Throughout the past few years, it’s no secret that home prices have risen substantially. More recently, inflation has raised the cost of living and conducting business, and higher mortgage rates have reduced homeowner’s ability to access that equity via downsizing.
One alternative that has been increasing in popularity is providing capital to homeowners for a share of future home appreciation.
HomeTap is one company that uses this method to give homeowners cash they need, whether it be for medical expenses, college tuition or home repairs, in an attempt to take advantage of increasing home prices.
An interesting trend they have found is that a growing portion of its customers have utilized the product to fund their own small business growth.
The 2022 housing market has been underscored by interest rate spikes and refi decline and lenders are working hard to adjust to new borrower trends. HousingWire recently spoke with Barry Coffin, managing director of home equity title/close at ServiceLink, about the ways lenders can capitalize on these trends by revving up their home equity solutions.
Presented by: ServiceLink
Q: First off, could you just describe HomeTap and the services you offer?
A: Let me give me you the overview on the company, and then we could talk a little bit about this exciting thing that we’re seeing around the increasing percentage of our homeowners using this capital to fund small businesses, which we think is really exciting. But taking a step back, We started working on this business back in 2016-2017, around the mission of making homeownership less stressful and more accessible.
The observation that we had, and still have, is that there are tens of millions of American families who are house rich and cash poor. Who have a really high percentage of their net worth tied up illiquid, and accessible in one single asset—their home. Even the best of circumstances, they take care of their home, pay down their debt, their home appreciates over time as it tends to do on average over time. That balance of equity that they have in their home grows bigger and bigger, but they’re unable to tap into that for other opportunities or challenges in life without doing one of two things. Either selling their home completely, which is always an option, but then you still have to go find somewhere else to live. Or of course the really the only option that’s really existed for this kind of situation is to go back and borrow more. Go refinance, take on more debt, have more monthly payments, pay more interest and be a little bit more under the gun on a month-to-month basis or get some cash out.
So the really simple idea of HomeTap is, why not create a third alternative to borrowing or selling completely, which is sell a little bit. What we do is we offer a homeowner capital today, and in exchange we take a percentage of the future value of their home. A defined percentage, so it’s X percent when I sell my house, refinance or choose to settle with HomeTap at the homeowner’s discretion. I just take the house value multiplied by a percentage, and that’s what I owe them inclusive of their initial investment. That’s what they owe, and so what we’ve done is we’ve built this alternative where it’s an equity investment alongside homeowners. What that does for homeowners is it gives you all the benefit of the capital today without the burden of monthly payments, monthly expenses, cash flow and the typical covenants that come along with that. That’s kind of the high level of what we do.
Q: Does that percentage ever vary, for example a higher percentage later but more money now, or is it always around the same percentage mark?
A: The percent that we take is really a function of two main things, which is the size of that size of the check that we write, and the value of the home. The percentage will vary, because some houses are more valuable than others and some people want a larger check or a smaller check. But I think the way to think about it is that like we’re typically owning 10% to 15% of the future value of the home. It can sometimes be a little bit bigger, it can be a little smaller, but that’s sort of where the median tends to sit.
Q: Is there a specific price point for the homes you’re looking at, or is it driven by who comes to you?
A: The price point is certainly not driven by us. It depends on the state,, the MSA and the cost of houses which varies quite significantly in different states. So you can see we have homes that have homeowners who’ve taken capital, where they’ve got homes that are valued at a few $100,000 and we have homes that are worth several million dollars where homeowners have seen value in taking capital out.
Q: Let’s talk about the small business factor. When did you start seeing more small businesses uses and why did you choose to focus on that sector as a vertical?
A: What we’ve seen over the last five years is that the use cases for the capital, the reason why homeowners are bringing us on board is dealing with the opportunities of life and the challenges of life. We’ve seen that for a long time. And people have historically used our capital for things like launching new businesses, sending their kids to college, renovating their home or sometimes buying a second property. We’ve also seen them use it for the challenges of life. Things such as paying off debt, some kind of house or medical emergency and those types of things.
We’ve really seen seen both sides of that, but what we’ve seen in particular, and I guess it makes sense given all the things we’re seeing in the macro economy, is that while there’s always been a use case for homeowners using our capital to help fund and support their growing small businesses, we’re seeing more of it now than we ever have. A lot more this year, Q1 over Q1 last year we’re seeing nearly three times as many homeowners using this for small business as we did at this time last year. I think it’s a few reasons.
