Tech startups have found all kinds of ways to lend money to those hampered by either too little or not very good credit.
The approach of a nearly two-year-old, 15-person San Francisco-based startup called Divvy Homes is among the more creative we’ve seen, even while we question (for now) whether it’s good over the long term for potential customers.
How it works: In Cleveland, Memphis, and Atlanta, where Zillow estimates median home prices are $52,000, $82,000, and $242,000, respectively, Divvy will enable a person or family to select a home they’d like to someday own, then to buy that home with Divvy’s help. The family chips in at least two percent for a down payment. Divvy pays for the rest, then it collects a monthly amount that includes both market-rate rent and an equity payment.
It does this until the newly installed residents have amassed a 10 percent stake in the home. The reason, says the company: By partnering with Divvy, tenants — some of whom have credit scores as low as 550, which is considered “very poor” by the consumer credit ratings agency Experian — can build their credit scores and eventually land a mortgage insured by the Federal Housing Administration, which requires a credit score of at least 580.
According to CEO Brian Ma — who co-founded the startup at the company creation studio HVF Labs — the idea is for this to happen within three years, at which point Divvy will sell and transfer the property over to them.
It’s easy to appreciate why this might be attractive to potential homebuyers who can’t secure a traditional mortgage in the current market — not all of whom suffer from poor credit but who are sometimes contract and self-employed workers without months of salary stubs to show nervous bankers. For example, Divvy says that it charges less in rent as a buyer’s equity begins to add up. That equity, it insists, can later turn into the person or family’s first mortgage payment.
For largely self-serving reasons, Divvy does what it can to ensure that the house isn’t a dud, too. As Ma describes it, Divvy uses data science and algorithms to ensure that a property makes sense financially, meaning that it will likely appreciate and that the tenants aren’t paying so much that they can’t simultaneously build equity in their homes.
Divvy also works with inspectors to make doubly certain each home is “move-in ready and won’t have large unforeseen expenses during the lease, like major roof, structural, pest, or foundation issues,” says Ma, who previously co-founded three startups, as well as spent several years as a program manager with Zillow.
Still, it’s also easy to imagine that some of Divvy’s aspiring homeowners will never actually own their homes. Consider: While Divvy may help some percentage of them improve their credit score, roughly 62 percent of consumers with credit scores under 579 are “likely to become seriously delinquent (i.e. go more than 90 days past due on a debt payment) in the future,” says Experian.
Naturally, like any other property owner, Divvy will evict tenants who don’t pay, even if it does so reluctantly.
“If a rent payment is missed, we will follow up to see how we can help,” says Ma. “Most of the time, it’s immediately curable or curable within a couple days. If it’s been longer than a week and we believe the tenant is going through some hardship, we will work our best to offer alternatives, including allowing them to purely rent the property by dropping the equity payments to lower their monthly payment. If we can’t find a way to cure the situation, we will go through an eviction procedure.”
Divvy also establishes the buyback price at the time that it’s buying the home — which can work for, or against, the tenants who hope to own it someday.
Adena Hefets, another Divvy co-founder who worked previously in both VC and private equity, recently explained to us that Divvy has a back-end model that projects where the house would price three years down the line and it allows tenants to “buy it back at that price at any time.” Yet buying it back early would invariably mean overpaying. Moreover, in the cities where Divvy is operating, housing prices don’t move around a lot, so a tenant could be overpaying at any buyback price that’s north of where the home sells today. (Home prices in Northeast Ohio were rising as of last spring, but they were still at 2004 levels.)
With the broader housing market poised for a slowdown, tenants wanting to buy their homes might decide it’s cheaper in the end to just move out of them and find something else. They’d still get 10 percent of the sale of the home, even if they overpaid for it over their three-year commitment. But where would that leave Divvy? We’d guess it would leave it looking more like a modern residential real estate investment trust than a “rent-to-own innovator.”
That’s not a terrible thing for Divvy, even if it sounds a little less glamorous. In fact, the company — which says it’s already buying one home a day — is today disclosing that it has raised $30 million in equity and debt from Andreessen Horowitz (a16z) and a commercial bank called Cross River Bank that notably is backed by a16z.
Ma declines to say how much of the round is equity and how much is debt. But he says that Alex Rampell, an a16z investor whose other real estate-related bets include a different fractional ownership startup, Point, has joined the company’s board.
Pictured above (at TC headquarters), left to right: Divvy founders Nicholas Clark, Brian Ma and Adena Hefets.