Can a fractional ownership model help renters become owners?
Homeownership is stuck. Persistently high rates have both locked renters out of the market and prevented existing owners from moving or refinancing. But an increasing number of companies are attempting to change that: last year, we wrote about the explosion of new models attempting to help “unstick” home ownership.
Today we’re going to take a deep dive into one of those companies: Ownify, which uses a fractional ownership model to help renters transition into homeowners. This is the first of a new Thesis Driven series digging deep into specific companies—their operating models, value propositions, and growth trajectories—loosely modeled off Packy McCormick’s Not Boring Deep Dives.
Specifically, today’s letter will tackle:
- The “unsticking renters” category;
- Ownify’s model and value prop for both customers and investors;
- Early results to date;
- Challenges and opportunities in the market.
The Homeownership Cambrian Explosion
The past few years have seen the launch of dozens of new models attempting to “unstick” the housing market in various ways. While the market could be divided along several lines, it’s straightforward to split the universe into two categories:
- Companies that primarily help existing homeowners unlock equity or move.
- Companies that primarily help people become new homeowners.
The first category includes companies that purchase shares of existing homeowners’ equity—such as Point and Unison—as well as sale-leaseback companies like TrueHold.
The second category includes structured co-investment startups like today’s subject—Ownify—as well as rent-to-own (RTO) concepts like Divvy and Home Partners of America. As we’ll learn, there’s a blurry line between co-investment and rent-to-own concepts.
In general, people need three things to become a homeowner:
- Sufficient income (to qualify for a mortgage)
- Good credit (again, the mortgage)
- A down payment (historically 20% of home value)
In theory, companies could help renters buy homes by solving any one of those. In practice, the first two barriers are much more difficult to address: income is income, and mortgage lenders are hesitant to lend to someone who can’t afford the monthly payment. Similarly, bad credit is a poor signal and is generally avoided in today’s eviction-unfriendly housing market.
But on its own, the down payment issue should be solvable—with sufficient income and credit, covering the down payment is simply a question of financing.
And companies have made various attempts to solve the down payment problem. The most successful to date has been the rent-to-own concept pioneered by Home Partners of America and Divvy. Rent-to-own is effectively a forced saving model: RTO participants are renters, and in addition to their monthly rent payment, they make a contribution to a special account that (in theory) goes toward a down payment. Using that money, they have the ability to purchase the home they rent and a pre-negotiated price after a pre-determined amount of time (typically 3 years).
The pro of the RTO model is that it’s fairly insensitive to credit score—as long as someone is creditworthy enough to be a renter, they can participate in a RTO program. The problem with these programs–at least for renters–is that relatively few participants actually convert to owners. In 2022, only 43% of HPA’s renters converted to ownership, an *increase* from prior years. When a renter fails to purchase his or her home, he or she typically forfeits some or all of their accumulated deposit to the rent-to-own company, making it a risky path to saving for homeownership. The rent-to-own company is then free to sell the house on the market or rent it to another tenant.
Other concepts attempt to provide ownership-like interest without legal ownership itself. Acre and Up&Up are both examples of this; they effectively provide renters with “wallets” that track to the value of the homes in which they live as well as other rewards such as bonuses for keeping repair costs low. The Up&Up wallet, for example, attempts to create a synthetic financial instrument that offers a renter many of the financial benefits–and some of the costs–of ownership. Up&Up has seen success from this model, with the company raising over $300 million in debt and equity funding and claiming to generate a 20%+ IRR for their real estate investors as of a December 2023 investor update.
But Ownify is taking a more literal approach to first-time home ownership, embracing a “fractional ownership” model more commonly seen in vacation rental plays like Pacaso. Rather than holding cash in a wallet or other escrow vehicle, Ownify’s customers—whom they term “Ownis”—are minority interest members of the LLCs that own the individual homes. The Ownify model is still early, as they’ve been buying homes for only 12 months and only currently operate in the Raleigh-Durham metro area. But it’s a concept worth exploring given its unique take on the home ownership problem.
