Divvy Homes’ Adena Hefets on Rent-To-Own Innovations

Welcome to the Top of Mind podcast from Altos Research. This is the show where we talk to real estate industry insiders and experts about the trends shaping the market today. Enjoy the show.

(00:20)
Mike Simonson here. Thanks for joining me today. Welcome to The Top of Mind podcast. For three years now, we've been sharing the latest market data every week in our weekly video series at Altos Research with the top of Mind podcast, we like to add context to the discussion about what's happening in the market from leaders in the industry. Every week, of course, Altos research tracks every home for sale in the country, all the pricing, all the supply and demand, all the changes in that data. And we make it available to you before you see it in the traditional channels. People desperately need to know what's happening in the market right now. It was frozen so solid last year, and, and now you know, the, the landscape changed dramatically this year again. So if you need to communicate about this market to your clients, go to altos research.com and book a free consult with our team.

(01:11)
We can review your local market and how you use market data in your business. Alright, let's get to the show today. I've got a terrific guest today, Adina Hefetz. Adina is the co-founder c o of Divvy Homes, a PropTech company on a mission to make home ownership accessible to everyone. A noble goal. in 2017, Adina set out to solve a problem she saw in the market. Fewer people can afford to purchase a home now than two decades ago. Heck, even two years ago. so she developed a new rent to own model that allows renters to gradually build up ownership in their future homes while living in it. So today we're gonna talk about PropTech. We're gonna talk about affordable housing, financial models, and, and so much more about housing. So, Adina, welcome.

Thank you so much for having me. I'm excited to be here.

Great. so for our listeners who don't know Divvy Holmes, let's start there and let's tell us about Dina, about, about Divvy and, and how you, you came to start the company.

Sure. so Mike, I founded Divvy in 2017. and just kind of how you said it was with the, with the goal in mind of, of how do I make home ownership more accessible? and I thought, hey, there, there's an entire group of Americans here. And at the time it was something like a little bit lower, something like, call it half to a little bit, slightly over 50% of Americans could not actually access a mortgage. And I thought, how do I create something that thinks, feels, acts like home ownership? And then I thought, well, okay, if I can't give them a mortgage, what else can I give them? How else could I package this such that it actually seems like something that is interesting to capital markets to investors? Because ultimately I needed their capital to go actually be able to execute on this.

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And so I thought, hey, there's this thing called a single family rental portfolio that, that lots of investors do. How can I give people access to home ownership and marry that with the sort of the investor lens that looks like single family rental and create a product? So I I locked myself in my apartment. I pulled out an Excel spreadsheet, which is generally how I start solving most problems in my life as my my husband will say. and I, I started thinking about what we could actually create. And about a week later I came up with the idea of something called I'd say a rent home that was a little bit more than a rent. It was a rent to own where, and it still is to this day, where you can actually build savings in your rental property. So what did I want?

(03:49)
I wanted so that consumers could pick out their own home. Cause I thought that was really important. I wanted, so that they could start off with some initial savings in the house so that they were bought in to the property, that they were thinking more like a homeowner. And then I wanted to give them the ability to actually build equity savings in a home over time. So that is exactly how to be structured today. Customer comes to our webpage, we underwrite them for budget, they go out shopping, they pick out the home, not divvy. It's not a preset inventory. It is, they pick out the home Divvy buys it on their behalf. They contribute one to 2% of the home value as initial savings. They make one monthly payment which is rent plus their option of how much they wanna save every single month. so you can decide one month, $20 a month, one month, $200 a month. It saves in the value of the home at that time and appreciates with them. And there's always a buyer right on the property at a preset price so they can roll their equity onto a mortgage or walk away and cash out their equity, less a surrender fee. so it really is, I think, an innovative way that that is really gonna drive the future, the future of home ownership.

So it's, it is the, the payment works by you do a one or 2% down, you put a little bit down because that's of course a huge hurdle for a lot of buyers is the down payment. And then I build my equity over time with sort of like optional extra payments. Is that, is that how it works?

