Startup Divvy Homes gets $ 2 billion valuation
For many millennials and middle-class Americans, owning a home has become a distant dream. Faced with a booming housing market, large student loans and credit card debt, the homeownership rate has declined from its peak of 70% in 2004. Homeownership rates have declined. Homeownership declined in the wake of the global financial crisis, reaching a low of 63% in 2016. The homeownership rate is slowly rising, but still hovers around 65%. Divvy Homes wants to solve this problem.
The San Francisco-based startup seeks to make homeownership more accessible to millions of Americans. Divvy’s business model is to allow clients to choose a home they eventually aspire to become and then re-let them over the course of a few years. In the meantime, clients are able to build up equity.
Barriers to Homeownership
There are a number of barriers to entry for Americans who aspire to buy their own homes. One of the obstacles is the uniformity of the conditions for obtaining a 30-year fixed mortgage. Obtaining a mortgage loan often requires having a strong credit history and a stable income. Millions of Americans are unable to meet the standards characteristic of traditional mortgage underwriting.
Divide rent income
Divvy generates income by collecting rental income. During 2020, Divvy has expanded to 16 markets in total. The average price of the houses he buys is around $ 200,000. Divvy’s business model is taking advantage of a huge potential opportunity. “The number of people falling outside of traditional mortgages is increasing, and more and more people are finding it difficult to buy a home,” says Adena Hefets, CEO of Divvy.
Co-founder and CEO Adena Hefets points out that the typical client is a middle-class American who has been left out of the traditional mortgage system in today’s market. “Our clients have, on average, about $ 4,000 saved in the bank, about $ 60,000 to $ 80,000 in income, and typically have a FICO score of around 635. Usually it’s a couple that settles down, they have children… they are going through a life event like this.
The Divvy path from rental to property
Divvy’s model of providing clients with a path from renting to home ownership has caught the attention of investors. Divvy Homes recently raised a $ 110 million Series C funding round led by Tiger Global Management. The startup last raised a $ 43 million Series B round in 2019.
From the start, Divvy Homes caught the attention of prominent Silicon Valley venture capitalist Andreessen Horowitz. Alex Rampell, partner of the venture capital firm, led Divvy Homes’ $ 10 million Series A round in 2018. Andreessen Horowitz made early investments in companies that have since reached remarkable heights, such as Facebook, Coinbase, Airbnb and Twitter.
“For us, the mission is really important to serve those who I think benefit the most from homeownership and who struggle the most with it,” said co-founder and CEO Adena Hefets.
Divvy started operations in three cities
Divvy Homes was initially launched in three markets: Memphis, Atlanta and Cleveland. They gave individuals or families in these towns the option of choosing a home that they would eventually like to own. Divvy would then help these individuals or families achieve their goal of one day owning the home of their choice. The individual or family must contribute at least 2% of the total value of the house for a down payment. Divvy would then receive a monthly amount consisting of both market rate rent and an equity payment. The business model is designed so that in three years or less Divvy will be able to sell and transfer ownership to them.
Divvy carefully inspects homes
In order to avoid high unforeseen costs for customers, Divvy works with inspectors to verify that homes will not have large repair costs. Inspectors look for potential structural and foundation issues, pest control issues, deteriorating roof condition, outdated electrical systems, and other issues that could be financially distressing for prospective homeowners.
Algorithms to assess purchasing capacity
The company uses algorithms to ensure that a particular property makes economic sense to the prospective home buyer. If rent payments are missed, Divvy will assess the circumstances to see if a solution can be found. “If a rent payment is missed, we’ll follow up to see how we can help,” said co-founder Brian Ma. “Most of the time it’s immediately curable or curable within days. If it’s been more than a week and we think the tenant is having trouble, we will do our best to offer alternatives, including allowing them to rent the property outright by removing equity payments to reduce their monthly payment. If we cannot find a way to remedy the situation, we will go through an eviction procedure. “
Although interest rates fell during the pandemic, mortgage lenders have tightened their underwriting approval standards. As a result, many Americans have failed to meet these stringent standards and have not been able to take advantage of the low interest rate environment for their own home purchases.