Why big investors are pooling billions to co-invest in your home

  • Many Americans who have seen their home values ​​rise are looking to capitalize on their equity.
  • A growing number of companies are offering cash in exchange for a portion of the home’s future value.
  • Major investors are lining up hundreds of millions of dollars to invest in this new asset class.

American homeowners have never been richer – at least on paper.

After watching their home values ​​rise over the past two years, many owners are looking for ways to tap into their huge piles of equity. More and more companies are offering to co-invest in the owners’ homes, providing immediate cash in exchange for a portion of the property’s value in the future.

Companies such as Point, Unison, Hometap and EquiFi say their products, known as home investments, can help homeowners unlock wealth that has traditionally been impossible for them to access without selling their homes or taking on more debt. These companies see tremendous growth potential, since American homeowners are sitting on a record $27.8 trillion in equity, according to the Federal Reserve.

Investors of all types are catching on, joining the likes of Bain Capital, which manages $160 billion in assets, as well as Palisades Group and Redwood Trust.

The industry is still relatively young – almost all of the largest housing investment companies have been around for less than a decade, and many investors did not want to be first movers in a new asset class. Now that early investors say they are getting strong returns, a flood of money is being earmarked for the home equity contracts coming from companies trying to bring the product to the masses.

“We went from being the biggest skeptic to going, ‘Holy shit, this could really revolutionize how people tap their homes,'” Scott Burg, chief investment officer and managing partner at Colorado hedge fund Deer Park Road Management Co. told Insider. , which managed $4.8 billion as of April, is an investor in Point and began buying up residential contracts from the company in late 2021.

Deer Park Road, known for its dealing in distressed subprime mortgages after the financial crisis, plans to launch a fund dedicated exclusively to residential investment. The fund was due to debut this summer, but the firm has decided to wait out the volatility in the credit markets, Burg said.

“Right now, I still don’t think there’s a lot of awareness of this product,” Burg said. “I think this is going to eat up a lot of market share if these guys do it right. And that’s why we’re so excited.”

Agreements show that several investors share this bullishness

In September, Point partnered with Redwood Trust and Nomura Securities International on the industry’s first securitization, a process where the companies wrapped equity deals into a portfolio and then sold the income streams as bonds to investors.

The $146 million deal marked a watershed moment, proving that the business model would be embraced by bond investors who could provide billions of dollars in additional capital. A $443m securitization backed by Unison contracts followed in December, although the deals have since become far more expensive as bond investors have cut back on risky investments.

In January, Hometap announced that investors had committed $245 million to its third and largest fund. Participants in the fund included Bain Capital and Delaware Life Insurance Co.

David DesPrez, a director at Bain Capital, said residential investment “makes a lot of sense” for consumers and represents “some of the best relative value we see in American homes, whether for rent or for sale.”

More originators of home-equity deals are jumping into the fray as support from institutional investors grows. San Diego’s Splitero, which is backed by Gemini Ventures and Redwood Trust, launched in March and already has deals to sell $1 billion of its residential contracts to investors, CEO Michael Gifford told Insider.

Increased investor interest in this asset class has also opened opportunities for younger participants to offer new products.

In December, HomePace, a home investment originator founded in 2020, closed on a $7 million Series A funding round led by LenX, the venture capital arm of Lennar, the nation’s second-largest homebuilder by revenue. The company plans to use the funding to begin offering down payment assistance to prospective homeowners in exchange for an equity stake in the property.

Homeowners who have seen home values ​​skyrocket during the pandemic face a common conundrum

On the one hand, homeowners are sitting on significant wealth: At the end of the second quarter, the average U.S. homebuyer had $216,900 in usable equity, according to Black Knight Inc. Nearly half of foreclosed homes in the U.S. were considered equity-rich. , meaning the homes were worth at least twice the amount owed on their mortgages, up from 34.4% the year before, according to Attom Data Solutions.

But homes are highly illiquid assets, meaning it’s difficult for homeowners to use that wealth without selling the property or taking on debt. Refinancing is no longer the preferred method of taking out home equity, as current mortgage rates are now significantly higher than those on most existing mortgages.

The money from home investments can be used to finance home improvements, pay off high interest credit card debt, clear medical bills or put cash into a small business.

Of course, that money is not free. At a basic level, the exchange is relatively simple: the homeowner promises the home equity investment company a certain percentage of the home’s future value and receives a lump sum of cash in return. After an agreed number of years – usually between 10 and 30 – the homeowner is required to keep that promise, either by selling the home or taking on some form of debt, such as a home equity line of credit, and using the proceeds to pay off the company’s option.

Exactly how much money a homeowner is eligible for depends on how much equity they have and the original value of their home. To ensure a positive return for investors, home investment companies typically discount the home’s initial value by a certain percentage, so that even if the value does not go up, they still make a profit.

Point, for example, uses a discount at 15 to 20% of the home’s original value, meaning that if a home is worth $500,000, Point can value it at $420,000. It could mean that a homeowner has to give up more equity, or get less money than they expected.

For homeowners who are house-rich but cash-poor, the trade-offs may be worth it. In late 2020, Betty Noujaim, a California single mother sitting on about $300,000 in equity, agreed to give Point a 25% stake in her home for $60,000.

Noujaim, who had bad credit and bills to pay, told Insider she struggled with the decision. But she decided that the money would be an important lifeline.

The offer from Point “came at the right time,” Noujaim said, adding, “It saved my butt.”

David Dunn, the president and chief investment officer of Kingsbridge Wealth Management, one of the earliest investors in home equity contracts, knows what it’s like to lack access to credit.

Dunn was working in private wealth management at Bear Stearns when the firm collapsed in 2008 and started the company immediately afterwards. However, he soon realized that without a steady stream of income he was “unfinanceable”.

Fortunately for Dunn, he was able to raise money by selling equity in his business. But most people don’t have that option, he said.

Since 2018, Kingsbridge has acquired more than $100 million worth of residential contracts from companies. Dunn said he believed his firm could eventually become a billion-dollar asset manager in the home-equity investment space as more homeowners tap the option.

“People don’t realize how powerful liquidity is,” Dunn said. “That’s what I think is driving the demand. Access to liquidity at the right time is absolutely invaluable.”

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