I think one is that the volume of new business creation continues to accelerate, and the numbers are amazing, right? Over five million new businesses started in 2021 or applied for new businesses. Part of it is there’s just an emergence of in our economy of small businesses, which has been a trend for a long time but it just continues to grow. I think that’s one thing. I think many small business owners have their businesses at home, and the homeowners of small businesses are particularly challenged in this macro environment where you’ve got rising interest rates The cost and availability of debt capital is becoming more and more expensive, and I think separately if you’re running a small business and it’s growing, it consumes cash which makes it difficult for you to qualify for a lending product. Both the cost of that capital and the availability of that capital is kind of getting harder and harder.
Thirdly, the ability to pay monthly payments. If you’re taking whatever discretionary funds after the end of the month, you’re putting it into your business. You just don’t have any extra cash flow to be able to go pay those monthly payments. I think for all three of those reasons a solution such as HomeTap, where you get capital and have no monthly payments or monthly expenses is really attractive. You layer that on to the growing number of new businesses that are being created, and it makes total sense.
Q: I know you’re talking about small businesses run out of residential housing. Have you given any thought to providing this type of product to commercial buildings?
A: It’s a great question. We don’t presently do that. I think we really are focused on this mission, around thinking about the person involved here first and foremost as a homeowner. What can we do to help a homeowner get more out of their home, and one of the things we talk a little bit about internally is that we want you to be able to have a home and a life. You want to have be able to afford your home and do other things, like fund your small business or send your kids to college. There shouldn’t have to be an OR. So we’re focused on the residential side, but of course lots of people who are launching small businesses own a home, and this is a nice opportunity.
I’ve seen lots of home appreciation over the last bunch of years, and interest rates are high. This seemed like a really good time for business owners to take a little bit of money out of their house and put it into their business. If those businesses are successful, it’ll be a creative for the homeowner. They get to do it in a way where they don’t have the monthly burden of cash flows. The negative cash flows. The other thing too is these small business owners don’t have a big infrastructure, right? They don’t have a big finance team and accounting team and legal team to go pull off heavy deals, right? They need something that’s easy. And so our process doesn’t require their W-2s. We’re not checking on the financial statements of their businesses. We’re not in the weeds on their business, This a great quote. Their business is their business, not our business. What we care about is that they’re in their home, they’ve got equity in their home and that they’re going to take care of their home and do the things that they already were doing to be a good homeowner. It just allows them to leverage that asset that they have in their home for, in this case, commercial purposes.
Q: You spoke about not getting into the businesses financials, and also not charging interest or monthly payments. Is there a KYC element to knowing who you’re dealing with and making sure the houses you’re investing in are going to turn out in the future?
A: Of course there is an underwriting process in order to qualify for the capital. We’ve worked really hard to leverage technology to make it user friendly and a good user experience as we possibly can. In fact, if you’re interested in one thing, I’d encourage you to do you can go to TrustPilot and type in HomeTap. I think there’s over 1200 reviews right now, and I think we’re averaging 4.9 out of 5, and that is really a function of how we’ve used technology and frankly training, culture and this mission-oriented approach to helping homeowners to build this great experience.
But there’s an underwriting process, where essentially what we’re doing is making sure that you in fact own the home, that you are looking to take money out, and we check to understand how much the existing mortgage is and how much equity you have. We’re doing title checks and kind of normal customary diligence on both the home and the homeowner before we invest the capital, but it’s a pretty light process that can be done in as short as a couple of weeks if the homeowner is motivated to get it done.
Q: In the case that a home goes down in value, what happens there and how do you handle those situations?
A: If the home were to go down significantly in value, this is a big difference between us and a bank. There can be and have been situations where HomeTap has lost money. Where we’ve invested a certain amount and the home went down in value, and we got back less than we invested. That happens. That is just the risk that we take as part of being equity investors in real estate. In those situations, we’re not happy, the homeowners not happy, and nobody’s glad that took place. But one of the really nice things I think from a homeowner perspective is that when you take capital from HomeTap, you have much more alignment with your capital source than you do when you’re taking it from a lender. The house goes up and we all do better. House goes down and we all do less well. That’s the definition of alignment.
In other recent proptech news, Quext secured $63 million for its multifamily smart apartment technology. Altrio also raised a $6.2 million Series A to help investors digitize and expedite their commercial real estate workflow.