Yeah, it's like an interest only mortgage, but you have a savings app and you can decide, I wanna save up this much every, this month and this much this month. Or you can set in, forget in just say $20, $200 a month, whatever you want. and I actually think that that is why people ask me often, you know, is the end goal for someone to move on to a mortgage? And you know, when mortgages were at two to 3% for 30 year fixed, I was like, yes, that's the goal. That's the intellectually rational decision. You will not find a cheaper option out there. However, today when mortgages are 6.7%, I look at them and I'm like, I'm not actually sure if that's the end goal because it's actually more expensive today to get a mortgage than it is to to rent with divvy. You on top of having it with a mortgage, you have to pay maintenance, taxes, insurance.

(06:02)
And by the way, when was the last time your mortgage provider said, Hey, you can actually choose to amortize your principal payment down or not. Right? You're not given flexibility, you're not given optionality. Right. And so I actually think that there's this break even spot, which I've roughly calculated it at a call it right around 5% mortgage rate, where you should be ambivalent from just a pure financial economical perspective between divvy and and owning. And then it's really a question of is, is there enough, you know, extras that make you want to pick one versus the other? And that's kind of for the consumer to decide.

Okay. So yeah. So, and, and this is actually sort of further down in the conversation, but, but you know, we are, we've shifted from the the free money world to the not free money world. And, and like that has to have implications for everybody, including divvy as a company and for, for your buyers, your customers.

Completely. And I think that, look, I think consumers are economically super rational. You know, they might not think, Hey, what is my implied interest expense with Divvy versus a mortgage? But they will say, Hmm, what's my payment on a mortgage? And now you're telling me I to pay PMI and now I have to pay how much in taxes and lemme guess what I maintenance is and then insurance. And you're telling pay that. Yeah. Or I can go, I can this amount. And by the way, like that I could just like go through a chat function or put in a request when I have a maintenance thing. I never have to deal with it. Wait a second. Like the light bulbs go off. I think consumers actually really get this. And you know, it's interesting, Mike, when I founded Divvy in 2017, interest rates were super low.

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I never thought this was gonna be that, that was the hardest time, meaning that was the hardest time to get consumers. Cuz my number one competition was mortgages. Right? And it's only now that I think that mortgage rates have increased that I realize, hey, if we have this much consumer demand during record low interest rates, I'm so hopeful for the future and I can see to the numbers, I can see that our demand is still insanely strong despite cutting back on on marketing dollars. I can see that demand has only increased for divvy over time. And I think that we're actually somewhat countercyclical in that way, which is when rates start to increase, I actually think that divvy becomes more attractive.

So I can imagine the, the counter cyclical impact in that suddenly renting is more attractive. You and I both live in the Bay Area and suddenly renting is significantly more attractive in many cases than, than purchasing. but it's also becoming true in, in a lot of the country because mortgage rates are so much higher. isn't the case though, because most of the, the properties that you're gonna rent from are, are financed with cheap money. So in other words, the like, now when we go to buy a a home, isn't the rents get set higher now? Is that, how is that working for your customers who are opting in now?

Yeah.

So are they getting, like, do they get market rents?

So there's a few different ways I I probably, I would think about this. So first and foremost is what is market equilibrium? So market equilibrium, if you go back historically, rent is always said about 20% higher than, than mortgages than the cost of a mortgage. Why? Because if you're a landlord, you have to cover that mortgage cost and taxes and maintenance and insurance. So you set rent a little bit higher so you can be break even at least that is most of the time about a 20% premium. Except the difference is Jerome Powell started raising the Fed funds rate and he did it so quickly that mortgage payments started to spike really quickly. And rent don't move that quickly. You're in a long-term contract, you have a one year rent contract. It's not like Jerome moves the Fed funds rate. And I'm like, Hey, by the way, Mike, we're raising your rent now by 25 bips cuz that's what, what interest rates went by.