The Ownis
Frank Rohde, co-founder and CEO of Ownify, spent 15 years in the mortgage analytics business before launching the company in late 2022 alongside former Divvy COO Ben Herold. By embracing a more direct ownership model in Ownify, Rohde and Herold sought to improve on some of the flaws of the traditional rent-to-own model.
To provide their renters with a real ownership stake, Ownify divides each home it acquires into 10,000 “bricks”, which are essentially membership units in the single-purpose LLC that owns the home. Upon the initial home purchase, the “Owni”—the company’s term for its customers—buys 200 bricks or 2% of the value of the home. As in rent-to-own, Ownis make monthly payments that are split between rent and an additional amount that goes toward the future purchase of their home.
In a traditional RTO model, this money is held in a special account. But in Ownify, the money literally goes to purchase LLC membership units—an average of 13 “bricks” per month.
Notably, the amount of “bricks” purchased by each Owni every month isn’t set in stone. Rather, it varies based on a monthly assessment of the home’s value. “If [the Owni] pays $400 every month to their purchase plan, that buys a different number of bricks each month,” explains Rohde. “If the home appreciates, they buy slightly fewer bricks. It’s like a 401(K) where you contribute every month, buying a certain number of shares. In practice you buy more on the dips, less on the peaks.”
The variable valuation model is a key piece of the Ownify puzzle. “Every month on the first of the month, we value each home in the portfolio based on a set of AVMs: HouseCanary, ClearCapital, and Kukun,” says Rohde. “Those marks then establish the price for each home and in turn the value of each brick.” These AVMs–automated valuation models–use statistical modeling and local property data to complete an almost real-time assessment of a property’s value at much lower cost than a typical appraisal. In a sense, the rising quality of AVMs over recent years helped unlock Ownify’s model.
If all goes well, the Owni will own a roughly 10% interest in the single-purpose LLC that owns their home at the end of their five year lease. At that point, they can choose to do one of three things:
- Buy the home at the value set by the model introduced above;
- Walk away, with Ownify buying back their “bricks” minus a re-listing fee equivalent to 2% of the home’s value;
- “Renew” for another five-year term.
The first option is similar to that of other rent-to-own models with one key distinction. As in other RTO concepts, the Owni has the option to purchase the home at any point. But in most RTO models, the purchase price is a set number agreed-upon on day one. Ownify takes a different approach, tying the purchase option to their valuation model–which could vary month-to-month–rather than a fixed number.
This approach has both pros and cons. On one hand, the fixed purchase price of traditional RTO models offers the renter a predictable target: save up a specific down payment and you’ll be able to buy the home in which you live. But the fixed-price model can cause problems when market prices drop. In a down market–which might be on the horizon–renters are faced with the difficult choice of buying their home for more than it’s worth or moving. Ownify’s model avoids this problem at the expense of a known purchase price.
The Owni’s second option—walking away—is straightforward. The Owni’s lease ends–along with his or her purchase option–and Ownify buys back the Owni’s accumulated LLC membership interest at the valuation as determined by their model. Ownify takes a 2% “relisting fee” from the buy-back price, effectively charging the Owni a meaningful share of the costs incurred to sell the home on the open market.
The final option–renewal–is nominally straightforward for the Owni but requires some gymnastics on the back end. In this scenario, the Owni would sign another five-year lease (and a new price) and continue their monthly purchases of membership units into the LLC. We’ll discuss this option’s complexities a bit later on.
Interestingly, Ownify also avoids rent escalations through the course of an Owni’s five-year term. Starting rents are a bit above market but actually go down as the number of bricks an Owni accumulates goes up. We’ll discuss the implications of this for Ownify’s investors in the next section.
Most Ownis find Ownify through the company’s network of 160 buyers’ agents. For agents, Ownify helps buyers who need down payment assistance. Anticipating the NAR settlement, Ownify recently rolled out an agent compensation program that guarantees the agent a 2 – 2.5% base commission in addition to a bonus equivalent to 10% of the difference between the listing price and the final purchase price, aligning agent incentives with those of the homebuyer rather than the seller.
