moving in, they’ve been at least 85% booked.
So far, they have no regrets about their unusual arrangement.
“It pushed us to go for something that was maybe more expensive than if we didn’t have Loftium, because we did want that extra privacy,” Erik says. “[It] was kind of a good thing, given the way the market is. It might seem expensive now, but it seems like everything is going up and up.”
“It’s a gift,” Rafaela says of the down payment assistance. “And we can see that we have this profitable business, which makes it really attractive.” When their 36-month contract with Loftium expires, the couple plans to continue listing their extra space on Airbnb.
As for Loftium, Zhang says the company’s algorithms have been accurately predicting the Airbnb income for part of a home. “We’re taking into account the characteristics of the home, the neighborhood,” she says. “We have homeowners on the outskirts of [Seattle] and the region. Everyone has been performing up to expectations. It’s exciting for us, because it’s proving our hypothesis that Airbnb income is a widespread tool that can be used for home affordability.”
She rejects comparison between Loftium and the potentially exploitative car leases that Uber and Lyft offer their drivers. “We’re not trying to trade people’s time for income,” she says. “We think there’s income that already exists in these homes. We’re just unlocking that choice for people.”
“A Modern-Day Barn Raising”
Paul Akinmade, CMO of CMG Financial, the bank behind startup concept HomeFundMe, offers a similar view. “What we want to create is a modern-day barn raising,” he says. “We see home buying as a community event.”
Billing itself as a “crowdfunding platform for your down payment,” HomeFundMe combines the traditional mortgage pre-qualification process with requests for down payment contributions via email, Facebook, and other social platforms. A HomeFundMe coach helps prospective buyers conduct their fundraising, offering suggestions based on the communities where they are most connected; one buyer, for example, distributed flyers with a bitly link at his church. On the back end, the bank provides documentation of each gift, as the industry requires. By mid-May, the platform had closed on 271 transactions, contributing $866,657 in total.
According to Akinmade, the risks are no higher than that of conventional loans. “If your friends and family help you get the loan, that’s a really awkward Thanksgiving if you let that house go into default,” he says. “The other part of this: People aren’t just putting the minimum down. This is a vehicle for them to create more equity and opportunity for themselves.”
Since HomeFundMe launched, its average down payment has been increasing and now hovers at around 10%. “These people are getting a house, they’re getting it responsibility, and they have a cushion in the bank if something goes wrong,” he says. HomeFundMe’s average FICO score is just under 700, with a minimum of 620.
Help for existing homeowners
For existing homeowners, there are now two new options on the market (and perhaps a third, after former SoFi CEO Mike Cagney unveils more details about his new startup, Figure). One is to refinance with help from Airbnb, which has teamed up with Quicken Loans, Citizens Bank, and Better Mortgage to ensure that hosts can include Airbnb Proof of Income in their application. Airbnb says it does not yet have data on the initiative’s popularity.
The second option is to sell a portion of their home equity to Point, a startup backed by Airbnb’s former CFO, Laurence Tosi. Point cofounder and CEO Eddie Lim says that he has bought into roughly 100 homes to date. With $150 million in new committed capital from hedge Atalaya Capital, Point is now poised to buy equity in 1,500 homes.
“The big a-ha for these customers is that there’s no monthly payment, there’s no debt,” Lim says, contrasting Point with HELOCs. “This is really the opposite of that—deleveraging your home, and sharing that equity risk.”
Many Point customers are facing a cash crunch or credit crisis due to a divorce, medical issue, or other life event. When high-interest debt is the issue, Point pays off the bill directly, through escrow. “We see a lot of situations where credit scores improve 50 to 100 points,” says Lim. “No surprise, these are happy customers.”
Point cashes out when a customer sells or refinances their mortgage. As Lim notes, the company has an incentive to achieve the outcome that is best for the homeowner. “If we can get you a better refinance, if we can help you get a better price, these are all things that are good for us as well.”
For Lim, a serial entrepreneur whose prior startup was acquired by Visa, homeownership should look more like startup ownership. “The American Dream used to be, I’m going to own this home,” he says. “But it was very binary, rent or own. Why not own 80%, or 77%? Most [startup founders] don’t own their entire company; they syndicate that risk. Why not let homeowners also have that option?”