Divvy, a rent-to-own home startup, said this week that it has nabbed $43 million in a Series B funding round.
A number of startups are looking to attract business by offering alternatives to taking out traditional mortgages. ZeroDown, founded by former executives at cloud HR software company Zenefits, this summer launched rent-to-own services for the San Francisco area.
The funding round for Divvy, which launched in 2017, included new investors GIC, Singapore’s sovereign wealth fund which invests roughly 10% of assets into real estate, and Lennar, one of the largest homebuilders in the nation.
Divvy first started offering its service in Atlanta and Cleveland, and now operates in Memphis as well. Adena Hefets, Divvy’s cofounder and CEO, told Business Insider that the company is planning to expand, but doesn’t have its sights set on places like California or New York. Hefets, who cofounded the company with Brian Ma, Alex Klarfeld and Nick Clark, declined to say how many homes Divvy has purchased.
The round also included previous investors in Divvy’s $10 million Series A like Andreessen Horowitz, which led a round of financing in brokerage startup Flyhomes this August, Caffeinated Capital, and Max Levchin, cofounder of Paypal and CEO and cofounder of Affirm. Divvy declined to provide valuation tied to the latest funding round.
Divvy’s services are geared towards people who don’t have the credit score and financial background to qualify for a traditional mortgage. Customers put down 2% of a home’s value.
“Giving them an entire mortgage was like going into the deep end, we wanted to stair-step them into owning a home,” Hefets said.
Other businesses offering different alternatives to homebuying have also sprung up. Haus, founded by Uber co-founder Garrett Camp, launched in 2016 and co-invests along with the homebuyer. The buyer pays that back over time and gets their portion of equity if they choose to sell the house. Buyers in that setup are fully responsible for taxes, insurance, maintenance, and other costs.
And on the home-seller’s side, companies like Zillow, Opendoor, and Redfin have launched iBuyer programs that make cash offers for homes to allow transactions to happen quickly. A report by real estate data firm Collateral Analytics found that iBuyer fees and other costs can cost a home seller 6% to 10% of a home’s sale price.
Meanwhile, the broader residential real estate industry is seeing rapid growth in upstarts that are looking to add a tech veneer to the space. Compass, which describes itself as a tech-enabled brokerage, raised $370 million in a July round of funding led by SoftBank’s Vision Fund, bringing the company to a $6.4 billion valuation.
Some rent-to-own companies have come under regulatory scrutiny in recent years. Vision Property Management, founded in 2004 and formerly one of the nation’s largest rent-to-own operators, has had to grapple with lawsuits by the Attorneys General of New York and Wisconsin, and by the City of Cincinnati over claims about its business practices. In 2017, Fannie Mae stopped selling homes to Vision.
Hefets said Divvy has a different approach than older operators when we asked about the regulatory crackdown on Vision. Instead of the fees that traditional rent-to-own companies charge for the service, Divvy charges customers only for the property’s market rate rent and the equity they’re building in the home. Three quarters of the payment covers the rental cost, while the other quarter is equity that goes towards an eventual down payment.
While renting, a Divvy customer pays for preventative and seasonal maintenance, though other maintenance is provided by the company. Traditional rent-to-own companies may often charge customers for all maintenance costs.
Divvy’s customers begin by completing a five-minute application with roughly the same information that is in a rental application, and the company preapproves based on a certain home value. The Divvy customer finds their house through a real estate agent, and then Divvy purchases the home on their behalf. Traditional rent-to-own companies typically already own homes for customers to rent.
Divvy owns the home for three years, at which point a customer can either choose to move, or to purchase the house outright from the company for a predetermined price.
A customer’s home equity can either be rolled into the purchase of the home, or is paid out in full if the customer decides not to buy the home. If a customer can’t make a payment or follow a payment plan, the Divvy keeps half the equity and tries to match the home with another potential buyer.