First-time home buyers in Raleigh-Durham and Charlotte, North Carolina, are getting a new path to owning their own house – or at least a fraction of it.
With a $2 million fund from individual and impact investors, Raleigh-based Ownify has helped seven first-time homebuyers get a foothold in the housing market. At least three are Black, Latine and first-generation immigrants, with incomes below North Carolina’s area median income.
The company says it is offering a pathway to homeownership that represents an equitable upgrade from predatory rent-to-own models, many of which have been shown to dangle the dream of homeownership to lock aspiring owners into long-term lease agreements with unfairly high rents.
“Rent-to-own is exactly what the word means: You rent, rent, rent, and then you have this hurdle to own,” says Ownify’s CEO Frank Rohde, “If you don’t make that jump, you don’t have anything to show for it, so there’s no real ownership.”
In the Raleigh area, 32-year-old Zachary Baker is one of Ownify’s first-time homebuyers. “My parents always rented, so I was the first in my family to actually go down this process,” he told ImpactAlpha (Ownify helped connect us).
Baker had been looking to purchase his first home when he found out about Ownify through a marketing event Ownify staged for first-time buyers. Baker found a home he liked, and Ownify paid for it, which Baker says cost between $350,000 and $400,000. He was a homeowner within three days of making an offer.
“They’ve been able to support us with maintenance, or when things out of the blue happened to break down, they’ve been fantastic with helping us financially, or even just covering the cost,” says Baker.
Rohde launched Ownify two years ago with Ben Herold, who had been with Divvy Homes, a San Francisco-based rent-to-own company that has raised over $100 million from investors including Andreessen Horowitz and PayPal tech billionaire Max Levchin. Divvy has endured a spate of bad reviews – and even lawsuits – from customers who have been unhappy with repair delays and high monthly payments.
As chief operating officer at Divvy, Herold was familiar with customer unhappiness with the rent-to-own model, Rohde says. “I think he saw that the model wasn’t as good as it should be.”
Ownify is different, Rohde says, in that residents begin accumulating equity with their first payments, and accrue additional equity every month. The model offers “a way to create true ownership,” he says, “a bona fide ownership stake in a home that you can build over time.”
“We started thinking about what if instead of a debt-structured path you create an equity-based path to homeownership, where you could pick a home, we buy it, and then you buy the home brick by brick, without the obligation of ever buying 100% of it.” He added, “Not borrowing money, but just buying it over time.”
Shared equity
Soaring housing costs and, now, higher mortgage rates have priced many first-time homebuyers out of the market, including in North Carolina, where the average single-family home price is more than $335,000. At the same time, private equity firms have swooped into the housing market, with investors accounting for more than one-third of single-family home sales in cities like Atlanta, San Jose, Phoenix and Las Vegas.
Access to home ownership has become a presidential campaign issue. Vice President Kamala Harris is pledging to provide $25,000 in down-payment assistance for struggling first-time homebuyers. “My mother saved well over a decade to buy a home,” she said at a rally in Raleigh last month. “I was a teenager when that day finally came and I can remember so well how excited she was.”
Fractional ownership of high-value assets such as luxury vacation homes is a big with high-net-worth individuals. Ownify is trying to take the model downmarket as a shared-ownership strategy for the roughly 77% of US households locked out of homeownership opportunities.
Ownify underwrites first-time homebuyers, or “Ownis” as the company dubs them, based on their credit scores and incomes. Once they’re approved, they go out and find a home with an Ownify agent. The company does a final screening before completing the transaction. Ownify covers closing costs, including insurance and property taxes, and assumes maintenance responsibilities of the home. It also takes out a mortgage on the home on behalf of the new homeowner.
Equity in the home is split into 10,000 “bricks,” each representing a basis point, or one-hundredth of a percentage point of ownership. Ownis, from day one, buy in with 200 bricks, or 2% of the ownership of the home. For a $400,000 house, that means coming up with $8,000, far less than a typical down payment. The rest of the bricks are owned by Ownify’s pool of investors. The Ownis pay rent to the investors on the portion they don’t own.
