This month, we’ll talk to mortgage leaders about where the market is headed and how products are evolving digitally to suit buyers’ needs now. We’ll also explore emerging alternative financing options that are changing the game for buyers and sellers. Join us for Mortgage and Alternative Financing Month.
For far too many Americans, traditional homeownership is objectively out of reach, making many question its very role in the American dream.
Thankfully, buying a house today doesn’t have to be like it used to be.
Cognizant of socioeconomic factors such as student loan debt, depressed salaries, construction declines and ever-increasing wealth gaps, among many macro-economic concerns, real estate innovators are emerging to offer alternative pathways to homeownership.
Creative, tech-powered combinations of iBuying, alternative finance, and traditional real estate concepts, a new branch of the business is being cultivated on a few brave startups’ whiteboards.
The Inman Handbook on Divvy will introduce you to a company that has capitalized on a niche landlord tactic, lease-to-own. They’re venture-backed and big-hearted.
The idea isn’t new. However, Divvy’s supportive consumer approach to it isn’t something we’ve seen before.
So let’s have a look.
Table of Contents
- Divvy at-a-glance
- The rent-to-own process
- Application process
- Agents and divvy
Divvy’s mission is rooted in trying to minimize the ever-growing girth of America’s homeownership gap.
“We believe the mortgage industry hasn’t kept up with changing times,” its website states.
Why should a financial hiccup upend a person’s ability to qualify for a mortgage? And why should the repercussions of generational housing discrimination continue to hamper the economic viability of those long separated from it?
Homes have become more commoditized than ever before. It should be easier for people to gain access to the market. Not everyone is a credit risk, and not every mortgage application decision should be black and white.
There does have to be a qualification line drawn, but why can’t it be etched in pencil?
Divvy, founded in 2017, wants to help aspiring buyers whose economics need a slight push to tilt the scale in the right direction. The company is a vocal advocate for more people being able to own homes and executes its advocacy while keeping the agent in mind and the buyer a priority.
While technology continues to underwrite the real estate transaction rapidly, making the “work” of buying and selling easier, Divvy streamlines the human side of the transaction. Perhaps that’s what’s needed most of all.
Even anecdotally speaking, Divvy’s market is huge, especially in light of ever-growing home prices.
“In a year when nothing is normal, owning a single-family home has become less affordable to average wage earners across the U.S., despite conditions that would seem to point the opposite way,” said Todd Teta, chief product officer with Attom Data Solutions, in a statement about Attom’s Q3 2020 housing market report.
Banks are seeking 20 percent down and above average credit scores. And the amount that makes up that 20 percent grows with every quarter of growth.
Inman’s Veronika Bondarenko reported that home-price growth in January 2021 soared by 10 percent year over year, a growth rate unseen since 2013.
“That carried over into the first month of 2021, when double-digit home value growth was observed for the first time in nearly eight years,” she wrote.
Sellers are avoiding selling because of the risk of not being able to buy, and even well-qualified buyers in need of financing are pushed aside by investors and cash-rich buyers.
So, where does this market leave the “almost-qualified?”
That’s the challenge Divvy is solving.
As it turns out, some organizations with money are all-in on helping Divvy achieve its goal of serving those who have less.
After a Feb. 2, 2021 infusion of $110 million in Series C funding, Divvy’s total debt and equity capital funding raised amounts to $500 million.
“At the start of the pandemic, we made a commitment to help and support as many future homeowners as possible,” Adena Hefets, co-founder and CEO of Divvy Homes, said in a press statement after the most recent funding announcement.
“During COVID-19, new mortgages became difficult to secure as banks tightened underwriting requirements for approvals. As a result, families were locked out of home ownership opportunities during a global pandemic — a time when they needed safety and shelter most. Divvy stepped up in place of traditional financing.”
The new raise will fuel Divvy’s expansion into 20 markets by the end of 2021. Part of that effort will be launching transaction efficiencies to simplify how it works with buyers and agents further.
Rent-to-own: The Divvy model
Divvy buys homes for an aspiring homeowner and leases them to the client for up to three years.
A small percentage of each monthly payment, up to 25 percent, is set aside in an equity savings account for an eventual down payment on the home. The rest is straight rent.
The plan is designed for renters to become homeowners after saving enough for a 5-10 percent down payment.
This means most will end up paying private mortgage insurance. And, because they won’t compete on the open market for the house and work with a cooperative seller, these offer terms won’t be a deterrent to acceptance.
The buyer’s only upfront commitment is 1-2 percent of the purchase price upon lease commencement, which serves as the first down payment savings installment.