(10:08)
That's, that's not how rent works. And so rent now is 25% cheaper than an apples to apples mortgage payment for the same home because it hasn't a time to catch up. So what is the impact on the industry? Yes, there is a world in which rents will increase over time to get back to that market equilibrium. There's also a world though, where mortgage rates come back down, right? And that kind of brings the, the market back into the equilibrium. I'm a big believer in extremes aren't the thing you look at long-term historical averages. And that is what is probably gonna happen over time. So I would say right now for the consumer, rent is economically cheaper and that's not going to last forever. That is a, a moment in time when we have this dislocation because rates for mortgages go up really quickly and rents do not at the same pace. And so right now renting should feel cheaper and I bet it will equalize at some point in the future. And, but for consumers now, that is the current market situation.

Got it. So and, and it's super powerful in that you know, when you think about the affordability challenges in the country and the affordability to ownership challenges that is a like anybody who's studied the housing market at all in the US realizes that like, we have an affordability problem and we have an affordability problem for, for everybody. and that, and so then tell me about like that journey of the you, the the divvy buyer. Like how, how, like how many you're in not all markets, right? So you're in, you're in limited markets.

We're in 20 markets. Mm-hmm.

<affirmative> 20 markets. Okay. and I assume it's the inbound migration markets, the places where everybody wants to live, like, like the south and west are, is that true or do you, are you working in other places that you find compelling?

Our largest markets are the Texas, Florida, and Georgia markets. And we have a presence also pretty decent sized footprint in the Midwest.

In the Midwest. Okay. and those are interesting because those have different rent and affordability characteristics like the, the Midwest markets have significantly more affordable purchase rates, purchase ability than, than even like Florida and Texas these days. So how does that impact your, your buyers?

Yeah, so I would say, okay, taking a step back, what what has driven the affordability issue in the us and if you look at it, it is not that, it is not that rents are like astronomically taking off. The problem is, is that incomes have not kept up with the rate at which homes have appreciated. So homes, home prices in the US have skyrocketed. Rents are just a percent of home prices, right? It just tracks the market because if you're a landlord, you have to take out a mortgage which tracks the home prices, right? That is what it's tracking to. so home prices have increased at a rate greater than income has increased in the US Now, why is that the case that that income hasn't kept up with with home prices? Well, we've fundamentally under Underbuilt in the US right? So if you think about supply and demand dynamics, everyone, everyone in the us I don't care who you are, everyone dreams of owning a home period, right?

(13:28)
And we haven't built enough homes to support that. And we haven't done it systematically for 10 to 20 years. And what happened is, during the financial crisis, because of a, a switch in supply and demand dynamics, there were a mass number of foreclosures which odd, which, which created a bit of a shock to the market and caused home prices to go down in a very unusual way versus historically how they've trended. And we finally started getting back to kind of historical norms of like, okay, let's start really building. and then we had another shock to the system, which is covid, right? Which brought forward a lot of demand that maybe wasn't going to come online until later. And if you think about during Covid, and I speak about this on some other podcasts, which I actually think is, it's, it's a tough point to make, which is that ultimately supply and demand didn't balance out correctly during covid.

(14:22)
Meaning there was significant demand. And during significant demand or times of that you would've expected the market to balance out on the supply side. How would we have expected that we would've expected government foreclosures, unemployment spiked, people couldn't make their mortgage payments, we would've expected foreclosures. And I don't wanna comment on the social issue cuz I actually very supportive of supporting Americans during very challenging times. And so I think the right thing to do was to say, let's, let's figure out payment plans, but ultimately the government medals in the market in a way that didn't lead to a balanced economy within the housing market, right? It caused people to stay in homes that otherwise supply would've come online. And now we have this issue that just even got further exacerbated, which is as a result of that we now have even fewer homes listed for sale than we had thought.

(15:13)
And that's not fixing itself. So to me, like the US has this fundamental problem where not enough homes, everyone wants a home, right? And that has imbalance itself out and we've had two supply, two, two shocks throughout the system that have fundamentally altered the market in ways that maybe would've been unnatural otherwise. so I dunno, I didn't really answer your question, but I'm, I'm more in support of it, which is like, I do think that we have an affordability crisis. I think the affordability crisis is due to home prices increasing at a faster rate than income can increase. and I think we have to do something about it, right? I don't think the answer is, Hey, by the way, don't ever dream of owning a home. I think that it is a time for innovation. You look for these points, you look for these moments where markets are dislocated in such a way where you get to create a product that actually serves demand. And that's what I see with Divvy is there's a dislocation in the market and we're we're serving it.