For Ownify, the agent network helps the company overcome the “house matching” problem that many similar models face when prospective owners want to buy properties outside of the company’s buy box. “[The agents] all know what our buy box is,” says Rohde. “They can then submit individual properties for underwriting,” a process which then has a higher likelihood of success given the agents’ role. Rohde claims that only 25% of properties submitted by buyer-agent teams are rejected, typically because they are too old, too rural, or fail inspection. Which brings us to the role of Ownify’s PropCo investors.
The Investor’s Perspective
From a renter’s perspective, Ownify offers another path to property ownership. But for investors, Ownify offers exposure to the single-family market and brings some advantages over single-family investment models.
One, Ownify has early evidence of generating better returns than other single-family investment models through three mechanisms:
- Higher initial rent in exchange for no escalations. As mentioned earlier, Ownify’s initial rent is higher than market, but they take no escalations over a five year period. This provides some security for renters and is a good deal for Ownify’s investors during times of sluggish rent growth–like now.
- Lower maintenance. This element is a bit more speculative, but Ownify claims significant decreases in maintenance costs given the “ownership mentality” of its renters. The Ownis are, after all, accumulating ownership interest in their specific home rather than a sidecar wallet or savings account.
- Lower vacancy & reduced turnover. The company doesn’t buy a home until an Owni has signed a long-term contract. So far, this has resulted in zero vacancy or turnover, contributing to higher investors returns.
Currently, Ownify is primarily focused on raising from high net worth individuals (HNWIs). “The message particularly resonates with people who like the impact component, investing in local communities and missing middle housing,” says Rohde.
The Ownify Buy Box
- Deal Size: $250-750K
- Leverage: 65-70%
- Target IRR: 15%+ (16.2% historical)
- Target Dividend: 4%
- Target Hold Period: 5Y
- Target Markets: North Carolina, Tennessee
Like many tech-forward fund buyers, Ownify purchases its homes all-cash and then adds leverage on both a property and portfolio level. This is a meaningful advantage in the purchase process, as it allows Ownis to make offers with no financing or appraisal contingencies. Currently, Ownify’s leverage comes from a warehouse facility from Setpoint at the portfolio level and DSCR lenders at the property level.
The renter renewal option mentioned earlier does create some unique challenges for the PropCo model. After all, Ownify is aiming to return capital to its investors after 5 to 7 years. If renters choose to renew—rather than exercise their purchase option or walk away—Ownify will be forced to recapitalize its own deals. “We plan to raise a continuation fund every five years,” explains Rohde. “So the 2029 fund would buy the home from 2024 fund the calculated valuation. 2024 fund investors would get their cash back, and 2029 investors enter the transaction at current market value.”
But Rohde believes that the company’s focus on high-FICO Ownis (avg portfolio FICO is 741) will lead to a much higher rent-to-own conversion rate that than typically seen in RTO businesses like Divvy and HPA. And there’s also good reason to believe that Ownify’s higher quality of customers combined with the mentality of literal home ownership—albeit fractional—will yield superior results.
What Ownify Means
Like many companies in the space, Ownify is testing the boundaries of what property ownership means. Can it be a simple option to buy a specific property, as in a rent-to-own concept? Or even a wallet that can be transferred to any property within a network, as in Up&Up? Or must it require a specific ownership interest in a property itself?
Ownify is sticking to a stricter interpretation of the nature of ownership. The company’s skeuomorphic rebranding of LLC membership interests into “bricks” is exemplary of this approach, betting that prospective homeowners will value literal ownership over synthetic financial instruments. Prospective home buyers could, after all, get exposure to the single-family market by buying some shares in a single-family rental REIT like $INVH or $AMH rather than their own home. But very few prospective buyers do that, demonstrating the psychological power of owning one’s own home.
While Ownify’s model provides its renters with a genuine stake in their homes, doing so creates a non-trivial administrative burden. “These LLCs each cost us $500-1,000 per year in accounting fees, filing fees, and other expenses,” explains Rohde. “So a big part of the solution is building the software to automate the administrative aspects of fractional ownership.”
But solving the challenges of first-time homeownership will require creativity, and models like Ownify’s push the boundaries of how the capital markets can be put to work to bridge the homeownership gap.
This article was originally published in Thesis Driven and is republished here with permission.
