WEBVTT - From Rent to Own With Divvy Homes

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<v Speaker 1>This is Bloomberg Business Week with Carol Masser and Bloomberg

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<v Speaker 1>Quick Takes Tim Stinovic from Bloomberg Radio. Well, you might

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<v Speaker 1>recently recall a story that we talked about. It was

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<v Speaker 1>on the Bloomberg also at Bloomberg dot com about the

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<v Speaker 1>property tech startups that buys homes on behalf of renters

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<v Speaker 1>and helps them become owners. While it hit a two

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<v Speaker 1>billion dollar valuation thanks to a recent round of equity

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<v Speaker 1>financing led by Tiger Global Management and Caffeinated Capital. Let's

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<v Speaker 1>find out a little bit more about this startup. We

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<v Speaker 1>welcome Divvy Homes CEO Adina Heffitt's. She joins us on

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<v Speaker 1>the phone in San Francisco. So nice to have you

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<v Speaker 1>here on Bloomberg. How are you. I'm good. Thank you

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<v Speaker 1>for having me here, Carol, Well, it's great to have

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<v Speaker 1>you here because I think one of the things that

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<v Speaker 1>we've talked about a lot over the last year and

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<v Speaker 1>a half, especially with all the inequities that are out there,

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<v Speaker 1>is the um lack of opportunities for many sectors of

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<v Speaker 1>our population to be able to buy a home. And

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<v Speaker 1>it's kind of this vicious cycle that prevents them from

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<v Speaker 1>do it. So Dina talked us at bit about what

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<v Speaker 1>you are doing at Divvy Homes and how it all works. Sure, so,

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<v Speaker 1>do be just a new way to to finance the

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<v Speaker 1>purchase of the home. What we do is we let

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<v Speaker 1>our customers pick out a house. We will buy it

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<v Speaker 1>on their behalf. We then rent it back to them

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<v Speaker 1>and with their rental payments, they actually build equity in

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<v Speaker 1>the property. So we let them build up to temper

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<v Speaker 1>cent ownership and the property over the course of three years. Um.

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<v Speaker 1>They can buy back the property in any type from

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<v Speaker 1>us by getting a traditional mortgage and rowing their equity,

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<v Speaker 1>or they can we can cash them out for the

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<v Speaker 1>value of their equally in the home. So, Carol, what

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<v Speaker 1>I really saw was that people are being able to

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<v Speaker 1>access home ownership because mortgages are getting just more strict

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<v Speaker 1>over time, harder to get, and so we thought might

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<v Speaker 1>as well provide access through a new form um where

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<v Speaker 1>it's it's sort of a rent to own option. How

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<v Speaker 1>long have you guys been doing this? So we were

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<v Speaker 1>founded about four years ago, but we've been purchasing homes

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<v Speaker 1>for customers and helping them access home ownership for about

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<v Speaker 1>three years at lass. And how's it going? So far,

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<v Speaker 1>give us, give us ideas of a typical scenario and

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<v Speaker 1>how it works out. Sure, So it's it's been really interesting.

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<v Speaker 1>What we have found is that especially during the COVID period,

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<v Speaker 1>access to mortgages have actually only gotten more challenging, and

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<v Speaker 1>so we saw a rapid rising demand during the COVID

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<v Speaker 1>time period, and say, UM have thousands of customers who

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<v Speaker 1>are using us to purchase homes across sixteen different markets.

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<v Speaker 1>What's really interesting is how well people are actually being

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<v Speaker 1>able to buy back to home. So we're seeing a

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<v Speaker 1>buyback rade of roughly which is four times uh sorry,

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<v Speaker 1>ten times the the average. The most rent to own

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<v Speaker 1>companies have the most rento own companies are are sort

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<v Speaker 1>of low single digits UM, and we're almost ten x

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<v Speaker 1>that amount in terms of buyback rade. What's even more

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<v Speaker 1>interesting is that our customers have on average about eighty

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<v Speaker 1>two hundred dollars of savings in their home UM. And

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<v Speaker 1>so when you think about the average American most doesn't

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<v Speaker 1>have um almost anything in savings. I think the average

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<v Speaker 1>amount of savings for rent or is roughly about eight

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<v Speaker 1>hundred dollars. So we're right now helping your customers save

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<v Speaker 1>a lot which feels really good. So you're saying they

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<v Speaker 1>have a rainy day fund of well, it's it's invested

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<v Speaker 1>in their homes. So it's investment in the equity of

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<v Speaker 1>their home. Well, I'm trying to understand what that appreciating value.