And by that I I like that a lot. The yeah, the, all of the policy and the laws and the tax structure in the country is designed to favor the people that own homes and to keep them in their homes. And so it seems unlikely that those, all of that policy is gonna change anytime soon, right? So we end up with this case where we, we encourage people to have their life savings in their home. and therefore we, we can't really allow home prices to decline. We can't really allow the, and and therefore we have an affordability, a continual affordability crisis. Okay. So that makes sense to me that, that then there are, there are paths to like Divvy is creating to getting people into, for, into a home building equity and the, the low down payment requirement, one to 2%. And, and then building some equity over time. So that makes sense. So let's, I'm interested in the impact that you're having. So like, like how many people are taking advantage of it and is it like are are you actually building significant equity in places like when the home price goes up? If I bought from Diviv in 2017, do I get the upside? Who, who gets that? How does that all

Work? Yeah, so our customers who had owned a home and then decided in 2021 or the first half of 2022 to, to buy back, they were significantly in the money. And you know what? Good for them, good for them. I want them to have that, right? That was the bet that they made. They got into a divvy home and we priced it assuming consistent. Generally we, you can see it all on our websites all public, but generally call it three, three and a half, 4% annual appreciation. So pretty mild. It depends. It's zip code level. So everything is specific to a geo. I'm giving you broad averages across the us which is never, averages always kind of get you in trouble. So I apologize for that. But for, for those folks where markets went up 20% year on year, they got all of that and good for them.

(18:19)
And look, it's not always gonna work out in the consumer's favorite. It balances out and I probably say in this market right now, right? Maybe people are gonna have more, more or lower appreciation going forward and they're not gonna get as much of a benefit, but that's okay. I think that the be here with consumers and the way that Divvy thinks about like what success looks like is providing options. Like what I want to do fundamentally is my job is not to like arb the market for consumers so that they make like an amazing return cause they happen to pick the right years. No, my goal with Divvy is give people the option, let them move into the house they want today, let them have the availability of going to the school district that they want their kids to go to. Let them start to nest, settle down, create a home, right?

(19:07)
Feel comfortable, feel stable, give them the constant option to stay in that house. You can build equity in that house. It's your choice. Or you can choose not to, like, you don't have to feel pressured one way or the other. And by the way, if you wanna ever roll into a mortgage of mortgage rates, get to a point where you're excited about them when you wanna, you have that option available to you as well. So I think my goal here is to create what I think is a more customizable, flexible home ownership program. One that I would want. I don't wanna be, you know, right now if you asked me would I take on a mortgage at 6.7%, no, no, I would never do it. I wouldn't. And, and look, it's not even high relative to historical mortgage rates. It's not that high, but I'm a Zer baby and so I'm used to like a good steady three to 4%. That's where I locked in my mortgage. And so if I had to move right now and give up that I wouldn't do it. And I don't think I should ever ask anything of our customers that I myself would've want.

So yeah, for sure. And then so you, they the, you enter in an agreement with a, with a customer and then they go out and shop for the home, is that right? Yes. Is there a, is there like a buy box that you guys have that has ultimately you're, you're like a single family rental operator, you own a bunch of homes and you have tenants in them, you just have an extra equity incentive and maybe a and a and a like a a right to purchase, like an option agreement on the house. Is that kinda what's happening?

That's completely correct. Yeah. So we, we do limit by price point. We have to set within a certain price point. Cause I can't have someone come to me with like a 5 million house.

I mean, I might be, maybe I'm in the market <laugh> maybe at some point in time when we have a fund dedicated to that. But otherwise it makes it too hard. We go through money too quickly. So they come, they, they go find the house. There are price point ranges and we do require to be move-in ready. We don't want you buying, this isn't a rehab program, this is not gonna get a fixer up or and we'll flag that. We actually, we ingest all homes listed for sale in the MLS and we actually flag where we think the home might not be a good fit. So it'll be like, hmm, there's one photo and it says investor special sale as is yellow flag. That's probably not a good divvy home. We're giving you a heads up cuz we don't wanna surprise any of our, our customers. But I remember you wanna hear a funny story, Mike, when we first found a divvy, I had no rules like in place, this was like very early on, like 2018, I didn't have as many rules.

