In 2006 my friends Mia and Andre (pseudonyms) bought their dream garden apartment in Harlem for $500K. They had rented in New York for a decade and bought the apartment expecting to make it their home indefinitely. They initially financed the purchase with a 30-year mortgage but flipped to a 15-year mortgage in 2011. While their monthly payments doubled, they both had high paying, stable jobs and wanted to accelerate the time to debt-free ownership.
Five years later things changed. Andre left his job to start a consulting business, borrowing $100K through a HELOC to support this effort. A year later, Mia lost her job and freelanced while looking for a new position. They had enough income and savings to continue making their monthly payments, but it was tight and stressful.
For six months Mia and Andre explored refinancing into a 30-year mortgage to substantially lower their monthly payments. They had about $350K of equity value in the property. But because they both had moved from steady W2 income to 1099 status, banks demanded a credit penalty as well as unfavorable terms. After numerous conversations with their bank and mortgage brokers, they reluctantly decided to sell their apartment and move to a rental.
There are many variations of this story. In our lives, financial circumstances change in both predictable (college tuition, renovations, retirement) and unpredictable (layoffs, medical emergencies) ways. These changes often require additional cash liquidity and/or reducing monthly payments.
According to U.S. Census Bureau Data, adults over 45 on average have more than 79% of their wealth tied up in home equity—an illiquid asset. Banks developed solutions with the only way they knew how: debt finance. They developed mass-market 2nd mortgage and HELOC products to enable homeowners to “tap into” their home equity. As we learned in 2008, these leveraged products can be flawed solutions for many homeowners.
Today we’re announcing an investment in Patch Homes, which offers homeowners a new financing solution: the fractional sale of home equity. The Patch model enables homeowners to “tap into” their home equity by selling 20–40% to Patch’s affiliate, Patch Capital, which shares in both the upside and downside. The homeowner remains in control of her or his home for the life of the relationship and exits via a sale or refinances in 7–10 years.
While this product is not for all homeowners, it provides a new and important financing option. The Fed estimates that home equity ownership in the US is $15 Trillion. It makes no sense that the only financing options are additional debt or a complete sale of the property. Patch gives homeowners the option to de-lever their personal balance sheet or otherwise raise cash. Clients have used Patch proceeds for numerous reasons, the most popular of which are to pay off debt, increase liquid savings and finance home improvements.
We’re especially excited about the customer-centric approach taken by Patch’s founders, Sahil and Sundeep. They’re approaching their clients as equity partners, not as debt contractors. Customer feedback to date has been off the charts. We feel fortunate to join the Patch team in its journey along with our friends at Tribe Capital. Thanks to Alex for making the intro after meeting the team at TechStars in 2017.