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<v Speaker 1>That's what I want to understand. When you say customers

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<v Speaker 1>have an average of savings on their home. What is

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<v Speaker 1>exactly do you mean by that? Is that equity? Is

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<v Speaker 1>that what that is? Yes? Exactly. UM. So we we

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<v Speaker 1>don't technically from a legal perspective, it's not technically called. Um,

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<v Speaker 1>it's not technically equity. However, UM, what we do is

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<v Speaker 1>we basically keep a virtual equity account for them. So

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<v Speaker 1>they contribute savings into an account we save there for them,

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<v Speaker 1>and we give them credit for for their present ownership

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<v Speaker 1>in the house. So let's say buy a house, Carol

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<v Speaker 1>ad Let's say a hundred thousand dollars. UM, they put

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<v Speaker 1>in ten thousand dollars at the beginning of the program.

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<v Speaker 1>That home appreciates to a d twenty dollars. They owned

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<v Speaker 1>ten percent of that home. So the ten thousand dollars

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<v Speaker 1>they originally put in, but they actually their ownership is

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<v Speaker 1>ten percent. And so the value of that equity is

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<v Speaker 1>close to twelve tho dollars and they made a two

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<v Speaker 1>thousand dollar gate on their equity and they get the

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<v Speaker 1>full benefit of that. So you said about the buy

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<v Speaker 1>back grade of people who UM rent to buy, the

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<v Speaker 1>buy back grade is forty and you said, that's ten

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<v Speaker 1>times some of the other rent to own companies. Of

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<v Speaker 1>the sixty percent who don't ultimately do it. What happens.

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<v Speaker 1>So it's actually interesting is we're seeing a lot of

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<v Speaker 1>people who um, you know, saved up to ten percent,

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<v Speaker 1>but turns up they need just a slightly larger down payment.

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<v Speaker 1>As we're seeing a decent percentage of people who actually

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<v Speaker 1>just stay in the house and they continue to build

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<v Speaker 1>up equity, so they build up larger round payment savings. UM.

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<v Speaker 1>There are some people who also just turn over. UM.

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<v Speaker 1>You know, we really encourage access to homeownership, but we

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<v Speaker 1>want someone to be able to actually want to live

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<v Speaker 1>in the home. So if your neighbor, you know, you

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<v Speaker 1>don't get along with your neighbor, you don't like the

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<v Speaker 1>school district, and you want to move, we don't make

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<v Speaker 1>it to that you're stuck in this house. You cash

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<v Speaker 1>out your equity and you can move on to another

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<v Speaker 1>location that might work better for you. Do you think

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<v Speaker 1>you know? Ultimately and get to a point where most

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<v Speaker 1>renters become a homeowner in this process. That is what

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<v Speaker 1>our our goal is. Like our goal we're starting out

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<v Speaker 1>at goal is only to increase that over time, and

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<v Speaker 1>we've done that through a couple of very specific things.

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<v Speaker 1>So first, um, we offer a free credit counseling for

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<v Speaker 1>all of our customers. That's a really important part of

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<v Speaker 1>our program. UM. Second, we have mortgage partnerships UM, so

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<v Speaker 1>we're able to refer customers over the mortgage providers today

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<v Speaker 1>that helps them actually work through the homebuying process. In

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<v Speaker 1>the future, what we want to do is be able

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<v Speaker 1>to eventually help issues the mortgage to the customers ourselves,

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<v Speaker 1>and that's something that we're slowly building towards because this

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<v Speaker 1>buyback portion um and increasing the percentage is quite important

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<v Speaker 1>to us over time. You're listening to Bloomberg Business sweet

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<v Speaker 1>Cal Masser in our indirective broker studio. Still with us

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<v Speaker 1>is Adina helf A, chiefs chief executive officer of Divvy

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<v Speaker 1>Holmes with us on the phone from San Francisco. So

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<v Speaker 1>you mentioned you know Adina the goal is to get

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<v Speaker 1>you know, more UH renters in every renter if possible.

