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There are three types of financing that are preparing to disrupt real estate transactions, Inman moderator Clelia Peters said in an Inman Connect Now session Tuesday entitled “Disruptions in Financing: What’s Coming Next.”
In the session, Peters dove into what real estate agents need to know about the major players in transaction facilitation, mortgage alternatives and home equity access.
Peters explained that these are the three major areas of disruption to the housing transactions, saying that over the coming months, she would provide deeper dives into what companies are causing this disruption.
1. Transaction facilitation
Financing to reduce historical points of friction in the transaction
Generally these transactions help buyers buy as if they were cash buyers, even if they are using a mortgage, or they help sellers buy before they sell their old home. They are intended to be short-term vehicles.
Transaction facilitation models are not replacing any form of capital that already existed, but instead bring an entirely new idea. Companies like Orchard, Flyhomes or Homelight offer this as a part of an overall suite of products. Other companies, such as Homeward, Knock and Ribbon have this as a standalone product.
There are two models or goals these companies hope to accomplish: They either turn a buyer into a cash buyer, or turn a seller into a buyer. They earn their money through spreads, or the value of the home when they buy it versus the value at which they sell it, and fees, or a premium paid for using this service.
These companies market directly to consumers and are especially interested in working with real estate agents.
2. Mortgage alternatives
Alternative or supplement to mortgage financing, often equity-based
This method uses a home equity-based lending model, and is used by companies like Unison or Homelight. Other examples of mortgage alternatives include rent-to-own models like Divvy Homes. These models earn money through fees, but are especially interested in earning money over time through the increased value of the home.
They are made to be mid to long term, and they specifically target buyers. They reach consumers directly and work through partnerships with real estate agents.
3. Home equity access
Alternatives to a home equity loan, generally buy out a portion of the home’s equity
Peters explained that this is a new concept for real estate transactions.
“Historically, financing for buying a home or for home equity access came in the form of a loan,” she said. “New companies are breaking the home into pieces and offering to buy a portion of the home. It’s done for a fee but there’s not interest. And the company participates in the upside of the home with the owner.”
This method focuses on homeowners who want to unlock the value of their home without taking out a home equity line of credit or paying interest.
These companies, like Unison, Hometap, Knock, Point, Noah and EasyKnock are building up their portfolios and operate like real estate managers. While they market directly to consumers for this product and are less interested in working with real estate agents, they are important to learn about as agents seek to provide options to their homebuyers who are looking for alternative financing methods.
In reflecting on these disruptions, Peters said it isn’t a question of if, but rather, when these disruptions will start to take over real estate transactions.
“The biggest question that I see around these is not if, but when,” Peters said. “I’m pretty confident that these tools are going to move more and more into the mainstream, but how long it takes for that to happen, I’m a little bit less sure. Are we going to see widespread consumer adoption of this like in the next couple of years? I’m really not sure. But five, seven, 10 years from now, I do think that these tools are going to be a lot more widespread in the market and maybe even a decade from now approaching normal as people think about financing.”