Startup has an answer for down payment blues

But moving in sans massive cash outlay has detractors

A new startup launched in the Bay Area on Tuesday says it can help buyers survive the region’s cutthroat housing market by doing away with one of its biggest hurdles — a massive down payment.

San Francisco-based ZeroDown allows clients to live in the home they want to buy while paying into a fund that ultimately will allow them to purchase it. It’s a unique idea designed to provide a leg up to buyers who are reasonably welloff but still struggling to afford the region’s pricey homes. But it’s an untested one that gives some experts in the indus

try pause.

Co-founder Abhijeet Dwivedi says he’s giving families access to the dream of home ownership.

“There are people who were in tears when they walked into their home,” he said of the clients he’s worked with during the company’s beta testing phase. “It was a very emotional experience for all of us here.”

To use ZeroDown, a qualifying client pays the company a $10,000 fee and chooses a house for sale. Then ZeroDown buys the home using funds borrowed from bank lenders. The client can move in right away and immediately begins making a monthly payment to ZeroDown in lieu of a mortgage. As the client makes those monthly payments, he or she builds up credit toward an eventual down payment.

After two to five years, the client can cash out those credits — which after five years will typically equal 9% of the home’s value, the company says. ZeroDown will add another 5% from the company’s own cash reserves for a total of 14%. That means the client only has to come up with 6% of the home’s value on his or her own to reach the 20% normally recommended for a down payment. At that point, the client secures a traditional mortgage and buys the home from ZeroDown.

If a client ultimately decides not to buy the house, ZeroDown will refund up to 9% of the home’s value. In addition to the $10,000 fee it charges clients, ZeroDown also plans to make money through its homeowner concierge service. The concierge connects homeowners with services they may need — such as plumbers, for example — and ZeroDown takes a commission from the service provider.

The company wouldn’t disclose how many customers it has served so far. The company got its start through the prestigious Mountain View-based Y Combinator accelerator and has since received $30 million in funding from Goodwater Capital and others.

San Jose-based realtor Mike Gaines worried ZeroDown’s novel business model could have unforeseen ramifications for homebuyers. It’s particularly concerning in the Bay Area, he said, where the market’s exorbitant prices raise the stakes on every decision. Until the house is actually in the client’s name, he or she is paying enormous amounts of rent to ZeroDown, Gaines said.

“I’m not sure I’d be comfortable paying that type of money, in a sense, for just rent,” he said.

It’s also a troubling time to launch such a product, as the market is trending down, Gaines said. Median year-over-year sale prices dropped in March for the first time in seven years and continue to lag behind last year. Now experts are talking about a “correction” to the region’s overheated market. Gaines worries clients who make a deal now with ZeroDown and then see the value of their intended home drop might wonder after five years if it was a good deal after all.

“It’s the untested parts of this model that are my concerns for the consumer,” Gaines said.

The price of a ZeroDown home is set at the beginning of the transaction and assumes an up market — the price the client pays will be the current price of the home plus 5.4% appreciation per year. If the home loses value, the client doesn’t get a discount. But ZeroDown will let the client postpone the purchase.

ZeroDown isn’t the first company to attempt to help tenants turn their rent payments into an investment toward their future home purchase. Property management and rental listing platform Onerent launched Poplar Street last year, which promised to add 20% of users’ monthly rental payments to a savings account for an eventual home purchase.

Greg Smithies, 35, used ZeroDown to buy a home in April, as one of the startup’s early beta users. The three-bedroom home in Oakland’s Lake Merritt neighborhood sold for $1.25 million, and Smithies and his wife now pay the startup $7,000 a month — a sum he says is a bit more than the payment would have been for a traditional mortgage.

“It’s significantly lifechanging,” Smithies said. “It allows us to get off of the rental treadmill.”

And it was fast. About 10 days after reaching out to the company, Smithies had a key to his new home.

Smithies and his wife previously rented a twobedroom house in the Berkeley Hills for $4,500 a month, but their lease was expiring and the landlord wanted an extra $1,000 a month.

Smithies and his wife make decent money at good jobs — he works in venture capital at BMW and she does branding and strategy consulting — but they didn’t have $250,000 for a down payment to buy a $1.25 million house.

So they reached out to ZeroDown shortly after the startup came out of stealth mode. Smithies plans to buy the house back from ZeroDown in two years, at which point he’ll need to come up with about $50,000 on his own to make the down payment.

Since moving into his new home, Smithies has recommended ZeroDown to several friends, many of whom have started working with the company.

“There’s some sort of massive pent-up demand there that they’ve tapped into,” he said.