When executives at online mortgage company Better.com decided to take their company public earlier this year, they elected not to go the traditional IPO route or direct listing. Instead, Better will hit the public markets by merging with blank-check company Aurora Acquisition Corp in a SPAC deal that values it at $7.7 billion.
While the stock performance of post-merger SPAC companies has been shaky at best this year, the team at Better believed they were getting a preferable deal through their combination with Aurora (and additional investment by SoftBank) than if they decided to pitch bankers and institutional investors through a traditional IPO roadshow.
“When an investment bank signs up to sell your stock to the public, there’s no guarantee of a price or no certainty of execution,” said Better CEO Vishal Garg. “We just were not confident that the investment bankers were going to be able to execute.”
You can hardly blame Better’s leadership for that lack of confidence. In the past year, two other online mortgage lenders — Rocket Companies and loanDepot — were listed through traditional IPOs that priced below range due to lackluster demand from institutional investors.
The same thing happened to real estate brokerage Compass, which lowered its target range on the day of its IPO and has seen its stock price continue to slide since going public.
“A traditional public offering makes sense for a story that your traditional investment banker can understand and categorize,” Garg said. “If you can be easily categorized as an enterprise SaaS company or a payments company, then a public offering makes sense.”
But the team at Better has bigger ambitions than just being seen as a mortgage lender and compared with other financial services companies. With mortgage lending at its core, Better has added a number of additional products and services, including realtors, title insurance and homeowners insurance.
In the second half of this year, Better plans to begin offering home services and improvement loans, and eventually will expand to other finance and insurance products like personal, auto and student loans, as well as life and disability insurance.
“We aren’t so easily categorized,” Garg said.
Making mortgages cheaper, faster and easier
Like many digital disruptors seeking to upend established industries, Better was born out of one person seeking to solve a problem for himself. Sometime around 2012 Vishal Garg, founding partner of One Zero Capital and founder of the online student lending company MyRichUncle, was hoping to buy his “dream home” but got hung up during the process of securing a mortgage and lost out on the bidding to a buyer who could close the deal faster.
As the apocryphal founding story goes, there were few options available for someone looking to apply for and secure a mortgage online — or even get a mortgage pre-approval letter. So Garg set out to build it.
“The original vision was to make the process of going from being a renter to a homeowner. cheaper, faster and easier,” Garg said. “We built a product that let you get a pre-approval letter online in five minutes, instead of five days or five weeks.”
According to Sarah Pierce, who joined the company as one of its first 30 employees and now runs all sales and operations, Better was able to fulfill the goal of getting approved for a mortgage faster by using its technology to assess borrower risk.
“Customers actually do not need to talk to a human at all during the process. And we have customers that do that, particularly on refinance: They come in, they’re able to apply, lock in their rate and do the entire thing without ever talking to a person. So there’s actually zero human intervention needed,” Pierce said.
But in some ways, Better was maybe a little ahead of its time, especially in the early days. It turns out that when making a life decision about the single biggest purchase you might make, it helps to have a little bit of hand-holding.
Even now, as borrowers have become more comfortable with accessing financial services online, only about 10% of Better’s users are “auto customers.” That’s what the company calls customers who don’t interact with a broker at all. The number slips down to 2% or 3% when you exclude refinances and focus just on homebuyers.
“Our average customer is sending us 87% of their life savings as their down payment on their home,” Garg said. “How do we help them feel more secure with their life’s biggest financial transaction?”
That’s where its salesforce of non-commissioned brokers comes in.
Unlike a traditional mortgage lender, where brokers are compensated based on a commission tied to the value of the loan they underwrite, Better hired a non-commissioned, salaried workforce to service clients. That stripped some costs out of the process, but it also helped align incentives between the broker and the borrower, according to Pierce.
“I found it very odd that people who are supposed to be licensed agents to work with customers on what home they can afford would be paid on a commission that puts their incentives at direct odds with the customer,” she said. “They’re paid to basically get the customer into a higher loan amount because they get paid more.”
Because the entire Better mortgage application is digitized, the firm was able to automate a lot of administrative tasks and processes and allow agents to focus solely on serving their customers. It also has enabled them to give customers a single point of contact to answer any questions they might have.
