By Adena Hefets – Last Updated November 10, 2022
In early November of 2022, TechEquity Collaborative published Rent-to-Own the American Dream: The Promises and Perils of Alternative Home Financing. This is one of the first comprehensive reports we’ve seen on rent-to-own, and it shares an important perspective on how the industry needs to evolve.
The report highlights the core problem Divvy is solving: Homeownership has become increasingly inaccessible, in large part because the mortgage product has not changed materially in decades. That problem is particularly acute for younger generations, first-time homebuyers, communities of color, and those earning incomes below the median. As a result, there is an opportunity for innovative companies, such as Divvy, to address that need with alternative homeownership models, such as rent-to-own. As highlighted in the report, “when executed fairly and transparently, [rent-to-own] products can play an important role in easing the path to homeownership for families that have low credit scores, incomes, or savings.”
Here are our key takeaways from the report:
Historically Rent-to-Own Has Been Predatory
Contracts for deed (CFD) and rent-to-own more generally proliferated in the 1950s with the seller often charging above market rent and passing the costs of maintenance, taxes and insurance onto the renter. The report points out that these contracts often took place outside of the mortgage regulatory environment, resulting in exploitative behavior and structures where the landlord or financier profited from the tenant’s failure to purchase the home.
Government Hasn’t Provided Strong Alternatives
In spite of the tainted legacy of these CFD arrangements, the report estimates that 36 million consumers still used them. Why? The reason is clear: mortgages are unattainable for the majority of Americans. In fact, less than 20% of Americans can access a mortgage1 despite >90% of renters wanting to be homeowners,2 leading to the unfortunate solution of contracts for deeds. Despite their shortcomings, CFDs filled a void left by strict and even racist underwriting standards.
Startups Are Shaking Up A Legacy Industry
We founded Divvy to offer a sustainable and ethical path to homeownership for Americans who have been excluded by the mortgage system. We knew this would be a tall order, made even more challenging by the history of rent-to-own. With fairness, transparency and empathy as guiding principles, we built a rent-to-own product that actually does good. And as the article states, “If implemented with the appropriate safeguards, this new model has the potential to help those who cannot or do not want to work within the primary mortgage market to overcome income and collateral constraints.” We couldn’t agree more.
Proof is in the Numbers
Ultimately, the proof is in the numbers, and we believe that sharing our results and policies openly will push accountability across the industry. Here are the numbers.
Our average rent varies by each home but averages $1,415 in our lowest price metro (Cleveland, Ohio) and $3,268 in our highest price metro (Miami, Florida).3 A Divvy customer’s buyback price also varies by home but averages to an annual appreciation of 4.96%, relative to the US average of 7.75%.4 With Divvy, our customers always know what their buyback price is and how it is set. We also provide the customer with a full breakdown of all of the expected costs before they sign a contract with Divvy.
With Divvy, a portion (usually 10-20%) of the monthly rent payment is set aside for a future down payment for the home. These ‘home savings’ appreciate as the home value increases. This means that if our buyback price assumes that the value of the home is increasing by 5% per year, so do the future homeowner’s savings.5 On average, our customers who have bought back their homes have made approximately 6% annual return on their savings.6 When customers choose not to buy the home, we cash them out for the savings, which averages almost $14,000 in savings.7
Divvy covers the cost of maintenance or repairs required to make the home safe and livable. So far this year, we’ve spent an average of $1,202 per home to ensure our homes are well maintained. Additionally, we invest in our customers, giving them the tools they need to become homeowners: we send periodic texts and training videos that outline basic home upkeep to educate customers and prepare them for homeownership.
We are transparent but firm on our rent policies, because without consistent customer payments, we cannot continue to offer our product. Rent is due on the 1st of the month, but we give a grace period until the 5th, and don’t charge late fees until the 15th.8 Still, we understand that life happens and sometimes customers experience sudden challenges or hardships that impact their financial situations. In those cases, we support our customers by coordinating with rental assistance agencies. We’ve secured nearly $1 million in financial support on behalf of our customers to date.9 We also work closely with customers on alternative solutions to support their circumstances, such as offering flexible payment plan options and extended timelines for move-out.
Divvy provides credit counseling for our customers through the National Federation of Credit Counseling, free of charge. We believe strongly that financial literacy and an understanding of credit are critical tools as a customer moves towards homeownership, and we are proud to support that journey.
For customers that leave their home without exercising their option to purchase, we charge a relisting fee of 2% of the original purchase price; for most customers this is approximately 2-3 month’s rent, and is more than offset by the savings they have built up in the Divvy program. That is significantly less than the 8-10% broker and closing fees10 a homeowner would pay if they were to sell their property. Additionally, this is less than a renter would have to pay a landlord if they broke their lease early, when typically the entire remaining rent in the lease would be due.
Nearly 50% of Divvy’s customers have exercised their option to purchase their property. This number is significantly higher than our closest competitors, and we’re quite proud of it: our customers’ success is our success. However, until we’ve reached 100% of our customers buying their home from Divvy, we still have work to do.
Divvy believes the “American Dream” of homeownership is attainable, even if the current economic climate can feel discouraging. We believe our rent-to-own model presents a flexible solution for millions looking for an alternative to skyrocketing interest rates and large down payments. We are proud to have helped thousands of families move into their dream homes and start on their path to financial independence, and look forward to helping tens of thousands more.
1 Calculated based on annual US census data on average household income and average monthly homeowner payments, including mortgage, taxes, and insurance.
3 Average rent is calculated based on a customer’s rent portion of their total monthly payment and does not include any savings contribution.
4 FRED; The national average is based on a ten year period from 2012 to 2022.
5 Average rent is calculated based on a customer’s rent portion of their total monthly payment and does not include any savings contribution.
6 Contributions are calculated based on total savings paid through the initial down payment and monthly savings contributions.
7 Total savings calculated based on average dollars paid out to tenants who have completed their lease and chosen not to renew or purchase their home. Rate of return shown is an IRR based on the dollars paid into savings by the tenant and savings credit given.
8 Our lease agreement allows late fees after the noted grace period; our current policy waives late fees until the 15th of the month and is subject to change.
9 Total rent assistance collected based on payments received from local and national rental assistance agencies from 2020 to present day.
Adena is the co-founder & CEO of Divvy Homes, a proptech company on a mission to make homeownership accessible to everyone. Divvy was named a Time100 ‘Most Influential Company’ in 2022. Prior to founding Divvy, Adena joined Square in 2013 and was responsible for building out Square Capital, a merchant cash advance platform with billions in loans outstanding. Prior to joining Square, she was part of the large-cap buyout team at TPG, a private equity firm, where she helped purchase companies in the real estate sector. She started her career as an investment banker at Merrill Lynch.
Adena holds a Bachelors of Science, Policy Analysis and Management from Cornell University and a Masters of Business Administration, Stanford Graduate School of Business. She was named 40 Under 40 by Fortune and is backed by Andreessen Horowitz, Tiger Capital, and Caffeinated Capital. She currently lives in Oakland, California.