The path to homeownership has never been more challenging. Inventory is tight, and mortgage rates are rising. Home prices are soaring, and, in many cases, incomes aren’t able to keep pace.
For many lower-income or first-time home buyers, raising a down payment and qualifying for a loan presents insurmountable barriers to entering the market.
According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index, in the 1st quarter of 2021, Los Angeles homebuyers earning income on par with the local median income of $78,700 could afford no more than 11.6% of the homes on the market.
Even financially solvent would-be buyers with nontraditional income sources can have trouble gaining entry into homeownership with rigid underwriting guidelines and 20-40% down payment requirements.
Rent prices are also on the rise. Coupled with college debt and low credit scores, all of these factors have largely barred a huge swath of Americans from purchasing.
Realizing the tremendous challenges faced by so many prospective homeowners, Divvy Homes is helping those left behind by the traditional mortgage process find the path to home ownership through a reimagined rent-to-home business model.
“Not everyone has a W2 job that they’ve been in for a number of years. More people are self-employed or have income that’s difficult to underwrite, and most Americans don’t have tons of savings accumulated, so there’s a hole in the market where traditional lenders just aren’t able to keep up with the needs of modern Americans to get into homeownership,” says Dan Strickland, Head of Divvy Brokerage.
Not only has the rent-to-own model resonated with lower income prospects but also younger people and former homeowners who want the flexibility of a try-before-you-buy option and like the idea of a three-year commitment rather than a 30-year commitment.
For the approximate 36% of Americans who are renting, Divvy Homes presents a new option to enter homeownership by granting them access to the home they choose while gradually building equity and a down payment over three years or less.
Raising $110 million to expand to 20 markets by the end of 2021, Divvy Homes currently operates in 16 markets, with a heavy concentration in the Sunbelt and Rustbelt cities, from Cleveland and Cincinnati to Memphis and Tampa.
Atlanta and Dallas have been particularly hot markets for Divvy, and Phoenix remains far and away the company’s most competitive market.
For a Divvy Homes client, the path to homeownership begins by first choosing a house that falls within Divvy’s purchase range in one of the 16 markets. Most of the homes fall within $60,000 and $350,000 with an average price of around $185,000 for a 3-bedroom, 2-bath house.
The customer pays 1-2% of the purchase price upfront as the first down payment toward savings. The rent amount is set at the market rate while the lease comes with a termination clause that allows the renter to walk away with their savings minus a relisting fee, which amounts to a small percentage of the original purchase price.
Divvy pays for the house the client selects in all cash and covers all standard closing costs, taxes, inspections and homeowner’s insurance. Clients then pay Divvy one monthly payment (interest-free) which includes rent and equity savings that goes into a savings account toward their buyback down payment. They then have three years to purchase the house from Divvy; if they purchase in the first 18 months, they save on the total purchase price.
Unlike some other rent-to-own companies, Divvy bases the final price at the initial lease term using a third-party analysis of average appreciation and projected market factors. Therefore, actual appreciation doesn’t swing the ultimate price and can often work out in the customer’s favor.
Atlanta resident and sales engineer manager JB Harmon was one such customer who, before purchasing a Divvy home, had a low credit score and could not get a mortgage. His real estate agent introduced him to Divvy’s lease-option program, which enabled him to ultimately purchase a 3-bedroom, 2-bath house for $127,900, according to a profile in The Washington Post. Harmon’s monthly payment, which went toward both rent and equity, was half of what he would have paid in rent and storage. Three months later, he purchased the house from Divvy for $134,000.
For customers like Harmon, the benefits are plentiful. The agreement gives these homeowners the chance to raise a down payment and improve their credit score over three years while granting them entry into the home immediately.
Once the customer begins the rental process, Divvy supports their move toward ownership through credit counseling, lender recommendations and general education.
While the onset of COVID had many in the real estate industry feeling uncertain about the future, the pandemic only accelerated mass adoption of Divvy’s and other rent-to-own programs.
Even with a “tricky second quarter” in 2020, the company grew “several folds larger” on a year-over-year basis, says Strickland.
As more customers sought new, larger spaces in the suburbs and rural areas, Divvy continued to purchase properties and enter new contracts with renters looking to make the transition into homeownership.
“It’s hard to keep up with all of that demand right now, but I’m heartened by how much it’s resonated,” says Strickland. “It’s really accelerated the adoption of a model like ours.”
Of course, as with agents nationwide, inventory has certainly posed a challenge for Divvy, especially since the company plays in the starter home price points of under $500,000 or lower where there’s excess demand everywhere.
“Often, we’re bumping into 40 or 50 offers on a home and, in some cases, we don’t want to be the one who wins that deal. The question then becomes how do we find inventory that may not be on the market’s radar yet? Do we strike relationships with large suppliers to provide inventory that might be able to provide our clients a sneak peek or exclusivity by not being able to find it elsewhere? For instance, we know that probably 40 of our clients would want to buy a four-bedroom, two-bath house in Jonesboro, GA. That opportunity is starting to show itself,” says Strickland.
“We asked, ‘Who is leading the charge on providing a fluid, intuitive eSignature tool that’s well-known in the industry, and, far and away, dotloop made the most sense from an adoption standpoint and with respect to integrations from the local MLSs and prepopulation of fields. So when we started building integrations, it was a no-brainer.”
One of Divvy’s goals is to remove the complexity of the rent-to-own process not only for the customer but also for the agents who represent the customer and the listing.
“I used to run the acquisitions team here and bought thousands of homes. If I told you the number of times I had to ask for edits on contracts, it would be an incredibly large number,” says Strickland. “One of the investments we made was integrating with a contract partner. We asked, ‘Who is leading the charge on providing a fluid, intuitive eSignature tool that’s well-known in the industry, and, far and away, dotloop made the most sense from an adoption standpoint and with respect to integrations from the local MLSs and prepopulation of fields. So when we started building integrations, it was a no-brainer.”
Divvy wanted a platform that could remove the heavy lifting from agents and provide a seamless, all-in-one system that would be easy-to-adopt and replicate the experience across markets. “We could not buy at the volume we’re doing without this dotloop integration,” says Strickland.
In addition to the transaction management platform, Divvy’s single family team brings everything in house to centralize operations, from acquisitions and inspections to closing teams. “This empowers agents from an efficiency standpoint. When an agent works with Divvy, they are super-charged in the field by our central teams who facilitate the contract, scrub down the inspection results, and coordinate with title,” he says.
Agents who work with Divvy collect their full commission in exchange for helping customers navigate the lease-option process, which includes a document on joint expectations, a lease contract, an option-to-purchase agreement and a separate covenant on exit clauses.
“If you’re an agent who’s thinking about adopting this program, it’s your chance to collect a full commission on a customer who might otherwise fall through or be a renter,” Strickland notes.
The best part of the Divvy model, he says, is its mission element which is, “‘making homeownership accessible to everyone.’ So often sellers Google us and can immediately relate to how hard it was for them to get into their home. They want to pay it forward. You can’t quantify that. That’s the really powerful aspect of it all.”
Dotloop Business+ has built-in eSignature functionality, custom transaction templates, automated compliance, reporting and more. Streamline the way your rental agents work with clients.