One of the hottest new types of real estate financing lets homeowners sell stakes in their home to outside investors.
Patch Homes is the latest startup offering this product to raise funding from venture capitalists. It announced a $5 million Series A funding round Thursday, led by Union Square Ventures, as reported by TechCrunch.
The startup offers homeowners what it casts as a superior alternative to a home equity loan of credit (HELOC) or second mortgage: up to $250,000 in cash for fractional ownership of the homeowner’s property, as well as a portion of the gain or loss in the home’s value.
“Unlike a traditional debt product — a HELOC or a Home Equity loan — Patch’s partnership approach allows homeowners to access as much as $250,000 of their home equity without the burden of monthly payments or interest,” the company said in a statement.
Instead, the homeowner must buy out Patch’s equity stake within 10 years. They can do that with cash they have saved or cash they can extract through refinancing their mortgage. Or worst case, they can sell their home and pay back Patch with some of the proceeds.
In Patch’s ideal scenario, the startup gets back the value of its investment, plus a portion of the increase in the home’s value. But if the home depreciates in value, Patch shares in the loss, receiving back the value of its investment, minus the depreciation.
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Since launching less than two years ago, Patch has underwritten homes collectively worth over $2.5 billion and expanded into 11 markets in California and Washington with hopes to expand to 18 markets in additional states such as Utah, Colorado and Oregon, according to TechCrunch.
Like other startups that offer similar financing, such as Unison and Point, Patch buys stakes in people’s homes largely using money from third-party capital partners. Patch said it plans to invest an initial $100 million in capital from private equity firm Patch Capital Partners.
Offering what remain largely untested products, Parch, Point and Unison provide financing with terms, requirements and fees that may vary widely.
For example, Unison says its average credit score to qualify is 680, while its average debt-to-income ratio to qualify is 43 percent, with a payback deadline of 30 years. Patch Homes, meanwhile, touts a minimum credit score of 550 and a payback deadline of 10 years.
Point charges a processing fee equal to 3-5 percent of the cash it provides to homeowners, plus an appraisal cost of $550 and escrow fee of $500. Patch didn’t immediately respond to email questions, including the cost of any financing processing fees.
The percentage of the home value appreciation or depreciation that these startups share in also can vary by home and borrower.
“Patch approaches their customers as equity partners — not as debt contractors — resulting in aligned incentives and incredibly positive customer feedback to-date,” Union Square Ventures Partner John Buttrick said in a statement.
Patch says it’s filling a “huge void created by banks and other lenders who take an increasingly narrow view of who qualifies for home equity loans or HELOCs.”
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