Homeowners who want to access the equity in their homes but fail to qualify for traditional solutions like home equity lines of credit (HELOCs) have a new solution in Point, a technology startup that gives borrowers cash in exchange for a share of their property’s equity.
The Palo Alto, California-based company is giving homeowners a way to dig themselves out of debt, remodel their homes or improve their finances in exchange for a temporary option on the property.
The service fills an unmet need that Point’s founders, who all have backgrounds in developing technology and online advertising startups, noticed as they aged into their 30s and began to buy and refinance their own homes.
Point co-founder and chief business officer Eoin Matthews
“In going through those experiences personally, it wasn’t what we thought it should be,” said Eoin Matthews, chief business officer and co-founder of Point. “The mortgage process took a long time, there wasn’t much we could do online and communication was inadequate. “
And at a macro level, it seemed to Point’s founders that mortgages were “a debt-driven product where all of the risk is dumped on the consumer,” Matthews said.
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“Around 2008 when the housing crisis happened, investors just wanted to get paid, no matter what,” Matthews added. “There was very little alignment between what the homeowner was going through and what investors wanted.
“We think that’s fundamentally problematic, and we wanted to come up with an innovative solution that combines equity and debt — not focuses on one or the other, but combines the two over time. We wanted to create a product that gives more flexibility to investors and homeowners so that when one party is in a pinch, it doesn’t cause too much stress to the system.”
Point doesn’t just consider a homeowner’s credit score and history but compiles a composite score that also takes into account the applicant’s debt-to-income ratio and ability to repay other obligations.
“We don’t have firm cutoffs,” Matthews said. “For example, we don’t say that you can’t qualify if you have a 500 credit score. This is a fully documented application process that considers both the homeowner’s personal risk and property risk.”
Point’s valuation and closing process
Point can be used on both primary residences and second homes. Investment properties are considered on a case-by-case basis. Qualified borrowers must own at least 20-percent equity in their homes and stay current on their senior obligations at all times.
Upon initial application, Point takes the owner’s estimate of the home’s value to generate a conditional offer. For the actual contract terms, Point uses combination of an on-site appraisal, a third-party automated valuation model and its own proprietary pricing algorithms to determine the property’s worth. Point may also apply a risk adjustment to the appraised value to determine the value of the home used to calculate the total appreciation.
Once the homeowner accepts Point’s offer, the company takes a 3-percent processing fee and $450 escrow fee from the funds to be disbursed. Borrowers also cover the cost of an independent appraisal, which is typically between $500 and $700.
Point then records a deed of trust and memorandum of option on the property in the county recorder’s office. The entire application and closing process takes about 20 days.
Typically, the maximum amount that homeowners can receive from Point for any one property is the lesser of $200,000 or 10 percent of the property’s value.
There are no restrictions on how borrowers can spend the funds, but Point monitors what they do with the money and may require that some existing debt obligations be paid at closing. For many borrowers, most of the funds go directly from escrow to paying off certain debts, causing their credit utilization to drop “almost overnight,” Matthews said.
“For many homeowners, Point is the bridge to a HELOC or home equity loan that they wanted in the first place, but were deemed too risky for conventional lenders,” he continued. “We find that the vast majority of people are rational, good people, and they want to do things right. But it only takes one or two hiccups in someone’s life to make it hard for them to crawl out from under their debt. The vast majority of people who battled through the recession just need to get out from under water.”
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Borrowers do not pay any monthly fee for the service but have about 10 years to buy out Point, repay the funds when they sell the home or finance Point out with a HELOC, home equity loan or reverse mortgage.
Point is responsible for paying taxes on its share of any appreciation when that value is realized, which reduces the homeowner’s capital gains. If the homeowner repays Point at the end of the term without selling the property, there will be no impact to the eventual capital gains on selling the home, but there may be an opportunity for other tax deductions.
Accounting for contingencies
Point has considered many “what ifs” in creating its business model. If the homeowner dies, the estate or co-owner just needs to abide by the terms of the Point agreement, which is enforced by the deed of trust the company records on the property.
If a spouse of the owner is not on the title of the property, Point will have the spouse sign an acknowledgement and consent of the agreement. In the event that a homeowner defaults, Point can exercise its limited power of attorney and take co-ownership of the property. Homeowners may refinance their properties or take on a HELOC as long as they maintain 20 to 40 percent equity in the home.
Matthews said homeowners have contacted Point directly to see if they qualify for the service, but mortgage lenders, brokers and realtors are also reaching out to come up with new solutions for customers who may have unusual income or financial situations.
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However, Point is currently only available in cities in coastal California, including the San Francisco Bay area, Los Angeles, San Diego and Orange County. Point hopes to add other areas and states to its coverage before the end of the year.
