With Point, credit scores can be less than 620, but homeowners must have at least 25 percent to 30 percent equity in their houses. Point adjusts the cost of its investment based on the owner and the property, taking a larger percentage of price appreciation from riskier customers. Should the homeowner not pay Point, the firm has the right to sell the home to recoup its investment and take its portion of the gains.
Those who decide not to sell their homes have to pay the company back at the end of the 10-year period, similar to a loan, with an annual effective interest rate that’s capped at about 15 percent, comparable to rates on some credit cards or unsecured consumer debt. Annual percentage rates at LendingClub range from 5.32 percent to almost 30 percent on three-year personal loans.
Point is investing in properties it expects to appreciate in value, initially focusing on California, with plans to fund homeowners in other states next year, according to a company marketing document. Home prices nationally are set to rise about 5.5 percent this year and may increase an additional 5.9 percent in 2016, according to CoreLogic Inc.
“If your home does well, we both do well,” Point CEO Eddie Lim, who previously co-founded a payments platform acquired by Visa Inc., said in an interview. “If your home doesn’t do that well, then this was one of the cheapest sources of financing that you could have obtained.”
For investors, the firm is trying to unlock some of the equity in residential real estate and make it a more liquid asset class that can be traded, Lim said. He’s raised money from investors -- separate from the company’s venture-capital backers -- to fund the equity products. The firm already is selling them to family offices and hedge funds that buy residential-mortgage bonds and has plans to securitize them as well.
Part of Point’s plan is to improve the financial stability of its customers because the firm transfers funds directly to pay off their debts, according to the marketing document. Other backers of the company, which Lim started in January, include Ribbit Capital, SV Angel and Bloomberg Beta, the venture-capital arm of Bloomberg LP, the parent company of Bloomberg News.
Point’s customers, aside from Bennett, include homeowners such as an Apple Inc. employee who makes $128,700 a year and owns a Mountain View, California, house appraised at $1.38 million, according to the firm’s marketing document. The logistics program manager, who owes about $715,525 on the property and has a credit score of 644, wanted $85,000 from Point to pay off debt from home renovations, the document shows.
In addition to Point, two firms -- San Diego-based EquityKey Services LLC and San Francisco-based FirstREX Agreement Corp. -- are back in the equity-sharing business after they stopped doing deals when property values collapsed.
Restrictive lending standards are driving investors to come up with more creative solutions for people to leverage home equity
, said Daren Blomquist, vice president of RealtyTrac. Firms like Point operate with less oversight than banks and other lenders, because they’re offering products that are structured as equity rather than debt.
Investors banking on future appreciation and expecting home prices will continue to go up should proceed with caution, according to Blomquist.
“We’re seeing evidence that home prices in many markets are slowing down,” he said. In one, the San Francisco Bay area, growth has slowed to a single-digit pace, “down from consistently double-digit appreciation in the past couple of years.”
Point Digital Finance discounts the appraised home value of its customers to account for the risk and generate greater returns earlier.
Bennett, the social worker, said she has no plans to sell her five-bedroom house, appraised at $415,000, because she wants her 7-year-old son to have it eventually. Now that her personal loan from Springleaf Financial Services and auto, credit card and payday-loan debt with interest rates as high as 110 percent are paid off, she can start saving money, she said. Even if her home skyrockets in value, the highest annual interest she’d have to pay back is 14.8 percent, according to Point.
“You can pay them back before 10 years is up, so that’s my goal,” she said. “My plan is to pay them back way before that.”