(21:30)
I just said, we buy within this price point. And someone brought to me, I kid you're not a castle. And they were like, will you do this with this castle? And I remember being like, I don't really have a rule around this. We should really start setting some rules as to the type. And I was trying to explain and the customer was just like, but you don't say that you can't buy castles on your website. And I was like, you're right. We don't, we don't have that rule. I mean we didn't end up buying the house for him, but it reminded me of this whole thing where, you know, we try to just, we try to get our customers to essentially buy homes that we know will generally appreciate. Do not buy the million dollar home and the average price point in the market is a $250,000 home.

(22:08)
That home, that's a tough investment and a tough bet to make, right? Buying a fixer upper home, it always seems like a good idea. And then when you're having to live in a house without half your roof, not such a good idea, right? And so we try to just push our customers towards what I call like a pretty standard starter home. Sometimes it depends, three, four bedrooms, two, three bathrooms, 2,500 to 3 3500 square feet being like, you know, any anywhere from sort of 15 minutes to an hour and a half from, from core downtown and maybe an hour from core downtown depending on the city. and those are roughly the houses that we, we, we try to help push our customers towards, but pretty open. Yeah,

Yeah, yeah. So, okay. So it's, it's pretty it's a similar buy box to the other, to investor range where they, they want to have that price range.

Well I will say the, the core difference though with other investors is they'll go out and they'll buy homes and there's this intangible of needing homes that are very specific to you. That becomes really tough for customer with a single family rental portfolio, right? Which is, I need a house down the street from my mom because she babysits my kids <laugh>. Right? That is a very specific requirement that doesn't work that well for single family rental portfolios because they're buying based off of oh our, you know, our acquisitions team and says it's one mile in a Starbucks and therefore, I mean, I'm sorry, but no one buys a house cuz it's one mile within a Starbucks. Everyone buys it because it's close to a school or their family or their job or some other thing. So it, it's a similar buying profile, but I will say that because we reversed the process, we started the customer not the asset, that it actually results in slightly different homes actually being purchased.

That's great. And that might be interestingly different competition for the buyers in a, you know, a notoriously competitive price point and in a bunch of those markets that, that might give them some flexibility. That's nice to hear. I I wanna go back to you. You had a, you, you said that you you, you have a rough average plan for a three to 4% appreciation on, on the homes. And then so in big booming up markets they the, if I'm a divvy customer and I say I wanna buy it now and I can get a mortgage and I, and I buy it I buy it for the predetermined price.

Yeah, everything's locked in ahead of time. Yeah. We wanna give you ability. Like, I also think that it's kind of crazy that we live in a world where like landlords can be like, Hey, surprise, they just raised your rent by 20%. And I'm like, what? Someone so like I, we don't wanna be like that. We want, we lay out for three years, here's your rent, you know this all before you can get into the arrangement bus. Like the, before we even sign anything, I call it a we call it the occupant proposal now is like the technical term, but I used to call it the baby agreement, which is, hey, here are the bullet points of just like, f yi you should know this before you like even get even close to signing a real contract. Our legal team did not love that at first. They're like, continue, you can't send customer bullet points, summaries of a legal contract. I'm like, but we need to, this is like, I want it to be, I want it to be understandable. But yeah, we provide that all.

Great. That's great. Okay, so, so tell me about your, your target. Who, who is taking advantage of this? Is it like, you know, 35 year old millennials? Is there like some other thing? What do you, what do you know about your customer?

late thirties, early forties in terms of age? largest segment are healthcare workers transportation workers folks in education. they're generally about a hundred thousand dollars of household income income in general. 51% are nonw two only. So income meaning that they, they maybe have W two, but they'll also have some 10 99 income or they'll have 10 99 plus child support. So it's various income sources. A lot of self-employed. Trying to think what else I can give you. Average FICOs actually almost six 50.

