Point Digital Finance allows individuals to sell portions of equity in their house as if it was a company. Point buys a fractional interest in the house and pays lump sum ranging from $40,000- $250,000 in return. This arrangement gives the homeowner the right to either sell the home or buy back the share at any time before the end of the 10-year term. This unique product of Point is carving its own niche in the consumer finance industry. Through this, it has created a new asset class whereby the homeowner can unlock some of their home equity wealth without creating a new debt obligation. Most importantly, no monthly payments have to be made by the homeowner. For investors, there are compelling returns from one of the most lucrative asset classes: owner-occupied residential real estate. The deal can be structured for as long as a decade.
Two years back, when Eddie Lim, a successful entrepreneur fresh from the sale of a company he cofounded, wanted to refinance the mortgage on his home. He had great credit, an enviable balance sheet, lots of equity in the home and an impeccable repayment history but his bank refused his application because he did not have a steady flow of income. This prompted him to wonder why home equity wealth could only be access by debt – just like one his companies, why couldn’t his home be packaged into shares that could be sold off with their future appreciation rights? US residential real estate is the largest asset class in the world with approximately $18 trillion of residential real-estate wealth in the US after accounting for mortgage obligations. He thought that debt shouldn’t be the only way to access all that wealth and Point was born.
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 Beta, Laurence Tosi (Airbnb’s CFO and former CFO at Blackstone) and Vikram Pandit (Orogen CEO and former CEO of Citigroup). Point 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 Trialpay (acquired by Visa), Yub (acquired by Coupons.com), Metails (acquired by Rakuten) and TXN. Eoin Mathews (co-founder) who cofounded Metails with Eddie, was on the founding team of Sendgrid and Alex Rampell (co-founder) who cofounded Trialpay, Yub and TXN with Eddie and who is now a General Partner at Andreessen Horowitz.
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 had bought mortgage securities, which triggered the U.S. recession. Lending standards tightened significantly after the crash and with many homeowners underwater, home equity borrowing all but died. Since 2012, homeowners have seen property prices rise an average of 30% nationally and home equity lending, albeit with more rigorous lending standards, has regained some momentum. However, for homeowners who do not meet lenders underwriting standards or who want to avoid taking on additional debt obligation, 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 was established to fill this void by providing an equity-based alternative finance solution for homeowners.
Point started their business in a few counties in California at the end of last year and hve met with strong demand from both homeowners and investors. It is ready to expand its platform to include more accredited investors, family offices and institutional buyers of their real-estate investments (which are structured as options). The company has begun to expand geographically and it is not accepting homeowner applications from Washington with plans to expand to at least 3 additional states by the end of the year. HELOC’s, companies providing home equity loans and mortgage refinancing provide some competition to Point but the company considers lax underwriting from traditional lenders as its biggest challenge. 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 – this alignment of interests is, the company believes, unprecedented in the consumer finance space.
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 optimizing for cashflow – the use of funds might be for debt payoff, small business investment, to help the homeowner bridge to a sale or refinance or to finance upgrades. Point customers fall all over the credit spectrum but the company takes pride in being able to offer their solution to some homeowners who fall below the underwriting cutoff requirements of traditional home equity lenders.
Point business model is simple; the company collects a 3% fee from the amount invested into the property and it also shares in a small percentage of any profits investors realize when the homeowner sells or buys back. For making an investment of 10% of the property’s value, the company often takes about 30% of the appreciation in the house although the exact % varies according to the company’s proprietary pricing which captures homeowner and property risk on a continuum.
To protect the investors from depreciation risk, Point prices its strike price at a discount to the appraised value of the home. This discount ranges from 10-20% of the property’s value. If the homeowner exits at a property price below this risk adjusted value then the investor will share in the depreciation below that risk adjusted price. To protect the homeowner against exorbitant costs, Point caps the cost to the homeowner so that it cannot exceed a maximum effective interest rate regardless of how much the property appreciates. That cap is typically in the mid to high teens.
To date, approximately 25% of homeowners are on track to buy out Point in the first year and investors capital should be returned in just over 4 years. Overall the company is targeting a return of approximately 12% over the life of the assets in its portfolio.
Homeowners use Point for various reasons including debt payoff, small business investment or property renovation. Now, whether it is a financial constraint or investment opportunity, they can always arrange the cash flow by utilizing their biggest asset, their home. After getting a strong response from the public for its products, it funded just over 50 investments in its first few months of operation and this was enough to convince the company’s investors to lead a $8.4 million series A investment in August 2016 led again by Andreessen Horowitz.
With the series A in the bank, Point is onboarding institutional investors with the goal to scaling volume to greater than $10 million per month within 12 months. It is focusing on MBS buyers, asset managers, sophisticated family offices, real estate funds, and investors who want to invest for the long term and are comfortable in holding a potentially 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 suggest Point will be very busy in the next few years.
Author: Heena Dhir and