The new buyers can accumulate additional bricks via fixed payments each month. The bricks are valued each month and each monthly payment buys roughly thirteen bricks or approximately 13 basis points of the market value of the home. The market value is determined by factors including the location, size and condition of the home. Any increase in the home’s value due to improvements made by the homeowners is theirs to keep.
The Ownify strategy takes advantage of the financial concept of dollar-cost averaging, in which an investor regularly allocates a fixed amount of capital towards an investment product, buying more when the price is low and less when it is high. That means Ownis with each fixed payment buy more bricks when they’re cheaper and fewer bricks when they’re more expensive.
“As home prices go up, the bricks become more expensive; if home prices go down, they become cheaper,” says Rohde. “That allows the Ownis to buy bricks at whatever market value in any given month.”
If prices rise rapidly, that could work against the goal of helping new owners build their equity stakes. On the other hand, rising prices mean appreciation in the equity they already own.
The strategy was designed to “protect the customer in scenarios where home prices go down,” Rohde told ImpactAlpha. “When home prices go up, the appreciation in the home is shared between the Ownis and the investor pool.”
Ownify has designed a track that allows them to purchase at least 10% of equity, or 10,000 equity bricks, every five years. When they get to at least 10%, they can get a traditional mortgage, essentially refinancing the deal to buy the home from Ownify at the then current market value.
Ownify says its homeowners in their first year have acquired an average $15,000 in equity stakes in their homes, which cost $400,000 on average. Ownify’s first-time homebuyers have the option of buying as many equity bricks in the home as they’d like until they’ve purchased the entire property.
“For a lot of people, however, owning more than 40% or 50% of the home equity may not make sense,” says Rohde. “So you have that flexibility to say, ‘If I want to buy more, I can, but I don’t have to.’”
Investment case
Rent to own and fractional ownership schemes have long walked a fine line between economic inclusion and predatory financing. Some of these strategies have indeed removed barriers to entry by allowing aspiring owners to share the financial responsibilities of ownership with other investors. The proverbial devil is in the details, which often include high fees and a long-drawn-out pathway to full ownership.
For investors, fractional real estate ownership companies tout their ability to offer retail investors portfolio diversification by investing across a range of real estate assets, much like a real estate investment trust, or REIT. Retail investors can invest as little as $50 in fractions of rental properties, or “property tokens” that can be traded any time, through Y Combinator-backed Lofty AI’s fractional real estate marketplace.
Fundrise, one the largest real estate crowdfunding platforms, since 2010 has allowed non-accredited investors to invest as little as $10 in commercial real assets that have historically been accessible to accredited and institutional investors. The company manages nearly $3 billion of equity for roughly 400,000 retail investors.
More recently, New York-based Homium, through its “shared-appreciation notes,” is helping low- and middle-income first-time buyers secure down-payment assistance in exchange for a cut of their home equity appreciation (see, “Homium aims to help home buyers overcome the down-payment hurdle”).
Ownify’s homeowners are giving up considerable upside potential if housing prices rise. But it offers a foot in the door of the housing market for many who have not had such access. The company requires potential Ownis to have a credit score of at least 670 and fit within 80%-120% of the area’s AMI. Incoming homeowners must live in the property. They pay rent to the pool of investors.
“We’re kind of helping the missing middle of blue-collar workers with good jobs, good credit but without the savings for a down payment,” says Ownify’s Allie O’Shea. “Those are the folks who are often not eligible for traditional zero-down payment type mortgages and government programs.”
As they acquire equity, Ownis can refinance the property and buy out the other investors. Alternatively, if an Ownify homeowner completes the five-year track and wants to move the company buys back the equity from them at the then current market value. “We’d charge what we call a relisting fee, because at that point we’d sell the home on the open market,” Rohde says. The relisting fee of 2%, he said, “basically covers some of the sales cost.”
