Photo by Tom Rumble on Unsplash

For many millennials and middle-class Americans, homeownership has become a distant dream. Faced with a soaring housing market, large student loans, and credit card debt, the homeownership rate has declined from its peak of 70% in 2004. Homeownership rates declined following the global financial crisis, reaching a low point of 63% in 2016. The homeownership rate is slowly climbing again, but still hovers around 65%. Divvy Homes wants to fix this problem.

The San Francisco-based startup seeks to make homeownership more attainable for millions of Americans. The Divvy business model consists of allowing customers to select a house they aspire to eventually own, and then renting it back to them over the course of a couple years. In the meantime, customers can build equity.

Barriers to Home Ownership

There are a number of barrier of entries for Americans aspiring to purchase their own home. One hindrance is the homogeneity of the requirements for securing a 30-year fixed mortgage. Securing a mortgage often requires having a strong credit history and a steady income. Millions of Americans are unable to meet the characteristic standards of traditional mortgage underwriting.

Divvy Income from Rent

Divvy generates revenue through collecting rental income. Over the course of 2020, Divvy expanded into 16 total markets. The average price of the homes it buys is around $200,000. Divvy’s business model takes advantage of a huge potential opportunity. “The number of people who fall outside of the traditional mortgage box is growing, with more people struggling to be able to purchase a home,” states Divvy’s CEO Adena Hefets.

Co-founder and CEO Adena Hefets highlights that the typical customer is a middle-class American who has been locked out of the traditional mortgage system in the current market. “Our customers have, on average, about $4,000 saved up in the bank, about $60,000 to $80,000 in income, and generally have about a 635 FICO score. It’s usually a couple settling down, they have kids…they’re going through a life event like that.”

The Divvy Pathway From Renting to Owning

Divvy’s model of providing customers with a pathway from renting to homeownership has drawn investor attention. Divvy Homes recently raised a $110 million Series C round led by Tiger Global Management. The startup last raised a $43 million Series B round in 2019.

Early on, Divvy Homes attracted the attention of the prominent Silicon Valley venture capital firm Andreessen Horowitz. Alex Rampell, a partner at the VC firm, led the $10 million Series A round in Divvy Homes in 2018. Andreessen Horowitz made early investments in companies that have since soared to remarkable heights, such as Facebook, Coinbase, Airbnb, and Twitter.

“For us, the mission is really important to be serving those who I think most benefit from access to home ownership and who most struggle with it,” stated co-founder and CEO Adena Hefets.

Divvy Began Operations in Three Cities

Divvy Homes initially launched in three markets—Memphis, Atlanta, and Cleveland. They gave individuals or families in these cities the option to select a home they would eventually want to own. Divvy would then help these individuals or families attain their goal of owning their chosen home someday. The individual or family must contribute at least 2% of the total home value for a down payment. Divvy would then collect a monthly amount that is composed of both market-rate rent and an equity payment. The company’s model is designed so that within three years or less, Divvy would be able to sell and transfer the property over to them.

Divvy Carefully Inspects the Homes

In order to prevent high unforeseen costs for customers down the road, Divvy works with inspectors to check that homes won’t have large repair costs. The inspectors look for potential structural and foundation issues, pest control problems, deteriorating roof conditions, outdated electrical systems, and other issues that could be financially burdensome for the eventual homeowners.

Algorithms to Evaluate Ability to Purchase

The company uses algorithms to make sure a given property makes economic sense for the eventual purchaser of the home. If rental payments are missed, Divvy will assess the circumstances to see if a solution can be worked out. “If a rent payment is missed, we will follow up to see how we can help,” stated co-founder Brian Ma. “Most of the time, it’s immediately curable or curable within a couple days. If it’s been longer than a week and we believe the tenant is going through some hardship, we will work our best to offer alternatives, including allowing them to purely rent the property by dropping the equity payments to lower their monthly payment. If we can’t find a way to cure the situation, we will go through an eviction procedure.”

Although interest rates dropped during the pandemic, mortgage lenders tightened their underwriting approval standards. Thus, many Americans fell short of these stringent standards and were not able to take advantage of the low interest rate environment for their own home purchases.