My, how things have changed. Just a couple years ago there was incredible momentum building around alternative ways to purchase, sell and extract value from residential properties.
iBuyers led the way on reshaping the options available to sellers through direct, instant cash offers at scale. The highly competitive purchase market and bidding wars gave rise to power buyer models to help non cash buyers compete.
Creative solutions meant to help renters become homeowners and let homeowners tap into their equity without taking on additional debt began to spring up like the California wildflowers I hope last through the fall (is there a fall season in California?).
There were historic amounts of investment and funding, and for some traditional housing finance models, real fears of being disrupted. That is until interest rates tripled in the course of nine months, of course.
The pullback of capital and massive drops in the number of real estate transactions have simultaneously put pressure on alternative business models to become profitable faster, and to find ways to adapt in a changing market.
However, the major problems that these businesses are trying to solve have not gotten any less daunting, funding or not. In fact, they might have become more challenging in many cases. Lack of affordability, limited supply and the need to access equity without selling remain major friction points for homebuyers and homeowners alike.
This need for adaptation has resulted in the consolidation of companies, blurred lines between alternative finance with traditional mortgage products and new momentum for platforms that address the needs of existing homeowners.
With all this change, it’s worth exploring some examples of how proptechs are adapting, and check out some of the business models that have survived the market pullback.
Fractional and shared ownership
The concept of co-ownership and co-buying is far from a new one. Friends and family members pooling resources together for vacation homes and investment properties has been a common tradition for generations.
But with mortgage rates well above 7% and home prices remaining stubbornly high due to a lack of supply, co-buying is being looked at as a viable option for first-time homebuyers.
Shared ownership in an investment property can also provide a means to accelerate the growth of funds for future down payments, allowing first-time homebuyers a faster path to homeownership.
The problem with this process has been complexity and access to lending products. Coordinating multiple parties can be tricky, but startups like Nestment are providing a platform for allowing friends to buy together. These platforms are even moving toward matchmaking networks, where you can find people you haven’t met with similar goals for co-buying.
Power buying/trade-in mortgages
High-rate environments tend to deter buyers who need financing more than cash buyers. That trend has been evident this year as the percentage of cash buying has increased to a decade high, according to Redfin.
There doesn’t seem to be more cash buyers in the mix, just fewer buyers who are financing. Either way, the need to compete against cash buyers with no contingencies continues to be a real challenge.
One contingency that companies like Calque are trying to reduce friction on is the sale of your existing home. Enter the trade-in mortgage concept, where you have a guaranteed path to make an offer on your next home without selling your current home.
Not only does this strengthen the offer to compete against cash buyers, but adds a level of convenience since you don’t have to prep your current home for listing until after you have moved into your new home. This is done through using the equity on your existing home as a down payment.
Moving can be stressful, so for buyers that need to change locations quickly, perhaps for a job relocation, this could reduce some of that stress.
Home equity agreements
Speaking of using your home equity, there is an incredible amount of untapped equity available to U.S. homeowners.
According to the latest Q2 report from the St. Louis Federal Reserve, there is a total $30 trillion dollars of equity shared by U.S. homeowners or $200,000 on average per homeowner.
However, traditional products like cash-out refinances and home equity lines of credit (HELOCs) are not always the right fit for some homeowners looking to tap into their available equity with today’s high mortgage rates.
This is especially true for homeowners who would not qualify for a traditional loan due to financial hardship, and want to use their home equity to get themselves into a more stable situation without having to sell their home.
Companies that offer alternative options such as home equity investments or agreements are on the rise. Unlock, Point and others offer to buy a portion of the home for cash, with an agreement that doesn’t require monthly payments but a share of the future home sale or refinance within a specified term.
Final thoughts
It looks like the real estate and housing finance market could be in a challenging place for a while longer, since the Fed is still working to combat inflation.
Innovations that give first-time homebuyers a shot at buying now, and let current homeowners hang on to their existing low mortgage rate while using their equity to create financial health are welcome.
Some of these models have not been tested long term and there is a constant need for consumer advocates to ensure homeowners and homebuyers are not taken advantage of, especially during times of need.
However, my overwhelming experience with proptech founders has revealed a number of “golden rule” followers out there. Most of them are just regular people who experienced a difficult situation buying their own house or maybe saw their family members struggle, and now want to keep that from happening to others.
We will need that type of mindset to tackle the current challenges in today’s housing market.
Kenon Chen is the EVP of strategy and growth at Clear Capital.
