From Rent to Own With Divvy Homes

find out a little bit more about this startup. We welcome Divvy Homes CEO Adina Heffitt's. She joins us on the phone in San Francisco. So nice to have you here on Bloomberg. How are you. I'm good. Thank you for having me here, Carol, Well, it's great to have you here because I think one of the things that we've talked about a lot over the last year and a half, especially with all the inequities that are out there, is the um lack of opportunities for many sectors of

our population to be able to buy a home. And it's kind of this vicious cycle that prevents them from do it. So Dina talked us at bit about what you are doing at Divvy Homes and how it all works. Sure, so, do be just a new way to to finance the purchase of the home. What we do is we let our customers pick out a house. We will buy it on their behalf. We then rent it back to them and with their rental payments, they actually build equity in the property. So we let them build up to temper

cent ownership and the property over the course of three years. Um. They can buy back the property in any type from us by getting a traditional mortgage and rowing their equity, or they can we can cash them out for the value of their equally in the home. So, Carol, what I really saw was that people are being able to access home ownership because mortgages are getting just more strict over time, harder to get, and so we thought might as well provide access through a new form um where

it's it's sort of a rent to own option. How long have you guys been doing this? So we were founded about four years ago, but we've been purchasing homes for customers and helping them access home ownership for about three years at lass. And how's it going? So far, give us, give us ideas of a typical scenario and how it works out. Sure, So it's it's been really interesting.

What we have found is that especially during the COVID period, access to mortgages have actually only gotten more challenging, and so we saw a rapid rising demand during the COVID time period, and say, UM have thousands of customers who are using us to purchase homes across sixteen different markets. What's really interesting is how well people are actually being able to buy back to home. So we're seeing a buyback rade of roughly which is four times uh sorry,

ten times the the average. The most rent to own companies have the most rento own companies are are sort of low single digits UM, and we're almost ten x that amount in terms of buyback rade. What's even more interesting is that our customers have on average about eighty two hundred dollars of savings in their home UM. And so when you think about the average American most doesn't have um almost anything in savings. I think the average amount of savings for rent or is roughly about eight

hundred dollars. So we're right now helping your customers save a lot which feels really good. So you're saying they have a rainy day fund of well, it's it's invested in their homes. So it's investment in the equity of their home. Well, I'm trying to understand what that appreciating value. That's what I want to understand. When you say customers have an average of savings on their home. What is exactly do you mean by that? Is that equity? Is that what that is? Yes? Exactly. UM. So we we

don't technically from a legal perspective, it's not technically called. Um, it's not technically equity. However, UM, what we do is we basically keep a virtual equity account for them. So they contribute savings into an account we save there for them, and we give them credit for for their present ownership in the house. So let's say buy a house, Carol ad Let's say a hundred thousand dollars. UM, they put in ten thousand dollars at the beginning of the program.

That home appreciates to a d twenty dollars. They owned ten percent of that home. So the ten thousand dollars they originally put in, but they actually their ownership is ten percent. And so the value of that equity is close to twelve tho dollars and they made a two thousand dollar gate on their equity and they get the full benefit of that. So you said about the buy back grade of people who UM rent to buy, the buy back grade is forty and you said, that's ten

times some of the other rent to own companies. Of the sixty percent who don't ultimately do it. What happens. So it's actually interesting is we're seeing a lot of people who um, you know, saved up to ten percent, but turns up they need just a slightly larger down payment. As we're seeing a decent percentage of people who actually just stay in the house and they continue to build up equity, so they build up larger round payment savings. UM.

There are some people who also just turn over. UM. You know, we really encourage access to homeownership, but we want someone to be able to actually want to live in the home. So if your neighbor, you know, you don't get along with your neighbor, you don't like the school district, and you want to move, we don't make it to that you're stuck in this house. You cash out your equity and you can move on to another location that might work better for you. Do you think

you know? Ultimately and get to a point where most renters become a homeowner in this process. That is what our our goal is. Like our goal we're starting out at goal is only to increase that over time, and we've done that through a couple of very specific things. So first, um, we offer a free credit counseling for all of our customers. That's a really important part of our program. UM. Second, we have mortgage partnerships UM, so we're able to refer customers over the mortgage providers today

that helps them actually work through the homebuying process. In the future, what we want to do is be able to eventually help issues the mortgage to the customers ourselves, and that's something that we're slowly building towards because this buyback portion um and increasing the percentage is quite important to us over time. You're listening to Bloomberg Business sweet Cal Masser in our indirective broker studio. Still with us is Adina helf A, chiefs chief executive officer of Divvy