Okay. That's really interesting. The, the 10 99 stuff is really interesting because what I, it sounds like you're saying, correct me if I'm wrong, it sounds like you're saying that like we can qualify a good renter here and but the mortgage people are gonna run you through the ringer and it's gonna be really hard. Is that, is that what you're finding? Yeah,

Well I think one good luck going through mortgage applications are a little bit of a, if anyone's gone through it, they never wanna go through, there's a few things you never wanna do again in your life. Probably mortgage applications one, then one more easier with simpler. And I think we're just more innovative in how we, we actually can underwrite individuals, right? So if you have multiple income streams, you're more complex self-employed underwriting case, we're more equipped to be able to handle that. I think look, mortgage underwriting was meant for its first use case was actually post post World War ii when, when soldiers were coming back, they were settling down and having a family man and woman settled down and they stay in a house for the next 20 years. they've, you know, steady income stream, W2 job that is what a mortgage is made for. Anything outside of that demographic, that social profile as well as that income profile mortgages were not really set up very

Well. Yeah, well, and, and I think one of the reasons people choose to rent is for the, the mobility of it, the, the ease of in and out. Do you, does, does Devy preserve that? Like, or now am I thinking about Well, I got my more like how, how does it, do I get my advantages of staying as a renter?

Yeah, you can, well you actually better advantages than that. You can leave any point on DPI's platform with 60 days notice period and we'll cash you out less the 2% surrender fee. That's 2% of the initial purchase price. Cause we now, we now need to sell the house and we need to pay brokers and commissions and all sorts of stuff. And so so we charge that fee. But otherwise you can leave. we're probably the only landlord who, and my CO is gonna hate me for saying this, but like, we don't, we don't make you stay in the house till the end of the rental contract. Just give us 60 days notice and we understand life happens. Most of the folks who are getting into divvy are getting in with the mindset of, I wanna be here for a while. Right? If you have to leave, it's not cuz you want to, it's cause like life happens. And so we, we try to just be really thoughtful around that.

Yeah. Okay. So I have some flexibility. and then you don't ever, if the, if the owner renter leaves, you don't ever keep that property and and put another renter in there. Do you?

We we sometimes we do a revy, so we'll, we'll list it out. If you go in our homes, they're listed as like move in ready. Those are ones where they've come back from another customer and we're offering them as another divvy property.

Okay. So the you you get the deal, but, but there's no transaction costs in there for you. You, you, you keep it there. That's cool. I like that. That that sounds like a, that sounds like a neat, a neat option of offshoot of having it there.

I mean, I'd love to, in the future you can even see an ecosystem in a world where divvy has a large enough portfolio of homes where you can move between these a little bit more easily. Now we don't have that today. We're not, we're not probably a big enough scale to do that. But that's something that I think is interesting is like being able to roll your equity credit. So like, I'm starting off in a starter home. I've been here for five years, I've had two kids, I'm ready to move up to my next home. Can you actually roll my equity in this property to my next home? and can you make that really seamless and easy for me? I think that that's things that in the future Debbie will be able to offer.

That will be amazing. Can can you share about how much scale you have now? you've raised a ton of money. So h how many, how, like how many people do are in Divvies now?

Yes. so we don't, I don't know what we've publicly released but I think that we, we have said we have thousands of, of families in our, our divvy properties. so that's definitely a number that we, we put out there. And I think we've announced some of our, our capital raises. So you can probably add all those up and kind of figure out about how much scale we've had. But I will say we are in thousands which is quite a bit larger than, than I'd say most of the other folks out there doing this.

Yeah, it's it's like it's real impact. You've, you've made some real impact there. Okay. You know, one of the things I like to ask my guests about is you know, you have a particular perspective on the market and on, you know, homes that people are buying and demand and, and some of the, the the you know, the interesting, I like the, the, the niche your customer niche with the healthcare and the education workers a hundred k income is like those are traditionally underserved home buyers, right? Those are like the people who are priced out more. So you have a perspective on the market. are there things from that perspective that trends or things that like our, our listeners should know or like that the headlines are getting wrong, that you go like, like this is not the case. Like this is a different world than, than what we keep reading about. Do you have different perspectives on things like that?

