When people buy homes in expensive markets like San Francisco, they often put their life savings into the deal. They do it because real estate has generally been a good investment over the long term. But the transaction's all-in nature can be difficult to take in the short term. Homeowners are asset-rich, but frequently cash-poor and loaded with debt.
That's why Point, a Silicon Valley startup, sees an opportunity for a new type of home ownership. Instead of people owning their properties out right, it sees a world where we would "fractionalize" home equity in exchange for outside investment. That is, we would sell off up to 15% of the title in return for an immediate burst of capital.
Since launching in 2015, Point has bought into dozens of homes in the Bay Area, offering between $40,000 and $200,000 a time. The arrangement allows owners to buy back their stake at any point within a 10-year window, and there are no interest payments. (It's not a loan.) Point hopes to make money on rising real estate prices: It automatically shares in any profit when you decide to sell.
Cofounder Eoin Matthews argues that selling a stake is better than taking a home equity loan, as the latter simply adds to the debt pile. Point's customers tend to be people in financial distress who already have lots of debt—whether it's the mortgage or some other kind. By selling a stake, they can clear what they owe and improve their credit score at the same time.
"There are no equity products in the biggest asset class in the world—American real estate—and there's no reason that should be," he says. "You're not just replacing debt with debt. You're actually applying equity to paying off student loans, unsecured loans, and credit cards. We're focused on helping homeowners in distress."
There's a slight catch, as you might expect. After appraising the house, Point adjust the value downward to make sure it still gets paid if the value of the house goes south. But it also caps its potential upside: Under an agreement with regulators, it's not allowed to make more than 20% on its investment.
Point is currently available only on the California coast, but it plans to expand to four or five additional states this fall (including Washington, Oregon, Massachusetts, Maryland, and Washington, D.C.). In the long term, it hopes that homeowners who've sold their stakes will also become investors on the platform. Matthews argues that fractionalization allows people to diversify their real estate investment beyond one single property in one (often) inflated market. (San Francisco may seem like a good investment, but of course it's reliant on the tech industry and susceptible to earthquakes.)
"In light of 2008, a financial adviser would tell you that investing in a single stock would be foolish. It might make sense to sell a fraction of the equity in one market and trade it for parts of homes in other parts of the country with different economic environments," Matthews says.
If Point takes off, we could have a more liquid housing market, where risk and debt are spread around, rather than so concentrated. That should be a good thing—but we'll have to see how the idea works for homeowners first.
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