For much of the early 2010s, there was an emerging piece of conventional wisdom that millennials were on the verge of radically breaking from the behavior of their older siblings, parents and grandparents and eschewing homeownership en masse. Many reasons were given (fear of default spurred by the Great Recessions, limited access to credit, generational preference for renting), but the upshot prediction was the same.
However, 18 to 24 months ago, that conventional wisdom changed quickly when older millennials — the group PYMNTS has classified as Bridge Millennials — began aging deeper into their thirties and behaving differently than expected. Specifically, they started buying houses in greater than expected numbers — and, suddenly, the dearth of millennial buyers turned into a new trend. According to TransUnion, 13 million to 17 million millennial consumers are expected to come crashing into the homeownership market by 2022.
Moreover, data began to consistently show that, far from being scared away from real estate markets, young consumers are, in fact, incredibly enthusiastic about them, even if they do not perceive themselves as financially ready for participation. According to the National Federation of Retailers, 81 percent of millennials reported at least aspiring to become homeowners. Recent data from Bank of America indicated that 72 percent of millennials rank homeownership as their top life priority — ahead of getting married (50 percent), traveling (61 percent) and having children (40 percent).
Millennials want to buy homes, but getting onto the launch pad with a down payment can be extremely challenging and creates a gap that many —otherwise enthusiastic — potential homeowners can’t get across. That same Bank of America study also shows that the majority of millennials are waiting until they’ve saved up enough money for a down payment. However, that saving is difficult because those millennials pay 30 percent of their income or more in rental payments.
Divvy, a San Francisco-based startup, wants to take on that problem by fundamentally changing the path consumers embark on when they want to buy a home. Its chosen tool for that is a technologically enabled, phased homeownership model that — Divvy Co-founders, CEO Brian Ma and COO Adena Hefets, told Karen Webster in a new PYMNTS Matchmakers podcast — is designed to help consumers wade into the homeownership process and more easily navigate barriers to entry that down payments represent, particularly for first-time buyers.
“We are a fractional ownership platform that gives customers the option of [working] with us to put down less, and then work within a specialized rental product that allows them to embark on the path to homeownership via a mortgage,” Ma explained.
How It Works
When a consumer wants to buy a home under the standard method, Hefets noted, the bank typically looks at three things: a customer's debt-to-income ratio, their credit score and their down payment. It’s that down payment aspect that often causes the first pain point in the transaction. Consumers don’t necessarily — as is sometimes thought — have to pay 20 percent upfront, but even the 3.5 percent and 5 percent that is typical for Federal Housing Administration (FHA) loans can be a stretch, depending on a home’s cost. Their credit scores can also be a gating factor.
Those are two pain points that a fractional homeownership approach mitigates right off the bat because the buyer of the home isn’t the consumer — it’s Divvy.
Here’s how it works: To join the Divvy platform, consumers first fill out a digital application and are put through a screening process to “make sure they really are a good fit for the program.” That includes the typical debt-to-income checks, as well as the ability for those customers to pay about 2 percent of the home's purchase price as a down payment, though they are able to put down as much as 10 percent if they wish.
Once a customer is selected, they are matched with a member of Divvy’s broker network — a licensed real estate agent from one of the cities in which Divvy operates and, together, they look at listings of properties through a multiple listing service (MLS) to find the perfect match. After a desired property is found, the agent brings the deal back to Divvy, which evaluates the property internally and uses its own models to suggest an offer that includes predicting the home’s value in three years.
“Our offers are very competitive, and they are all cash offers,” Ma noted.
Hefets added, “Even in very competitive markets, we often can justify paying list price or even a little bit less when we negotiate for our buyers.”
If the customer accepts, Divvy buys the home and the customer immediately enter into a three-year lease with Divvy at a fixed monthly amount. Part of that payment goes to Divvy as rent and the other part is saved on the consumer's behalf as “equity” in the home. At the end of three years, Divvy's tenant has saved, on average, a 10 percent down payment and can work with a traditional lender to get a mortgage to buy the home. That purchase price is calculated at the time of Divvy's purchase and is known to the rent-to-buy owner at that time.
“Unlike a traditional home-buying process, where you find a house and then find a family to fill it, we are finding the family first and working with them to find a house that they will one day want to own,” Hefets said.
Real estate can be a bumpy market, which means that much of what Divvy must do is properly manage risk, making sure it is investing in the right customers and the right houses. This, Hefets told Webster, is why the platform is very circumspect about its expansion into new markets.
Today, the service is available in Cleveland, Atlanta and Memphis — markets where prices are close to national averages, and where the potential for appreciation is strong and volatility is at a minimum. Before entering new markets, she noted, Divvy wants to have a strong grasp on its fundamentals, and be able to feed its algorithms and data team enough information to make good value judgments on behalf of its customers.
“At times, we will warn the customer if they have picked a property we don’t believe is likely to appreciate, along with recommendations for where else they might look,” Hefets said.
There might be a future in more volatile markets (think high-price, high-swing markets like Boston, San Francisco or “Texas as a whole”), and both Ma and Hefets think there are ways the model could work in those places. However, as a young startup, they are taking a conservative approach to rollout.
The platform is growing, though, they noted, particularly as it works with a wider network of independent brokers and sees more customers brought its way during their housing search. It's also growing as an emerging class of customers — who had perhaps not thought about ownership, but are recently married or on their way to having children — consider a more economically efficient path to homeownership.
Divvy has had some issues with non-payment, Ma pointed out, mostly due to customers who’ve found themselves suffering from an unexpected life issue, but that was temporary and something the company was able to catch up from. In some cases, he added, Divvy has worked to adjust people’s payments by removing the equity part of their monthly bill, and only collecting the portion that is rent.
“Our focus now, and very much going forward, is making sure people are on track to buy houses,” Ma said.
Divvy recently announced that it has raised $30 million in equity and debt from Andreessen Horowitz, with participation from seed investors Caffeinated Capital, DFJ and PayPal Co-founder Max Levchin. Its immediate plan is to build out the program and data operation, while making “some tweaks” for an expansion of terms to include one-year or five-year contracts, or the ability to make additional equity payments during a contract.
As for the bigger picture, both Ma and Hefets agreed, Divvy is expanding into a much wider range of support services. That might mean being able to alert its customers immediately when they qualify for a mortgage on their property and sending them directly to a recommended underwriter. It might also include finding a great insurance provider or closing attorney for its customers.
“There are these much bigger pockets that I think we can take on in the future, particularly as we build out and scale the platform," Ma said.
However, both co-founders noted that Divvy is only a two-year-old startup, and disrupting the entire path that many consumers take to buy their first home is a pretty big project all on its own — even before adding other services to its platform.
Ma and Hefets know the destination they are driving to in the long term. Until then, they said, it’s equally important to have a good roadmap to the next month.