Home Equity – You’re a mean one, Point CEO Eddie Lim. You really are a heel.
Point, a Silicon Valley based startup company, is looking to get homeowners sell Point’s investors a chunk of the equity in their homes in exchange for a lump sum payment. Selling a fraction of your home to an equity investor? It’s a novel concept. But as is the case with most deals, the devil is in the details.
Here’s how it works: prospective Point customers provide basic information about their home and household finances. A quick prequalification process will determine whether Point’s investors are interested in pursuing a deal with you. Typically, Point will offer between 5% and 10% of the home’s appraised value; at a minimum, Point requires homeowners to retain 20% equity in their homes. Once the terms are agreed upon, Point files a Deed of Trust and Memorandum of Option at the county register’s office. Upon recording, the lump sum is transferred to the homeowner, less the Point’s 3% processing fee.
[drizzle]Deals are structured in 10-year terms. Homeowners must repay Point during that 10-year period, and can do so a number of ways: through sale proceeds or by buying back Point’s stake at any time at the then market rate. Point requires repayment of the original equity investment, as well as a fraction of any appreciation the home has accrued since the signing of the agreement. If a homeowner defaults on their mortgage, Point can exercise limited power of attorney to take co-ownership of the property.
But….why would anyone use Point instead of taking out a home equity line of credit?
Here’s where the Grinch comes into play. See, in reality, though Point bills itself as the “anti-debt approach to homeownership,” they’re really just positioning themselves as the loan sharks of home equity. They’re targeting people who have credit scores so low that they don’t qualify for a HELOC. And if banks won’t be lending to these people, do you think Point is doing so out of the goodness of their hearts? Of course not. They’re going after easy prey.
Home Equity: How to qualify
To qualify for a Point equity investment, homeowners can have credit scores below 620. Point simply adjusts the costs of its investment based on the owner and the property. Point will take a larger percentage of price appreciation from those who it deems riskier customers.
A few other aspects that jump out as concerns: Point uses its own appraiser to determine assessed value (unlike banks, which are required to choose from a list of independent third parties). Point is only targeting properties it expects to dramatically increase in value—and then plans on capturing a chunk of that appreciation through these deals, which makes the short-term lump sum a potentially bad long-term deal for homeowner who will lose significant upside.
“While it may be appealing to get an upfront lump sum of cash, the risk here appears to be that a consumer could end up with a more expensive product with harsher repayment terms than they would with a more conventional loan,” says Sarah Edelman, director of housing policy at the Center for American Progress, a Washington think-tank that promotes economic mobility.
Speaking of economic mobility—building equity in one’s home is considered one of the most surefire bets to long-term financial stability. Many Americans rely on the equity in their homes come retirement. Cashing in that equity is not only a poor idea for most homeowners, but it is especially concerning for families with poor credit scores as this may indicate financial instability. A chunk of cash may be the last thing a person needs if they cannot manage their finances properly to begin with, and if they will need to rely on the equity in their home later in life.
What’s more, because Point structures its products as equity rather than debt, it is able to avoid the oversight that is required by banks and other lenders. Like it or not, there’s a reason those consumer protection laws exist.
Point seems to have created a system pitched as a business opportunity, one that allows a minority investor to allow the largest shareholder of the asset to unlock their rightful equity. Yet there are strings attached, fine print and details that the average consumer may be unaware of when using Point—a system that intentionally targets those unable to qualify for traditional home equity products.
Now, this isn’t to say that there aren’t potential benefits to Point. A recent Bloomberg article tells the story of one consumer, an Apple employee who makes $120k+ per year and owns a home in Mountain View appraised for $1.38 million. The consumer owes just over $700k on the property, but was unable to obtain a traditional loan for the $85k necessary to do desired home renovations because of a credit score that clocked in at just 644. For this homeowner, Point was a viable alternative.
Home Equity: Do you trust Vikram Pandit?
Still think we don’t need housing finance reform? Just wait as startups and technology platforms begin to unravel an industry that Point general partner (and Lim’s Harvard classmate) Alex Rampell calls “ripe for disruption”. It’s just a matter of time, and once these platforms take hold, they’re difficult to unseat (see Airbnb and Uber as examples).
Greylock Partners and Vikram Pandit have already backed Point. No doubt they see the potential of churning an unscrupulous – albeit legal – profit on unsuspecting homeowners.
A gut-check on this startup has me singing… You’re as cuddly as a cactus, you’re as charming as an eel, Mr. Lim!