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<v Speaker 1>Who partaking your program to become a owner in this process?

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<v Speaker 1>Tell me a little bit about, you know how the

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<v Speaker 1>traditional financial system when when we talk about it a

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<v Speaker 1>fair amount here at Bloomberg, they really don't. They really

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<v Speaker 1>kind of ignore a big part of the population. How

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<v Speaker 1>do you deal with things that they might say is

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<v Speaker 1>important like bad credit ratings or not a credit credit history,

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<v Speaker 1>or low income? How do you deal with that? Sure? Yeah,

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<v Speaker 1>So the mortgage market was created, has been around for

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<v Speaker 1>a while, but was really put into um existence by

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<v Speaker 1>the GSCs back in and during that time they set

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<v Speaker 1>underwriter requirements so FICO requirements where your income had to

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<v Speaker 1>be debt to income ratios and down payment requirements. Rightfully,

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<v Speaker 1>so those requirements have not changed over the last hundred years.

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<v Speaker 1>And the reason why is the couple of times since

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<v Speaker 1>that they've tried to change them slightly, it's led to

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<v Speaker 1>major issues like the global financial crisis. Right um, and

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<v Speaker 1>and so I actually really believe that the mortgage market

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<v Speaker 1>is efficient and should continue to operate as it is operating.

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<v Speaker 1>And the reason why is if there is someone who

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<v Speaker 1>is unable to make their mortgage payments, and there has

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<v Speaker 1>to be a foreclosure that happens. For closures are extremely

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<v Speaker 1>expensive and just take a really really long time, mostly

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<v Speaker 1>because they're just so heavily regulated. Did he can take

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<v Speaker 1>on people who are in a wider credit spectrum than

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<v Speaker 1>than a traditional mortgage, So we go as well as

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<v Speaker 1>a five fifty pc although our sweet spot is right

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<v Speaker 1>around called six seven hundred YCO. We only require one

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<v Speaker 1>to two percent of the home value as a down

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<v Speaker 1>payment UM, so are our customers generally have on average

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<v Speaker 1>call it two to six thousand dollars saved up UM.

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<v Speaker 1>We require a minimum of two thousand dollars UM. And

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<v Speaker 1>because our our our product is fundamentally a rental product,

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<v Speaker 1>if the tenant is unable to make a payment, we're

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<v Speaker 1>able to be a little bit more flexible, try to

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<v Speaker 1>work through a payment plan and ultimately in the worst

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<v Speaker 1>case to or if we do have to go through

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<v Speaker 1>an eviction. UM evictions are less costly and take a

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<v Speaker 1>lot less time, which means that we can take more

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<v Speaker 1>risk and opening up the aperture for who we offer

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<v Speaker 1>this product to than a mortgage can take. Hey and

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<v Speaker 1>doing this what has been a surprise to the upside.

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<v Speaker 1>What has been a surprise to the downside. Oh wow,

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<v Speaker 1>that's an interesting question. Uh, surprise that the upside has

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<v Speaker 1>just been Um. You know, everyone talks about starting a

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<v Speaker 1>mission based company, and for me, that has really just

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<v Speaker 1>gotten better over time. I love waking up every day.

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<v Speaker 1>I love helping people actually act as homeownership. I really

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<v Speaker 1>believe that it is a major way to to grow

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<v Speaker 1>well for the low middle income Americans. So I think

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<v Speaker 1>it's actually quite important. Um to the downside, I would say, Um,

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<v Speaker 1>you know, building a company is just a bumpy ride. UM,

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<v Speaker 1>and things like you know, right now, we're having a

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<v Speaker 1>mass shortage of inventory. UM. Interest rates are kind of

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<v Speaker 1>very low right now, but kind of jumping all over

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<v Speaker 1>the place, and we're not sure where they're going to go.

