Rick Lazansky – President of Sandhill Angels Lev Mass – Venture Partner at Xseed Capital Mike Olson – Founder and now Chief Strategist at Cloudera
Confirmed our hypothesis that counter-party liability was a huge issue – so we started working on ideas for how to mitigate that through our product
But we also heard something else that was interesting – even though we were focusing on investment properties, co-owner agreement was still huge.
Learned that if we don’t tackle this first, nothing else matters
So now, moving on to the lenders, we needed to figure out where the money for these mortgages was going to come from. When we initially launched the idea, we envisioned using peer-to-peer networks to get around industry regulations – but we quickly found that 1) this model isn’t immune from regulations, 2) using this model implied proving not just 1 side of the market but 2 and 3) this industry has been facing a lot of headwinds -Next we looked at private equity, and here our research and interviews showed that their high rate expecatations made them unappealing as debt lenders and further more, if you start thinking about $1M homes, even $100M of private equity only represents 100 homes – it would be hard to use PE at scale -So we finally settled on traditional lenders, and more specifically local banks, that have an established system for providing mortgages at scale, if you can play within their guidelines.
These conversations with lenders ended up being some of the toughest on our journey
Finally, there has been an increasing push for institutional investors want to access residential real estate as an asset class, and we think our new model provides two key opportunities for them. First, we see potential for Private Equtiy to act as the guarantor for HomeSlice mortgages by providing bridge funding for these mortgages, so that individual retail buyers don’t have to.
Second, we think they could buy out slices at a discounted rate, especially in the case of default, in order to become equity stake holders in residential homes.
So, in summary, we’ve come a long way from week1 – as we continued to learn incrementally more about customers, lenders, and institutional investors, we continually iterated and adjusted the left side of our canvas accordingly.
Allowing them to use their standard operating procedure for assessing and securitizing these loans.
Our revenue model mirrors other financial lending platforms – we take a percentage of the closing fee from both the buyers and the banks, implying a 7.5K LTV, of which over 50% is immediately recuperated. We anticipate a very engaged user base that would generate a high potential for additional revenue through value added servcies..
a key piece of that was creating an MVP to help them to understand our approach to default mitigation, which was to create an insurance product to give non-defaulting co-owners and opportunity to bring on additional investors, with the loan ultimately backed by the full sale of an asset.
HomeSlice • Primary homes •
Peer-to-peer financing • Mortgage brokering service We talked to 101 people! Making real estate more accessible through fractional ownership • Investment properties • Lender financing • End-to-end home-buying solution Making real estate more accessible through fractional ownership A $518B market
You saw how we pivoted
to focusing on investment properties… …but there was a lot more to our journey than that.
Week 1: To be in
real estate, you need to know something about real estate? • What the home-buying process looked like • How mortgage underwriting worked • Who the key players were • Where the money was made in the real estate industry • What do we even really mean by a fractional mortgage
This market is highly regulated
and has more than 2 sides.. And they’re each motivated in different ways! Mortgage Title of House Loan Servicer Lender Institutional Investor Real Estate Agents Sellers + Mortgage brokers + Title companies + Lawyers + Appraisers +…
…So why don’t they do
this today? Our first MVP was a card sort to get potential buyers to show us what their biggest barriers are today to shared home ownership 4.2 3.9 3.8 3.2 2.8 Liability in case of co- owner default Finding a reliable co- owner I won't be able to exit when I want Structuring co-owner agreement is a hassle/awkward Difficult to find a property everyone likes Where we focused much of our energy Upcoming MVP: Co-owner Matchmaking Upcoming MVP: Secondary Marketplace Q. Rank the following concerns about co- ownership in order of importance to you, 6 being most important
Additionally, concerns about co-owner agreements
dominated customer feedback “I've always talked about co-owning a property with friends from high school and college. This is a great idea! … The only downside, from my perspective, is that people have different personalities and preferences and sometimes they have struggled when deciding what to do in terms of remodeling or improving certain things on the house.” -C. Toscana-Rodriguez, Haas MBA 2017
So we made a second
MVP…. We Learned: Helping users understand and decide on all of the necessary details of co-ownership provides significant value when pursuing real estate investments via LLC. “It was incredibly difficult for us to draft our co-ownership agreement until we brought in expert advice. We also didn’t initially have the right connections to lenders – a platform like this would have been a big help.” -Victoria Volkar, Haas EWMBA 2018
Customer Archetype Millennials: People aged
25-34 who haven’t owned real estate before... Investment Properties: …seeking hands-on real estate investments… $ Coastal / Expensive Cities: …in popular cities with high rent to income ratios
Moving on to the second
side of our market, we considered several possible types of lenders Peer-to-Peer Institutional Investors Traditional Lenders
Working with traditional lenders made
it difficult to maintain our customer value proposition 1. No lender will deal with a fractional default 1. Separate mortgages for each co- owner 2. Individuals are each guarantors for themselves 3. New mortgage product 3. Banks like things they recognize 2. They want guarantors on the mortgage 1. One mortgage for the home, under an LLC 2. HomeSlice as guarantor, backed by Private Equity firm or Institutional Investor 3. Mortgage under LLCs have existed for a long time Our initial MVP: what we thought. What we learned. How we pivoted: our new MVP.
