Point Digital Finance allows individuals to sell portions of equity in their house as if it was a company. Point buys a fraction of the house and pays lump sum ranging from $40,000- $250,000 in return. This arrangement even gives the buyer an option to buy back the share. This unique product of Point is carving its own niche in the lending industry. Through this, it has created a new asset class in which owner gets to live in the residential property without having to worry about monthly payments and enabling the investors to earn a sizeable return in one of the most lucrative asset classes. The deal can be structured for as long as a decade.
Most importantly, no monthly payments have to be made.
Two years back, when Eddie wanted a loan for his new venture, the bank refused his application because he did not have a steady flow of income. This helped him appreciate the pain point of homeowners and hence Point was born. This means that the home owner needs to either sell the house or pay back the investor within 10 years. Real estate is the largest asset class in the world and worth $14 trillion in the US.
Point was founded in the beginning of 2015 and is headquartered in Palo Alto, California. Point boasts of a high-profile list of investors which includes Andreessen Horowitz, Ribbit Capital, Bloomberg Capital, Vikram Pandit (Former CEO of Citigroup). PDF is the brainchild of Eddie Lim, Eoin Mathews, and Alex Rampell. Eddie Lim (co-founder) is a Harvard alumnus and has many successful start-ups to his name like TXN, Yub Inc, and Trial pay. Eoin Mathews (co-founder) was a board member at VietHope Inc and also the founder of Popt.com. Alex Rampell (co-founder) has experience in starting and building profitable products and companies.
HELOC vs Point
Before the real estate crash happened, individuals bought houses via easy funding which in reality they couldn’t afford and borrowed further against their equity as property prices rose. The collapse in home values ripped through banks and financial institutions that bought mortgage securities, which triggered the U.S. recession. Funding to house owners has only recently loosened up after an average 30% increase in property values across the nation since 2012. Ever since the real estate crisis of 2012, banks have reduced the amount of cash one can take out after refinancing their home and tightened credit standards for home-equity lines of credit, HELOCs, requiring higher FICO scores and proper documentation. The question is whether debt is the only product available on a home? Why not take the risk out for the “borrower” by having no monthly installments. Point Digital Finance (PDF) was established to fill this void by providing equity to homeowners with an option to buy a small fraction of their homes.
Point started their business in a few counties in California at the end of last year and after tasting success and rave reviews from both the homeowners and investors, it is ready to expand its wings by adding accredited investors and institutional partners. Expanding geographically is also in its plans, in order to make Point available to millions of homeowners across the country. HELOC’s, companies providing home equity loans and mortgage refinancing provide tough competition to Point. It is able to fend off the competition because of the uniqueness of its product where both parties (investors and homeowners) want the property to appreciate so that they both can make money, very few companies operate in a similar space. Depending upon the size of the loan, cost of acquisition can range from $800 to $2500. Unlike HELOC and home equity who only provide loans to people with good credit score and a steady flow of income, Point targets people who are in need of cash and don’t have a good credit score or steady income flow. In its constant effort to make the product more affordable for the masses, Point is working on a different combination to protect its exposure to risk, so that it can provide money at 8% APR rather than 18% which is available right now in the market.
Point business model is simple; it works on 3:1 ratio. For buying 10% of the home, it takes on an average 30% of the appreciation in the house and it also shares the losses, if the property value depreciates. To protect the investors from this downside, Point appraises the house at 90% of the market value. In case, homeowners exit the contract early and to ensure a win-win, it has capped an effective interest rate of 16%-18% compounded per year. The funding is usually covered within 4 years of the contract and 30% of the homeowners’ buy back the equity in the first year of the contract itself. Point charges 3% processing and escrow fees for the services it provides to its clients.
Homeowners use Point to sell their houses for various reasons like to settle a large debt, to improve their finances or renovation. Now, whether it is a financial constraint or investment opportunity, they can always arrange the cash flow by utilizing their biggest asset. After getting an overwhelming response from the public for its products, it did 20 deals in last quarter and plans on making it to 50 in the next few weeks. On average $1 million- $2 million worth loans are done by Point every month, in its endeavor to grow, it wants to find institutional investors and originate loans worth $10 million per month. It is focussing on MBS buyers, real estate exposure funds, and investors who want to invest for the long term and are comfortable in holding an illiquid asset in anticipation of a superior return. Point is now in the process of expanding and growing. It will start its operations in 5 more states by the end of 2016 and also brought Ryan Randall onboard as the head of its Capital Market. Ryan was previously CFO of Upstart. All this activity, a pedigreed investor base, and a seasoned team suggests Point will be very busy in the next few years.
Author: Heena Dhir and