I'm not sure if I'd say that they're different. I'd say each market, first of all is very idio idiosyncratic. Like if you asked me how each market is doing, Phoenix I think is down like 5% year over year in terms of single family, existing home sale price. you have someone like Cleveland that's up roughly the similar amount, but in the positive direction. So first and foremost, each market is very specific and you have to know that local market as to what is going on within it in terms of within the market. I always find that the best appreciating part of the, the price bands in there is go to whatever the average median home price is in that area and go down 10%. That to me is the area of market that you'll see and we've consistently seen has appreciated the greatest amount over the last five years or so.

(31:58)
And so that's kinda a nice sweet spot to be in because one, everyone if you're at the medium price point, you know that there's like close a lot of demand. And if you actually price slightly below that, you know, you leave room for appreciation versus like going slightly higher and pricing out a lot of demand. So that's like one other thing to just think about in the markets. I don't know that I have anything else that I think is very counter like to to, to norms. I think the one, and this is fairly known for anyone who's in the industry, is like, I thought it was gonna be doomsday when, like, when the Fed was increasing interest rates and transparently it hasn't been, home prices are down from peak, which was in August of 2022, but overall they're flat to slightly up year on year.

(32:47)
So I'd say overall the housing market has held up phenomenally well. and I think that I, I don't see anything to suggest that we're gonna have a massive fall off in home prices. I think we're, we're not gonna see the spike in appreciation that we had during 2021, but that was probably once in a lifetime situation, right? I don't think that we're gonna have, that's not the norm. And anchoring to that is probably the wrong answer. The norm is, if you go back over the last a hundred years, I used to, I say this all the time, I used to be an investor for a while and I had this amazing guy who founded the fund and he used to be like, historical averages. Tell the truth, go back to what things have been. And if you go back and you take the historical rate of appreciation for a specific market, that's probably what you should expect going forward.

Got it. Okay. So I, I think you're right, by the way about the, there's nothing in the data that shows home prices are falling from here. In fact, a lot of the data is showing generally home price appreciation across the country, especially at by the time you get to the end of the year. You know, we, we almost all the markets are comparing favorably, including Phoenix. you know, there's a couple of exceptions. San Francisco and Austin are, are maybe the, the few that aren't quite there yet. But, but but in general, the data's pointing very positive and gets easier as we go to, to the end of the year. so I'm interested also in talking about PropTech as the, as it's called, the venture funded real estate related technology companies. We, we've had a, we had an explosion of PropTech companies over the, the time, the last decade.

(34:27)
you know, I, when I started Altos Research 17 years ago, I would you know, talk to venture folks at the time, and I never took out outside capital, but, you know, there were only a handful of venture investors that would do anything in real estate, only a handful. And and that changed dramatically in the last decade. So so you were obviously part of that big, and now there's a big shakeout, right? A lot of those folks are not making it. So tell me, how are you making it through? Like what's, what's the latest for you guys and, and, and, and like, what's next for, for, for all these, you know, venture funded real estate PropTech companies?

Yeah, there's a lot to unpack there. so let's start first with venture capital investing. And PropTech, you're right, when I was raising in 2017, it was hard to get anyone to even take a meeting. They were like asset heavy real estate. Like that's not technology. And it took a while to get them comfortable. And so it's really unfortunate that we're in a situation now where PropTech companies are going under because it's gonna make it hard for all of us. Even those that have been successful are now going to struggle as a result of this. So, so one, I fully agree, we came a, we came a long way and it feels like we maybe skirted back a little bit. I would say though, tides change, people venture capital community can be fickle and the eye goes towards one thing that the entire community runs after.