With our new MVP, institutional
investors want in! Investors are excited about the opportunity to invest in real estate in new ways and see multiple ways to partner • Acting as the guarantor to HomeSlice mortgages so that individual buyers don’t have to • Buying out slices when owners choose to sell them off (or default)
HomeSlice removes barriers for borrowers…
Effortless process to align with co-owners on purchase and management terms 1. Legal structure to allow sales of home slices 2. Roadmap to manage potential default of co-owners 3.
One home One single mortgage
for the entire property …while keeping things the same for lenders (while opening up a new market!) Lender underwrites loan Institutional investor holds the paper
HomeSlice makes money during origination
and upon monthly mortgage repayment Buyers Lender 2.5% fee to borrowers over 6 years $3.5K total Downpayment & Monthly Repayments Loan 0.5% origination fee to both lender & borrowers = $4K total $7,500 LTV for borrowers over 6 years (>50% realized immediately) Potential for many other value-added services to generate extra revenue $1000 CAC
The potential is huge… *
Based on median home price by city and 80% loan-to-value ratio Top 10 US metro areas 25-34 yrs old 53-77% below income threshold to afford to own 50% would want to own if they could 3M People $518B Lending Opportunity People Who Want To Buy But Can’t*
…but we need to act
fast $8M Series A investment by a16z in Sept 2016! New player coming in (Seattle):
Immediate Next Steps • Continue
to build out a front-end website • Model out return profile for institutional investors / initial financing partners • Complete our first beta transactions for a batch of customers
Big Idea #2 – Co-Owners
Need Babysitting Our second MVP was centered around the user interface with our platform to understand how we can best deliver value to them We Learned: Aligning with co-buyers on purchase and maintenance terms is a HUGE pain point currently standing in the way of shared ownership. If borrowers can’t figure this piece out, they won’t want to co-purchase homes (even with no cross-party liability) We Did: Made this a key value-add of our platform and brought it to the forefront of the interface
Big Idea #4 – It
Needs To Be Personal We learned that lenders always require a personal guarantor on a residential mortgage who can demonstrate that he/she is capable of paying it back (even for LLCs) BUT…talked to PE lenders and figured out a way to make HomeSlice the guarantor PE firms are looking for new investment opportunities in real estate and may be interested in providing bridge financing for HS backed mortgages or contributing capital for HomeSlice buy-outs of defaulting slices
Big Idea #5 Investment property
use case is easier for people to swallow – even Millennials (69% of people surveyed were interested vs. 34% for primary residence)
Customer Segments • Millennials aged
25-34 who haven’t owned a home before and are looking to build their assets • Family members of first-time home buyers • Couples who aren’t married but want to live together and build their assets • CMO investors looking for new opportunities • Low-income individuals who qualify for an FHA loan • House-rich, cash-poor baby boomers KEY LEARNINGS • Many Millennials have family members who could help with the purchase, but the lack of system to make it a “real investment” stops them from asking • Low-income segments bring a flurry of additional challenges and are a hard place to focus initially • There are already lots of solutions available for people who want to cash out home equity
Value Proposition • Catalyzing first-time
home purchases • Increasing access to income-generating investment properties • Taking the counter-party risk out of shared ownership • Facilitating the drafting of legal documents for shared ownership (co- owner agreement, LLC docs) • Understanding the financial benefits of renting vs. buying • Increasing liquidity of RE investments • Cashing out of real estate investments without refinancing • Enabling the shared purchase of vacation homes • Using peer to peer lending to facilitate home ownership KEY LEARNINGS • HomeSlice can make home ownership seem cool again to Millennials (“won’t have to move to Orinda to buy”) • Investment property use case is easier for people to swallow – even Millennials (69% of people surveyed were interested vs. 34% for primary residence) • HomeSlice can deliver maximum value if it reduces counter-party risk for borrowers while keeping things status quo for lenders (single property = single mortgage) • Agreeing on terms of property ownership and management is a HUGE pain point for co-owners
Status Quo Process for the
Lenders One home Lender underwrites loan Institutional investor holds the paper One single mortgage for the entire property BENEFITS: • Access to a new market of buyers • No additional complexity of tracking and managing payments
Less Complexity and Risk for
the Borrowers BENEFITS: • Reduced financial hurdle of a first home purchase to start building assets • Reduced counter-party default risk • Reduced legal and tax complexity of shared ownership (e.g. co-owner agreement) Legal structure to allow sales of home slices: Measures to manage counter- party default risk: • Mortgage insurance provides a 6-month window to avoid foreclosure 1. Other slice owners have first rights to buying the default slice 2. New owner buys default slice 3. Entire property is sold
Channels • Direct to Customer