Leases are signed for three years and set at market rates. There’s a termination clause that allows the renter to leave with their savings, minus a relisting fee calculated as a “small percentage” of the original purchase price.
Divvy makes all-cash offers (no appraisal required) on the homes its clients prefer and charges no interest on the mortgage to the renter, enabling the buyer to afford the down payment savings each month. It can also close in under 20 days on approved homes.
Divvy also handles all standard closing costs, taxes, inspections, and homeowner’s insurance.
The renter can buy the home at roughly any time during the lease term, should the opportunity arise. The home is less money if purchased before an 18-month benchmark and more if completed after that date.
The home’s final buy-back price is set upon inception of the initial lease term using a third-party analysis of average appreciation and projected market factors. If the market suggests it’s worth more than that upon the sale date, the buyer gets an even better deal.
“Our appreciation estimates are pretty conservative, and we like to keep it that way,” said Hefets in a phone call with Inman. “We want customers to buy back the homes, we don’t make all that much off of the appreciation, it’s not a moneymaker.”
Divvy sets a purchase and rent price range for eligible homes in each market it operates. Obviously, to keep itself profitable, luxury or above median price homes won’t make the cut.
Here’s the current breakdown:
Although Divvy states it “can buy almost any home,” it really means “any home within the approved budget.” So yes, buyers’ selections are limited, but remember, these are buyers with limited funds, so that’s to be expected. They also impose a 2-acre land maximum.
It has a home search function on its website, which filters homes according to each market’s price range.
Condos, foreclosures, short sales, mobile homes and anything outside of simple single-family homes or townhomes are not eligible for the program.
The renter remains responsible for all cosmetic issues and repairs during the lease term, as is standard in most lease scenarios. And Divvy will handle any serious maintenance issues, such as heating systems, roofs and structural concerns.
The Divvy Portal, a backend software interface for all parties subject to a Divvy sale — Divvy, agents and clients — tracks every month’s payment and the building percentage of equity savings against the accepted buy-back price.
There are several ancillary benefits to the clients, such as ongoing credit counseling and credit bureau reporting, as well as the comfort of knowing their landlord is “in it with them” and won’t sell a house out from under them or aggressively push rent increases. Divvy doesn’t report any missed payments.
Divvy has also arranged mortgage partnerships for its clients when it’s time to buy back the home. There is no requirement to use them, but there are a few discounts involved if one does. The company works with Rocket Mortgage and Loan Depot.
The application process
Even though the mortgage industry application and qualification processes are starting to move away from their antiquated workflows, Divvy wants to ensure that its client onboarding processes in no way deter people from their goal of homeownership.
The company has worked to minimize what it asks of applicants while still sufficiently analyzing risk and their ability to get a person into a home for the long term.
Agents can use Divvy’s application efficiencies to help sell those who may be a good fit because, as any agent trying to do taxes understands, complicated business functions often hold people back, even when qualified.
Divvy’s financial benchmarks are not that challenging to meet:
- 550 FICO score
- $2,500 verifiable monthly income (co-applicants are allowed)
- Six months of income, including any additional self-employment income
- Proof of $2,000 in funds for the initial down payment
- 50 percent debt-to-income ratio
Prequalification involves a chat with Divvy about location and home goals and to ensure they’re aware of how the program works. It’s a new idea that hasn’t been around that long, so, understandably, people will be skeptical.
Divvy will run a soft credit check to ensure everything is above board with the finances, and if it checks out, Divvy will offer a budget to the consumer.
As is done with a standard mortgage, full approval requires the submission and verification of the above-mentioned financials. Because Divvy is going to be a landlord for a while, a background check is required, too.
Divvy uses a ListHub feed to pre-filter home searches according to each market’s approved home price. But because not every home in a market is part of ListHub, buyers may find other options outside of Divvy’s search.
“We started in a market that had the lowest median home price, and that was Cleveland,” Hefets said. “We spoke to a lot of single-family rental leaders, and they pushed us to more common single-family rental markets, which at that time was, and still is, Atlanta.”
Markets are selected now based on average sales price, according to Hefets.
“We need the cap rates to make sense, so we’re trying to be in almost every Tier 2 market, then Tier 3.” she said.
The entire application and approval process can be completed in well under a week, sometimes 24 hours, if the individual’s documents are submitted promptly.
Divvy offers a nice relief from what traditional mortgage approvals require. It’s never fun to have to document every dollar earned, especially when everything exists in many formats and under different account numbers and financial providers.
Understandably, clients will go through the more traditional route for the buy-back, but they’ll have a lot more time to prepare for it, as well as cleaner financial records thanks to Divvy’s ongoing oversight.
