Based on the notion that far too many U.S. homeowners are “house-rich, cash-poor,” home equity investment firm Hometap provides clients with a way to tap into their home equity instead of selling their home or taking out a loan.
Hometap, as an investor, provides cash in exchange for a share of their home’s future value. When the home sells or the homeowner settles the investment within the 10-year period. In return, Hometap receives an agreed-up percentage of the sale price or current appraised value.
“We do see this as a new asset class in the real estate ecosystem and we see it as complementary to traditional debt options that exist today,” Dan Burnett, head of investor product at Hometap, said in an interview with HousingWire.
The market for home equity investment is still small, with the estimated investment volume from players in the market to be around $2 billion and $3 billion.
With continued demand for home equity investment from homeowners, Burnett is confident that the market is poised for growth in the decade ahead.
While Hometap doesn’t directly work with mortgage lenders or real estate brokerages right now, Burnett sees an opportunity for partnership to help buyers’ homeownership in the long term.
Read on for Hometap’s business model and areas of potential partnerships with other players in the housing industry.
This interview was condensed and lightly edited for clarity.
Connie Kim: A potential concern that investors could raise about Hometap’s business model is that it’s dependent on the home’s future value going up. But history shows that this isn’t always the case. I’m curious how Hometap is hedging against that risk.
Dan Burnett: There are three ways that we approach this. One is through the market that we’ve approached. Home prices have been historically resilient asset classes generally historically. Average home price appreciation over the last 50 years floated in the 5%-range.
While the Great Financial crisis obviously is the most notable home price depreciation period, there are not too many other examples of that outside of the Great Depression.The ones that you have seen have a tendency to be short and sharp – like a one or two year correction, but not occurring over a full 10-year span.
Second is the selection of homeowners. We do spend quite a bit of time thinking through our underwriting rules and making sure that our homeowners are able to and are capable of paying their first mortgage. We also look at the appraised value of the home to make sure that we’re making a possible investment into a home that’s in good condition.
The third part is the structure [of the deal]. Because it is not a one-to-one exchange rate, we do get a little bit of extra ownership for every dollar that we put in, so that does provide a little bit of protection on the downside in case home prices depreciate.
Kim: There are a handful of home equity investment firms in the market. Hometap’s investment volume hit $1 billion in February, surpassing 10,000 home equity investment issuances since it was established in 2017. How does the company differentiate itself from other competitors in a niche market?
Burnett: We are trying to take the homeowner-first mindset as possible into everything we do as a business. An example of that is our product structure. We make an investment right at the moment of the investment and we have a fixed percentage ownership in the property. That was a different approach than what has historically been prevalent in the space prior to Hometap’s entry.
Two other companies in the space – Point and Unison Equity Sharing – both use a share of appreciation model. What they’re doing is, they’re taking a percentage of the future growth in value of the home. So if the home went from $1 million to $2 million, they would own a share of that appreciation.
We view our approach as a more simpler way of explaining this to homeowners and making sure that there was clear alignment and understanding of our product. We have a home equity dashboard that’s available to the public, which can be used to do scenario planning with a product like ours as well looking at other potential financing opportunities. So we think sort of holistically by providing a product that is homeowner-focused and technology to help people make important decisions.
Kim: Interest rates are expected to drop sometime this year, how does this affect Hometap’s growth trajectory?
Burnett: After being founded in 2017, we made our first investments in 2018 and 2019. An interesting thing about our business is we were kind of born into a headwind in terms of the interest rate environment. With the rise in interest rates, we had seen continued appetite in terms of homeowners being interested in taking on a product like ours.
It has no monthly payment component. That’s what we do and although we do see interest rates coming down over time, we’re confident that we would still be competitive in a low-rate environment like what you saw in 2017 through 2020 as well as where we kind of expect rates to shake out in the future, around the historical norm of 4.5% to 5%. So we still think our value proposition with homeowners continues to hold very strong.
From a capital markets perspective, as rates go down, we are a more compelling alternative investment vehicle for a broader swath of investors as well, which hopefully creates additional demand on the capital side and provides more competitive pricing to our homeowners.
Kim: The home equity investment space is still a niche market. How big is it?
Burnett: Between $2 billion and $3 billion in investment volume. I think there’s just several large players, who make investment volume of high-nine figures on an annual basis and then there’s a significant number of smaller businesses that are still getting their footing who are probably in the low-nine figures, high-eight figures.
Kim: With interest rates elevated, a significant number of mortgage lenders have started offering home equity lines of credits (HELOCs) and home equity loans. Does Hometap foresee an opportunity to partner with mortgage lenders to expand the home equity investment market?
Burnett: We do see this as a new asset class in the real estate ecosystem and we see it as complementary to traditional debt options that exist today. I think there are absolutely use cases on the homeowner side where a product that is aligned on the value of the home and is providing relief in terms of the amount of monthly payments you need to make to continue to service the debt itself.
In the long term, we’re looking to potentially reduce or to augment their first lien they’re taking on when they purchase a new home and use home equity as a way to potentially bring more capital to bear without meaningfully increasing their monthly costs so they can achieve homeownership and get into the home they’re looking to purchase in the first place.
Kim: What are some ways Hometap sees a potential partnership with real estate agents or loan originators?
Burnett: There are scenarios where a homeowner may be looking for a HELOC or a HELOAN and ultimately that’s not the right fit for them and conceivably you could absolutely see scenarios where it would make sense for a partnership to evolve over time where we’re folks potentially work with Hometap to take on a home equity investment as an alternative. I do think it’s greatly speculative at this point.
We don’t have direct partnerships with real estate agents today. I think what could be compelling is life cycle management. Real estate agents are building relationships over time with homeowners and they want to make sure that they’re helping those homeowners meet their financing needs as much as possible and it doesn’t necessarily need to result in a home sale.
To the extent that home equity investment makes sense particularly as a mechanism where a homeowner has a partner who’s aligned on increasing the home value over time, allowing them to stay in their home until it’s the right time for them to potentially move while also providing them the necessary funds, I think it could be another tool in the tool bag for those real estate agent to use.
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