homeslice berkeley 2016
TRANSCRIPT
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
The Team
Anna Roumiantseva
Product
Anne ReadyMarketing
PJ O’NeilFinance
Raj AgrawalTech
The Mentors
Rick Lazansky
Mike Olson
Lev Mass
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+…
Starting Business Model Canvas
Starting Business Model Canvas
Customers are interested…
Not interested: 8%
Definitely Interested: 22%
Potentially interested:70%
We asked over 100 customers.. how interested are you in using HomeSlice?
…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
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 ArchetypeMillennials:
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-owner2. 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 LLC2. HomeSlice as guarantor, backed by Private Equity firm or Institutional Investor3. 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)
Value proposition iterations flow through the BMC
What the final product looks like TODAY
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
HomeSlice is democratizing home ownership.
We invite you to join us!
Thanks to: Mentors, Classmates, Teaching Team
Appendix
Our third MVP was centered around the details of default mitigation, a sticking point for VCs, PEs, and lenders
Big Idea #2 – Co-Owners Need BabysittingOur 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 #5Investment 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 foreclosure1. Other slice owners have first
rights to buying the default slice2. New owner buys default slice3. 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 DiagramWe 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
MonthlyMortgage 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-Front100% of home+6% Closing Fee
MonthlyMortgage payment
Up-Front1.5% 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
Buyer Economics
Buying with HomeSlice is 15% CHEAPER than Renting
• Shorter duration
• Higher mortgage rate
• Higher closing costs
TAM - Latent DemandPeople Who Want To Buy But Can’tTop 10 US metro areas
25-34 yrs old53-77% 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
We Iterated A Lot On Our Business Model
Final CanvasMillennials 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 serviceLegal & tax supportMortgage brokeragePayment collection & processingSoftware dev Marketing & growthBusiness 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) & growthCustomer serviceSoftware 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
Expansion Roadmap
Highest population density +
Highest real estate prices =
Biggest concentration of users who can’t currently afford to buy