Agents and Divvy
Agents are central to Divvy’s business functions, as they’re the front line, working with people unable to qualify for mortgages fully.
Part financial adviser, part emotional punching bag, real estate agents can catch a good deal of emotional shrapnel from clients unable to buy. Thankfully, Divvy provides those clients a valuable alternative to simply giving up on the market.
Working with Divvy means handing off your client to a sympathetic but encouraging business partner.
You can also keep clients on the path to homeownership, a much more valuable solution than wishing them well and hoping your drip campaign is effective. Divvy offers a tangible, proven way to own a home — and there’s not much more you can do for a client in that situation.
Agents who want to work with Divvy as a referring agent but under their existing brokerage will go through a rather moderate web-based training to understand the program and learn who among their clients are the best match.
Derek Walkush is now the designated broker of the first Divvy Brokerage, located in Cleveland, Ohio. Previously a referral agent for the company, he said Divvy’s solution opens up an entirely new market for real estate agents. They no longer have to walk away from good people.
“It’s really a blessing because I was able to convert some of my buyers who fell short on maybe an FHA loan and give them an alternative to right their wrongs,” he said. “It’s a great feeling, not only are we putting quality people into a house, but we’re giving them a chance when the establishment won’t.”
Walkush said the new Divvy-branded brokerage is a little over 100 days old and that it’s actively recruiting agents to join. A Divvy brokerage has opened in Atlanta, and one in Dallas is just getting off the ground.
“We found we just didn’t have enough agents to hold the capacity for the number of leads we had,” Hefets said. “We would bring on agents, train them, and give them up to 40 leads per month sometimes. And it was really hard to scale up that way.”
Creating a brokerage makes it easier to manage the lead flow. But Hefets is very clear that any non-brokerage agent who brings in a lead will always own that lead.
“Any lead an agent sends us stays with them, 100 percent. There’s no co-mingling of that,” Hefets said. “And if they close a certain amount of deals with us, we’ll start sending them leads. Actually, many of the agents with our brokerage now started out as referring agents.”
Any leads that come from Divvy’s paid marketing will remain with agents at the brokerage, which is traditional.
If a client, for some reason, can’t continue with the lease or buy-back the home, the company “re-Divvies” it for another qualified customer, keeping the transaction totally in-house.
Obviously, the home search will be limited by the approved Divvy budget, which may help those clients who tend to inflate their budgets as they go.
It’s important to note that because the “buyer” will become a renter once Divvy is engaged, agents actually represent Divvy as the homebuyer.
The company is your client; the consumer is its client.
The relationship changes slightly, but by serving Divvy, you’re serving your client. Their best interests are aligned.
Agents earn the full buy-side commission; Divvy doesn’t take any cut. Divvy also offers all-cash and can close most transactions within two weeks, making it a very competitive and easy-to-manage buyer.
There’s not much need for agents to work with the buyer upon the buy-back, given the nature of the relationship between Divvy and its tenant/buyer. After all, it’s a home they’ve been in for likely a couple of years, and Divvy contractually has no other buyer for it.
Yet, because it’s a “starter” home, there’s a good chance you can be there for them when it’s time move again.
The Divvy Portal will become your CRM for all Divvy deals and client application tracking. Given the unique nature of Divvy’s model, it makes sense to have a separate system for their transactions.
Divvy’s backend will benchmark your clients as they progress, letting you know as they move along, from starting the application to getting fully approved.
Your broker is going to want to know the status of your deal for ongoing revenue tracking. If they use software for that, expect to do some manual input in your brokerage-provided system.
The software can also be used to share Divvy invites and referrals via email, text or social.
“It’s hard for us to fully quantify, but I personally believe it’s in the tens of millions of people,” Hefets said when asked about the size of their market.
Any buyer’s agent who’s been through the pain of working with a borderline-mortgage qualifier can attest to the pain of that relationship’s final straw. Both parties are usually pretty dejected.
Divvy is doing more than helping people own a home; in some ways, it’s making up for history’s mistakes. Think how far better off the nation would be financially if redlining never happened, for example. The unrealized generational wealth is incalculable.
Homeownership may not be everyone’s American dream. But whatever that dream might be for someone, it becomes a lot more accessible with the financial bedrock of homeownership securely underfoot.
Have a technology product you would like to discuss? Email Craig Rowe
Craig C. Rowe started in commercial real estate at the dawn of the dot-com boom, helping an array of commercial real estate companies fortify their online presence and analyze internal software decisions. He now helps agents with technology decisions and marketing through reviewing software and tech for Inman.