Housing solution? Yep, but not here

Bay Area tech firm buying rent-to-own properties out of state

Jeanine Smith wanted to buy a house for her family in Ohio, but a spotty credit record and modest savings put a mortgage just out of reach.

She went online and found an unexpected ally — Bay Area startup Divvy Homes.

“They purchased a home for us,” said Smith, now living in a large two-story house in Cleveland with her extended family. “This is such an innovative program.”

The 2-year-old San Francisco company is seeking to boost homeownership by finding customers with steady employment who are eager to own a house but are saddled with less than perfect credit. The company earns income as a landlord and, potentially, on the sale of the house.

Divvy Homes founder Brian Ma said the declining rate of homeownership in the U.S. has created a new market.

“There’s a gap between renting and owning,” Ma said. “It’s getting much bigger.”

Ma saw an opportunity to reach renters with good but not great credit scores — those who might not qualify for traditional mortgages — and help them purchase properties. The tech company has identified up-and-coming markets where it can afford to buy many homes.

It won’t be expanding near its headquarters, where home prices

are the highest in the country. “We’re a startup,” he said. “We have to go into places that aren’t the Bay Area.”

Rent-to-own contracts aren’t new but more typically apply to televisions, couches, dinette sets and sometimes vehicles. Bringing the idea to real estate requires capital, strategic partnerships with real estate agents and mortgage brokers — and the right customers.

Martin Orefice, founder of an online platform for real estate transactions, RentToOwnLabs.com, said the practice is not widespread in home sales and has its pros and cons.

For potential buyers, it can bring financial discipline to a renter struggling to save for a down payment. For sellers, it can eliminate fees and a longer sale process that comes with real estate agents, he said.

But prospective buyers tend to be a bigger credit risk and less dependable than the majority of the homebuying market. “It’s not a great option for everybody,” Orefice said. “You could be setting someone up for failure.”

The pool of tenant buyers is larger than the pool of traditional homebuyers in some areas, he said. For example, Orefice, based in Orlando, Florida, put up a rent-to-own sign in front of a property that drew 200 phone calls.

Sandra Knau, spokeswoman for the California Department of Real Estate, said the agency does not track rent-to-own real estate companies.

But she said the department urges caution for consumers when entering a nontraditional arrangement: “Make sure they review the contract closely.”

Divvy Homes has raised $37 million, including $30 million in October, to build a network of financial and real estate brokers and buy homes in Ohio, Georgia and Tennessee. The company is designed to align its financial interests with customers, Ma said, a switch from a predatory model of some rent-to-own contracts.

At Divvy Homes, the prospective homeowner fills out an online form, gets a credit check and, if successful, is partnered with a local real estate agent.

Ma wants to reach more undervalued communities across the country. Divvy has launched in Memphis, Cleveland and parts of Atlanta, seeing an opportunity for homes to appreciate in value.

Divvy buys the home on behalf of the customer — and requires a 2 percent down payment and monthly lease and equity payments. Most of its customers have credit scores that fall just short of FHA loan guidelines, he said. “We are way more strict than a standard lease,” Ma said.

After three years, the customer has 10 percent equity in the property. That equity can be used for a down payment on the home or cashed in on a resale of the home.

Smith and her husband had been searching for a home in Cleveland for about a year, she said. Her husband, a chef, is the main breadwinner while Smith, 36, takes care of their children and aging parents. She has accumulated about $50,000 in college loans while pursuing her master’s degree.

The Smiths wanted to have a stable home and build equity but had trouble finding a suitable place on a budget of $1,500 a month. Smith discovered Divvy Homes on Facebook, but she and her husband were initially skeptical about dealing with a tech company through a website to make a large investment.

Her main concern, she said, was “not having access to people face to face.”

After the company accepted their application, the Smiths met a local real estate agent and went house-hunting, easing their concern about a lack of customer service.

They found a house in Garfield Heights for $90,000 that would accommodate their extended family. The family of eight moved into the 3,000-square-foot house in January and pay $1,115 a month.

“I love having the family together,” she said.

Divvy Homes owns about 100 units in three states and has accelerated purchases to about one a day, Ma said. It says it receives about 2,000 applications per month.

The transactions are generally quicker than traditional sales because the company pays with cash.

Divvy hopes to expand to other markets, Ma said. “The world is ready for technology to do more things in real estate,” he said.