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<v Speaker 1>You know, you have to be apparent for some of

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<v Speaker 1>these macro things that impact your business but maybe are

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<v Speaker 1>hard to predict at the onset. I never thought I

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<v Speaker 1>was gonna be managing a company through a global pandemic.

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<v Speaker 1>I've learned more in the last year and a half

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<v Speaker 1>than I have probably my prior by prior, you know,

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<v Speaker 1>thirty four years um. And so I think that that

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<v Speaker 1>has made it a really interesting learning experience, but but

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<v Speaker 1>definitely um a little bit of a crazier ride than

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<v Speaker 1>I had expected. It's like overnight, you're now ahead of

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<v Speaker 1>a company with a lot of experience because of the pandemic.

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<v Speaker 1>And we we've heard it listen, We've heard it from

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<v Speaker 1>CEOs who have been leaders for a long time. There's

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<v Speaker 1>just things they learned because they had to and pivot quickly.

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<v Speaker 1>The timelines were just so bizarre during the last year

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<v Speaker 1>and a half. Um, one thing I wanted to ask you,

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<v Speaker 1>in terms of home ownership, how does it how do

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<v Speaker 1>you think about things like diversity and inclusion to make

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<v Speaker 1>sure that you are helping a diverse population. So what's

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<v Speaker 1>interesting is that that's the Government Act SALLY regulates that

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<v Speaker 1>you can collect um demographic information on an individual. So

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<v Speaker 1>you can't ask someone what their races. You can actually

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<v Speaker 1>ask them if they have children or not upfront in

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<v Speaker 1>the application. And all these things are really important because

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<v Speaker 1>those were historically groups that had been discriminated against when

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<v Speaker 1>it came to rental property. So we don't ask any

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<v Speaker 1>of that up front um, although I do estimate just

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<v Speaker 1>from qualitatively having met a lot of our customers I

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<v Speaker 1>think our demographics roughly represent um, the demographics of whatever

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<v Speaker 1>area we're in. So I think like someplace in Atlanta

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<v Speaker 1>that I don't know the exact number, but it's probably

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<v Speaker 1>call it six percent of the populations black. I'd say

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<v Speaker 1>probably similar numbers are a similar percentage of Divvy customers

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<v Speaker 1>are also black. We have a lot of families. I'd

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<v Speaker 1>say that that's probably the majority. We don't know up front,

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<v Speaker 1>but later on we do make them list out everyone

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<v Speaker 1>who's in the house just for safety reasons. Um. So

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<v Speaker 1>a lot of families, um and a pretty diverse customer base,

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<v Speaker 1>which we were really proud of. Hey really quickly, just

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<v Speaker 1>got about forty seconds here. Um. I do wonder what

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<v Speaker 1>the end game is for you guys. Do you find

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<v Speaker 1>that staying private is a better thing? You just did

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<v Speaker 1>another funding round, you're now hitting a two billion dollar

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<v Speaker 1>or you're there at a two billion valuation? Is the

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<v Speaker 1>endgame to go public? And I just or do you

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<v Speaker 1>need to stay private in order to function in the

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<v Speaker 1>best way possible? And again, just got about thirty seconds. Yeah,

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<v Speaker 1>so I'd say, Carol, staying private is always preferable than

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<v Speaker 1>having to a a public as you know, going public as

0:11:31.679 --> 0:11:35.480
<v Speaker 1>a company has a lot of legal and compliance requirements. However,

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<v Speaker 1>I do foresee us probably going public within the next

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<v Speaker 1>five years, just because of the asset class we're in,

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<v Speaker 1>the amount of capital that we need to access. The

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<v Speaker 1>public markets also generally tend to understand real estate businesses

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<v Speaker 1>super well, um and we've seen a bunch of our

0:11:49.880 --> 0:11:53.559
<v Speaker 1>protect competitors benefit from this so greatly. On the horizon

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<v Speaker 1>at some point, well, I hope you'll you'll stay in

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<v Speaker 1>touch and let us know as things progress over the

0:11:57.640 --> 0:11:59.319
<v Speaker 1>next couple of years. Left to check back with you

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<v Speaker 1>real soon to see how things are going to be home.

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<v Speaker 1>CEO Adina half Its joining us on the phone in

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<v Speaker 1>San Francisco,