Building the home screen for your home
Mortgage lending and refinance are at the core of Better’s business, but the company has been aggressively expanding its product line. The goal, according to its execs, is to become a sort of one-stop shop for all needs related to a home purchase, as well as the care and maintenance thereafter — what they sometimes refer to as a “home screen for your home.”
That started in 2019, when Better began offering homeowners insurance and title insurance policies into its purchase flow, which are businesses that have grown dramatically over the past year. Insurance coverage written increased from $1.1 billion in fiscal 2019 to $8.8 billion for the 2020 fiscal year, according to Better’s S-4 filing. And there’s plenty more room to grow, as the company is still growing the number of states in which it even has licenses to operate those businesses.
At the time of the company’s S-4 filing, Better’s title service was licensed in 24 states and its home insurance product was available in 37 states. That’s compared to the 47 U.S. states in which the company can offer mortgages.
Just based on the fact that it’s bound to add more markets over time, Better Chief Financial Officer Kevin Ryan said, “By definition, we’re going to grow that business faster. But what we do that nobody else does — and we truly think this is a differentiator — is we embed everything in our flow.”
A first-time homebuyer might not know that they want title insurance — in fact, they might not know that they need title insurance, but by making it a part of the standard mortgage application process Better can very easily capture that business.
The same is true for homeowner’s insurance, where Better doesn’t underwrite policies but makes money from referring its customers to online insurance brokers like Hippo and Lemonade. “They’re paying us fees to deliver our customer, and that’s almost free money because we have no customer acquisition costs,” Ryan said.
Upselling customers with additional products on the back end of the mortgage process is one thing, but Better also wants to be involved in the earliest portion of the home-buying journey. It’s doing that by matching customers with real estate agents who can help them find a new place to live.
At first, Better was referring its mortgage customers to a network of real estate agents. But increasingly the company is bringing that operation in-house, for the same reasons it spun up its commission-free mortgage brokers: to streamline the process and reduce costs for customers.
“We’re trying to replicate what we did with mortgages in the real estate agent space to see if we can tackle this piece of the puzzle that really takes value away from customers,” Pierce said. “The average real estate commission is 6%, and that’s a down payment for some customers.”
Starting with just five non-commissioned real estate agents at the beginning of 2021, Better now has more than 200 operating across 26 different markets. And it expects to have 500 by the end of the year.
In today’s housing market, where there can be intense competition between buyers, being able to close quickly has become somewhat of an advantage. (Recall that the whole company was started after the CEO lost out on his dream home due to delays in financing.)
“The only thing preventing you from closing instantly is the mortgage company is too slow or your bank is too slow,” Garg said. But, he added, “If we already know within a few minutes that you’re eligible to get a mortgage and if we let you lock your rate in 15 minutes, we should just be able to turn you into a cash buyer.”
Better is doing just that by launching a Cash Offer product. If one of its preapproved customers can’t afford to make a cash offer themselves, the company will make the cash offer for them, give the buyer time to get a mortgage and transfer the home to them once it has closed. Launched in mid-August, Cash Offers are available across eight states in markets where Better has in-house real estate agents to avoid fraud.
All of the above products and services are designed to help people buy a home and finance the transaction, but what happens after that?
According to Pierce, the typical life cycle of a mortgage is about five to seven years, so reacquiring customers can be a challenge. While about 8% of its borrowers have returned as repeat customers even in its short lifetime, Better knows that it needs to build deeper engagement with buyers after a home purchase has been completed.
To do that, the company has plans to launch a series of products designed to extend its usefulness to customers. That starts with offering a home equity line of credit (HELOC) to existing mortgage customers.
The Better Home Line of Credit will be a closed, unsecured line of credit up to $50,000 that will be available through a debit card issued for spending specifically on a client’s new home and will offer up to 15% cash-back credit at participating home goods and hardware stores.
Finally, according to its roadshow deck, Better plans to begin offering products like personal, auto and student loans, credit cards and life insurance as early as the first quarter of 2022.