That’s lower than the 5-6% commission that traditional sellers typically pay. The difference is that homeowners with a mortgage realize all of the upside in the value of their homes. If an Ownify homeowner only holds 10% of the equity in the house, that 2% fee represents 20% of their appreciated value.
Ownify says it has generated an annualized return of 16% for investors. The company last year raised $7 million from seed investors, including Lobby Capital, Socially Financed, Gaingels and others.
Now, Ownify is raising a $10 million inaugural fund to pilot the strategy in North Carolina’s most populous metropolitan areas, where it believes it can draw in up to 50 aspiring homeowners.
“Ownify offers a compelling way for impact investors to earn financial returns while also helping first-time homebuyers to start building wealth and avoid the cycle of renting,” says Matt Eldridge of Realize Impact, which committed $1 million to the Ownify fund. The company’s fractional ownership strategy “is designed with first-time homebuyers in mind, [who] tend to be disproportionately from groups such as BIPOC people or refugees that have lacked access to conventional sources of financing.”
Ownify’s founders say they have learned from the problems created by rent-to-buy models. More than 10 million adults in the US have been stuck in a rent-to-own agreement at some point. Black and minority families, particularly those that are low income, are disproportionately impacted by such predatory agreements in attempts to bridge the homeownership gap between them and their white counterparts, according to Michael Neal, a senior fellow at the Urban Institute that specializes in housing finance and policy.
“Particularly in the aftermath of the Great Recession, [when] a number of Black families had lacked the ability to financially qualify for a loan, the rent-to-own approach was designed to give them the space that they might have needed, even if they were not necessarily financially prepared for homeownership,” Neal told ImpactAlpha.
“There have been stories around the prevalence of evictions, around the physical adequacy of these properties and how well they’re kept, and there have been stories around the proportion of those who are renting who are not able to turn into homeownership,” he adds. “At least for those three reasons, the rent-to-own model has been connected more with those racial inequities.”
Financial innovation
First-time homebuyer assistance programs are getting a fresh look ahead of the upcoming presidential election. More than 40 million homeowners and renters in the US are cost burdened with surging rents and home prices.
In addition to her plan for down-payment assistance, Harris’s other housing plans include expanding the supply of affordable housing. She is calling for the construction of 3 million new housing units by the end of her first term. Incentives include tax credits for developers of new affordable rental housing development and new affordable single-family homes for first-time home buyers.
Denver’s Dearfield Fund for Black Wealth in Denver provides interest-free down-payment assistance loans to local Black families to purchase their first homes. The place-based impact fund is centering Black women first-time homebuyers who are leading their households (see, “How Dearfield Fund helps Black women buy homes to build wealth and health”).
Blackstar Stability, a Washington, DC-based firm, is helping low-income families of color that are stuck in predatory mortgages buy out of them (see, “Replacing predatory loans to build equity and wealth for homeowners of color”). Some of the predatory rent-to-own agreements include “contracts for deeds,” where a homeowner takes on the obligations of ownership, but doesn’t enjoy the benefits of outright ownership.
“Much of the extended history of these kinds of products are associated with redlining practices,” says Blackstar’s John Green. “So families who have been excluded from traditional mortgage markets by redlining and similar sorts of practices often turn to alternatives like these.”
Blackstar’s $100 million distressed debt fund helps these homeowners lock into more traditional, homeowner-friendly mortgages with better interest rates, lower monthly mortgage payments and greater access to their home equity
As it proves out its own model, Ownify plans to lower the barriers to entry in the form of its income and credit score thresholds.
Being an Owni is “a little bit of a trade off,” says Baker, is currently living in his Raleigh-area home with his life partner. He knows it might be better to buy the home outright or have a larger stake in it. Baker
As one of the first Ownis, Baker had his concerns about Ownify, including whether or not to purchase a home in full, and the responsibilities that come with it. As a brand-new company, Ownify couldn’t offer other customers to share their experiences.
‘With what they’ve offered and what they’re continuing to offer, especially for first-time homebuyers where it can be such an intimidating process, I think it’s certainly worth the trade.”
