Divvy Homes’ rent-to-own business model faces a test

Nash and Pam Alexander purchased their home in Atlanta from Divvy in March.

With high eviction rates, substandard properties and shady legal practices, rentto-own home businesses are one of the darkest corners of the real estate world. Financially vulnerable people seeking a piece of the American dream often end up swindled for money and property improvements, then booted on to the street.

Divvy Homes, founded three years ago and backed by Silicon Valley investors, has said it aims to change all that.

Instead of offering clients a meager selection of rundown homes to pick from, Divvy allows them to select a property on the openmarket. Thesale price is locked in at the start of the lease, and they can get a discount for buying early. And would-be homeowners are offered services to help them get themortgage they’ll need, while Divvy holdsonto the extramoney they put aside each month for a down payment.

Already, some oncewary clients are convinced. “We did some research on it because we were skeptical and worried we might get scammed,” said Nash Alexander, who closed on his home earlier this year.

Now Divvy is entering a crucial year. Its first round of three-year leases will soon expire, and those clients must make buy or back-out decisions. Some customers, like Nash, have closed on their homes ahead of schedule and see Divvy asmaking goodonits promise of offering a new path to homeownership.

But Divvy is also showing a few of the industry’s familiar warts. Some clients complain of high costs and maintenance problems. In one area, Divvy is as likely to have sold to an outside buyer as to the tenant who picked out the home. And the company has been involved in several dozen eviction cases, although many were eventually resolved or stayed because of evictionmoratoriums put in place as a result of the coronavirus pandemic.

Since it was founded in 2017, Divvy has earned acclaim as a member of a vanguard of companies aimed at people who have been cut out of traditional lending. With the backing of investors like the Silicon Valley venture capital firms Andreessen Horowitz and

Caffeinated Capital, aswell as a Singaporean sovereign wealth fund, Divvy has grown rapidly, now renting more than 1,500 homes in nine markets, including Atlanta, Cleveland, Cincinnati, Memphis, Tennessee, and Phoenix. The company hopes to convert about half its renters into homeowners by the time its first round of leases expires.

Frank Ford, a senior policy adviser with the Western Reserve Land Conservancy who has focused on housing issues in the Cleveland area, said that would be a considerable accomplishment, since Divvy’s clients often lack good credit histories.

Adena Hefets, who is Divvy’s chief executive, said the company is essentially a “savings mechanism” for its clients. They pay above-market rent, with the premium going toward maintenance costs and an eventual down payment. If the renter does buy the property, Divvy pockets a profit on the sale on top of the rent it collected. If the renter decides not to buy— or still can’t qualify for a mortgage — Divvy returns the extra cash the renter paid toward equity, minus a “surrender fee” of2% of the original purchase price.