“A lot of people have their niches in the way they’re attacking this, but we feel like we’re on a path to being full stack where everything’s embedded in the same flow,” Ryan said.
A COVID bump
There’s no doubt that the COVID-19 pandemic was a boon for Better’s business — and the online mortgage market in general. At the same time that bank branches were closed due to the threat of community spread, borrowers were able to purchase or refinance mortgages at historically low interest rates.
Add to that the necessity of working from home, along with students being forced into online learning, many families were forced to reevaluate their living situations, which led many to move to less populous areas with a lower cost of living and better quality of life. Finally, according to Garg, the pandemic also prompted many long-time renters into considering buying a house for the first time.
“COVID accelerated the future and brought it forward by three to five years in terms of adoption of financial services and deep disruption of the consumer’s previously long-held desire, but unactualized desire, to own a home,” he said.
All of that together led Better to grow much faster than anticipated and to reach profitability well ahead of plan. Its total revenue grew 7x to $876 million in 2020 and it posted a profit of $172 million for the year.
2020 represented a perfect storm for the online mortgage industry, but things barely slowed down in the first quarter of this year. During the three months ending on March 31, Better reported revenues of $426 million — up from $49.8 million in the prior year’s first quarter — and a profit of $82.3 million compared to a loss of $42.7 million a year earlier.
According to Fannie Mae, single-family mortgage originations are expected to decrease in value from $4.5 trillion in 2020 to $4.1 trillion in 2021 and $3 trillion in 2022. But Better expects to keep growing by increasing market share in its home mortgage business.
“We are not immune to macro factors,” Ryan said. “The thing we have going for us is TAM [total addressable market]. We did $876 million of revenue last year and [had] 40 basis points [0.4%] of market share. If we can do that much revenue, the pool of addressable market for homeownership just in the U.S. alone is massive.”
Better also hopes to accelerate the revenue it takes in from real estate, title and homeowners insurance, which it calls Better Plus. Today those product lines generate just about 5% of all revenues but are the fastest-growing part of the business.
Back to the SPAC
The combination of fast revenue growth, an expanding product line, and a massive increase in employee headcount are all good reasons why it made sense for Better to go public — and to go public now, according to company execs.
But there are some other reasons, like potential M&A activity. Already this year, Better has acquired two U.K.-based companies — online mortgage lender Trussle and fractional home ownership startup Property Partner — but exchanging public stock in an acquisition is usually favorable to private shares. Being public will also enable it to more easily raise funds if it needs to do a cash deal.
“We’ve got really big ambitions, and that probably requires some M&A over time. It’s really hard to deliver private company stock in an M&A deal,” Ryan said. “For the same reason that an employee has no idea what [their stock is] worth, a target has no idea what it’s worth.”
Then there’s the squishier reason Garg gives for going public, which is his belief in allowing small investors and customers to own a piece of the company.
“I really believe that internet companies should be public companies. You want to let your customers own a piece of the future that they’re helping to bring about by doing business with you,” Garg said. “I want my customers to be able to own a piece of the future that they’re making.”
All of which brings us back to the question of, “Why do a SPAC?”
According to CFO Ryan, Better evaluated doing a traditional IPO and decided against it for a couple of reasons: “One, we didn’t feel like we would have a lot of flexibility in who owned our shares on the other side. Two, the SPAC deal we got was unique. All the credit goes to SoftBank. They guaranteed the deal.”
Going the SPAC route was partly about the peace of mind provided by one of its biggest existing backers. As part of the deal, SoftBank has agreed to invest $1.3 billion into the company through a PIPE, or private investment in public equity, along with another $200 million from SPAC sponsor Aurora. That investment comes on top of the $500 million that SoftBank put into the company earlier this year.
“What we got with the SPAC was SoftBank underwrote and the SPAC sponsor underwrote our entire deal,” Garg said. “So we have 100% certainty on the price and the execution. That’s really valuable because we’re not wasting time.”
That time saved might be the most important reason to forgo the traditional IPO process. According to Garg, “When you’re growing 300% a year, you don’t want to waste weeks on the road talking to people who may or may not really be interested in your IPO.”
“We spent the entire summer launching new products, rather than being on roadshows,” he said.