Holmes with us on the phone from San Francisco. So you mentioned you know Adina the goal is to get you know, more UH renters in every renter if possible. Who partaking your program to become a owner in this process? Tell me a little bit about, you know how the traditional financial system when when we talk about it a fair amount here at Bloomberg, they really don't. They really

kind of ignore a big part of the population. How do you deal with things that they might say is important like bad credit ratings or not a credit credit history, or low income? How do you deal with that? Sure? Yeah, So the mortgage market was created, has been around for a while, but was really put into um existence by the GSCs back in and during that time they set underwriter requirements so FICO requirements where your income had to

be debt to income ratios and down payment requirements. Rightfully, so those requirements have not changed over the last hundred years. And the reason why is the couple of times since that they've tried to change them slightly, it's led to major issues like the global financial crisis. Right um, and and so I actually really believe that the mortgage market is efficient and should continue to operate as it is operating.

And the reason why is if there is someone who is unable to make their mortgage payments, and there has to be a foreclosure that happens. For closures are extremely expensive and just take a really really long time, mostly because they're just so heavily regulated. Did he can take on people who are in a wider credit spectrum than than a traditional mortgage, So we go as well as a five fifty pc although our sweet spot is right

around called six seven hundred YCO. We only require one to two percent of the home value as a down payment UM, so are our customers generally have on average call it two to six thousand dollars saved up UM.

We require a minimum of two thousand dollars UM. And because our our our product is fundamentally a rental product, if the tenant is unable to make a payment, we're able to be a little bit more flexible, try to work through a payment plan and ultimately in the worst case to or if we do have to go through an eviction. UM evictions are less costly and take a lot less time, which means that we can take more risk and opening up the aperture for who we offer

this product to than a mortgage can take. Hey and doing this what has been a surprise to the upside. What has been a surprise to the downside. Oh wow, that's an interesting question. Uh, surprise that the upside has just been Um. You know, everyone talks about starting a mission based company, and for me, that has really just gotten better over time. I love waking up every day. I love helping people actually act as homeownership. I really believe that it is a major way to to grow

well for the low middle income Americans. So I think it's actually quite important. Um to the downside, I would say, Um, you know, building a company is just a bumpy ride. UM, and things like you know, right now, we're having a mass shortage of inventory. UM. Interest rates are kind of very low right now, but kind of jumping all over the place, and we're not sure where they're going to go. You know, you have to be apparent for some of these macro things that impact your business but maybe are

hard to predict at the onset. I never thought I was gonna be managing a company through a global pandemic. I've learned more in the last year and a half than I have probably my prior by prior, you know, thirty four years um. And so I think that that has made it a really interesting learning experience, but but definitely um a little bit of a crazier ride than I had expected. It's like overnight, you're now ahead of a company with a lot of experience because of the pandemic.

And we we've heard it listen, We've heard it from CEOs who have been leaders for a long time. There's just things they learned because they had to and pivot quickly. The timelines were just so bizarre during the last year and a half. Um, one thing I wanted to ask you, in terms of home ownership, how does it how do you think about things like diversity and inclusion to make sure that you are helping a diverse population. So what's interesting is that that's the Government Act SALLY regulates that

you can collect um demographic information on an individual. So you can't ask someone what their races. You can actually ask them if they have children or not upfront in the application. And all these things are really important because those were historically groups that had been discriminated against when

it came to rental property. So we don't ask any of that up front um, although I do estimate just from qualitatively having met a lot of our customers I think our demographics roughly represent um, the demographics of whatever area we're in. So I think like someplace in Atlanta that I don't know the exact number, but it's probably call it six percent of the populations black. I'd say probably similar numbers are a similar percentage of Divvy customers

are also black. We have a lot of families. I'd say that that's probably the majority. We don't know up front, but later on we do make them list out everyone who's in the house just for safety reasons. Um. So a lot of families, um and a pretty diverse customer base, which we were really proud of. Hey really quickly, just got about forty seconds here. Um. I do wonder what the end game is for you guys. Do you find

that staying private is a better thing? You just did another funding round, you're now hitting a two billion dollar or you're there at a two billion valuation? Is the endgame to go public? And I just or do you need to stay private in order to function in the best way possible? And again, just got about thirty seconds. Yeah, so I'd say, Carol, staying private is always preferable than having to a a public as you know, going public as

a company has a lot of legal and compliance requirements. However, I do foresee us probably going public within the next five years, just because of the asset class we're in, the amount of capital that we need to access. The public markets also generally tend to understand real estate businesses super well, um and we've seen a bunch of our

protect competitors benefit from this so greatly. On the horizon at some point, well, I hope you'll you'll stay in touch and let us know as things progress over the next couple of years. Left to check back with you real soon to see how things are going to be home. CEO Adina half Its joining us on the phone in San Francisco,