You can rent-to-own a car, but it’s harder to find flexible financing to buy a home.
People are starting to question why homebuyers have to take on a 30-year mortgage to opt for ownership. And one startup, Fleq, launching next month in Pittsburgh has come up with a solution.
“We didn’t think that [mortgages] were the appropriate and fair approach to homeownership, and we didn’t think it resonated with millennials and Gen Zers, who saw their parents wiped out by the financial crisis,” said founder and CEO Todd Sherer, who has 22 years of real estate finance experience.
Los Angeles-based investor-backed startup Fleq buys the house of a customer’s choice and sells it back to them in shares, piece-by-piece, in whatever time frame and amount the consumer wants.
In the meantime, Fleq makes money off the deal by charging rent. Fleq reduces the rent as the customer owns more of the property. The idea is that eventually, the consumer will own 100% of equity in their house, if they so choose, and Fleq will step away and hand over the title, without the consumer ever having to pay a mortgage downpayment or make interest payments.
Alternatively, the consumer could choose to just pay Fleq rent and never buy the home—there is no expiration date on the deal and no penalties for deciding not to buy. And if a consumer wants to move while in the process of making payments to buy the home, the customer can sell the house and split the money with Fleq based on how much ownership the customer has in the house at the time of the sale. Fleq will also help with marketing the property.
“We often refer to mortgages as a tool, which can look like a backhoe or trowel. We think of our alliance as a Swiss Army knife. We can do everything a mortgage can and can provide benefits you can’t get with a mortgage,” said Sherer. Fleq plans to be a national financing option by 2021.
Experts say alternative financing has advantages, but they are waiting to see the quality of Fleq’s product when it launches.
"Startups like Fleq in the lease-to-own space that charge fair market rent and require longer leases offer a great product, as they incentivize their clients (the tenant) to take care of the property. When the rent is fair, and the tenant isn't overpaying, the equity built is a bonus,” said Ben Mizes, CEO of St. Louis-based real estate data company Clever.
Why Fleq’s model makes sense
A third of first-time homebuyers got help from family members on down payments in 2019, according to the National Association of Realtors. That parallels a growing trend of young people living with their parents while saving for a downpayment, instead of renting while they save, said Lawrence Yun, National Association of Realtors chief economist and senior vice president of research.
Downpayment sizes have multiplied since the mortgage system was invented, when the average home cost only one-and-a-half times the average salary, said Sherer. And millennials and Gen Zers are reluctant to take on more debt, in addition to their massive student loans. Markets need to start to consider how to facilitate homeownership in a new generation of homebuyers, said Sherer.
“A mortgage, while mostly ubiquitous, is not the best way to buy a home any longer,” said Sherer.
Fleq is not the only alternative to a traditional mortgage. Contract-for-deed is a similar model where a buyer pays a mortgage directly to the seller, who retains the title until it is fully paid. Owner financing also offers a buyer-to-seller mortgage, except it gives the title to the buyer upfront.
But they still use mortgages, which is not a good enough solution for people who want to live a debt-free lifestyle, said Sherer.
“There are a lot of people doing home affordability products... But they all still require a mortgage. We thought that was the paramount thing we wanted to change,” he said. “This is the only solution I’m aware of that is a one-size-fits all, don’t-ever-need-a-mortgage, flexible-as-you-want, and change-as-you-go-along solution.”
Sarah Paynter is a reporter at Yahoo Finance. Follow her on Twitter @sarahapaynter
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