• Real Estate Agents • Banks (mortgage lenders) • Large companies via financial wellness programs • Mortgage Brokers KEY LEARNINGS • Real estate agents really function as gate keepers to the industry (via their relationships with sellers), it will be important to work with them from the beginning • Banks can’t be incentivized to use HomeSlice, and they’re very traditional – selling through them isn’t really feasible, but they may provide a way to target individuals who didn’t qualify for a full mortgage • Similarly mortgage brokers can’t be incentivized, and we’re in a slightly competitive position to them
Customer Relationships • Educator –
when & how to buy • Simple, easy to understand, one stop shop for fractional mortgages • Social impact – enabling home ownership • Real estate broker replacement • Underwriter • Legal advisor • Fully vertically integrated bank KEY LEARNINGS • There’s a lot of discrepancy in what individuals know about the financial trade-offs of buying homes and a lot of opportunity to help them through the process • Whether we focus on investment properties or primary homes, our basic motivation is to enable home ownership (& this resonates with investors too!) • Underwriting and legal advising imply significant costs & difficulties, with ambiguous benefits – we need to explore these more
Key Partners • Lenders (mortgage
providers) • Private Equity / Institutional Investors • Real estate brokers • Loan servicers • Property developers • Insurance companies • Mortgage brokers KEY LEARNINGS • Need debt financing to do this at any sort of scale, which means playing within the existing ecosystem • TICs have been top-performing loans for lenders (~0% default rates, even during housing crisis) • PE firms are looking for new investment opportunities in real estate and may be interested in providing bridge financing for HS backed mortgages or contributing capital for HomeSlice buy-outs of defaulting slices
Petal Diagram We Are Not
Alone But We Have a New Angle In addition to the diagram, HomeSlice also competes with other investment alternatives, ranging from REITs to Wealth Management companies
Key Activities & Resources •
Customer service • Legal & tax support • Mortgage brokerage • Payment collection & processing • Software dev • Marketing & growth • Biz dev • Realtor KEY LEARNINGS • We projected that launching the ‘whole enchilada’ would cost us about $1M a year in expenses in our first year of full operation.. • However, we think that hacking the process really requires very little besides up-front capital to qualify HomeSlice for guarantor-ship and strategic partnerships with a willing law firm & a bank
Monthly Mortgage payment + 2.5%
processing +1.0% insurance premium Previous Owner Real Estate Agents (buyer & seller side) Or other institutional investors, accessed through a loan servicer Or other lender Cash Flow Diagram: Up-Front: 20% of down payment + 6% Realtor Fees +1.5% Closing Fee for bank + .5% Closing Fee for HS Up-Front: .5% origination fee for HS Up-Front 100% of home +6% Closing Fee Monthly Mortgage payment Up-Front 1.5% Closing Fee
Revenue Structure • Upfront borrower
fees • Upfront origination fee (paid by banks) • Ongoing mortgage payment fees • Refinancing origination fee • Mortgage insurance premiums • Value added service sales • Real estate brokerage commission KEY LEARNINGS • Large fees are assessed upon closing of a property – there is opportunity to add fees at this point in the transaction • HomeSlice can function as a mortgage broker and collect fees in the same fashion • There are many regulations surrounding loan servicers. It is still TBD if HomeSlice would serve this role or partner with an established loan servicing provider. • While it may be necessary for HomeSlice to play the role of real estate agent, we will limit our ability to scale if we play that role indefinitely. Playing this role will also limit our ability to partner with agents locally.
Cost Structure • Customer Service
• Mortgage Brokerage • Software Development • Marketing & Growth / Biz Dez • Payment Collection & Processing • Legal and Tax Support • Real Estate Brokerage KEY LEARNINGS • Once we have developed a LLC and co-owner template, we likely do not need to have many legal resources on staff, as any disagreements on the legal documents are resolved between co-owners, not owners and HomeSlice • We likely do not need to build real estate brokerage resources, as much of that will be outsourced to realtor partners • Many of these costs can be “hacked” in Years 0 and 1 as we manually close real estate deals
TAM - Latent Demand People
Who Want To Buy But Can’t Top 10 US metro areas 25-34 yrs old 53-77% below income threshold to afford to own 50% would want to own if they could 3M people $518B lending opportunity * Based on median home price by city and 80% loan-to-value ratio
Final Canvas Millennials aged 25-34
who haven’t owned a home before and are looking to build their assets Catalyzing first-time home purchases Increasing access to income-generating investment properties Removing counter-party risk from shared ownership Facilitating the drafting of legal documents for shared ownership (co- owner agreement, LLC docs) Educator – when & how to buy Simple, easy to understand, one stop shop for fractional mortgages Direct to Customer Real Estate Agents Customer service Legal & tax support Mortgage brokerage Payment collection & processing Software dev Marketing & growth Business development Lenders (mortgage providers) Private Equity / Institutional Investors Real estate brokers Loan servicers Platform PE funding to allow HomeSlice to “back” the mortgages Marketing (direct & PR) & growth Customer service Software development SG&A Closing cost fee (buyer) Origination fee (lender)
Immediate Next Steps • Model
out return profile for institutional investors / initial financing partners • Understand legal implications of HomeSlice being on mortgage and LLC being on title • Continue to pitch to lenders, need a lender partner • Build a functioning front-end website