(35:55)
And that's kind of where everyone, everyone goes towards. And it's a known thing in venture that being right and non-consensus does win. Being right and being consensus does win cuz you gotta get follow on rounds of capital. so I would say that I fully see what you have seen and I think that that is something that does transparently make me a little bit nervous is, is sentiment towards the industry. I'd say divvy. On the other hand, look, we've done phenomenally well. I think there's the old Warren Buffet quote kind of to what you said, which is like the tide goes ice, he's been swimming naked, which some we're kind of seeing that a little bit shake shakedown in the industry where you're like, growth masks, all things growth masks what your debt service coverage ratios are. It masks issues with your maintenance costs or operationally how you're handling things.

(36:45)
And when growth stops, it really shows who has been investing in what they've actually been trying to build out, especially in real estate, I think to be, look, I'm not saying we were perfect, there were definitely things that we had to work on. I can tell you like, this is a hard business. There's a million things I have to operationalize like everything down to like, you know how we deal with HOAs, which if you wanna talk about something that you never wanna have to spend a good chunk of your life working on, that's probably it. And we, we had to figure it out, right? And you work through those and the people who I think come outta the other side are a lot stronger. And I think that that, you know, I believe in divvy, I believe in the mission. I wouldn't be here otherwise.

(37:27)
And I think we've had things like everyone else that we had to work through, but I think we're gonna come outta this tremendously stronger because of it. So that's probably what I could say there. and I will say that maybe one other point that I think is important to make is venture capital understands when they're investing in a deep tech in like a deep technology like ai, if you are the partner who is diligencing that investment, they will pull in someone who can actually read code, who can understand what is being built in because they know that even if you have a great business model, someone actually has to understand the technology that is being built out. And if you don't right, you can get into something that you're maybe unprepared for. Venture capitalists I think thought that they could understand real estate because they were like, ah, I'm in a home, I understand real estate and they probably should have brought in people on the debt and credit side who finance alar these assets at large scale.

(38:26)
A perfect example is every creditor that I have here at Tibby has asked me for my home tape. Every home we own every payment, every detail, and they analyze and pull that home tape apart and go row by row looking at every single house. Not one time has a venture investor asked me for that. And so my one piece of advice for venture investors are to invest in this space and be successful and to be smart in it, do the same thing you would do with any other industry, which is pulling the experts to diligence it. And there are people who have been doing asset backed investing for a very long time and I'd probably pull them in to make sure that the companies are ultimately investigating are the right ones.

That's fascinating. So the venture folks don't ask for the the asset, the detailed asset level analysis, the, like, that's the business. Like that's where the magic is. Like, and they don't, that's really interesting. <laugh> I'm really telling

Maybe now they'll, maybe we'll change the tie to the market, which I'm gonna be biting my tongue for saying that. Cause now I'm gonna get like these detailed diligence questions. Maybe that was dumb of me

Though, in my, in my vast poll with the venture industry. my, my my vast venture capital audience will be paying attention to that. and, and you'll get new questions next time. and careful what you ask for by the way, <laugh> like now you're gonna have to provide it. so, so, so are there models or even companies in the PropTech the the technology real estate focused world, are there ones that you are excited about that you go, that one's cool that one's got legs and and I'm thinking especially in this, like all the assumptions are different now, right? Than they were six years ago. And, and so in the, in the next future there's no more SoftBank, there's, you know, like

Yeah, the ecosystem has changed.

Yeah. So, so are there, are there those that you are that you're, that you're excited about or that even if they like, you know, bought a bunch of market share because they had SoftBank capital, maybe they have another, maybe they bought enough and they're like, tell me what you're excited about.

so I'd say when I look at a a PropTech company, the, or anything sort of in, in real estate world, commercial or residential, I look for a couple of characteristics. And I want you to laugh at these cause recurring revenue and high margin. And the reason why I say that is this is no different than any other business. This is no different than a SaaS business. It's, you find companies that cashflow, that cashflow absent the macro cycle, recurring revenue, high margin. This isn't like rocket science, right? All businesses are the same. And if you look at a lot of the kind of very big names in PropTech that maybe have gone away, a lot of them were based off of transaction revenue, non-recurring low margin. And so I guess, you know, when I think about what I am excited, I think very much from a business perspective, recurring revenue, high margin business is number one.

(41:39)
in terms of actual core technology that could like truly, truly change our market. I think that, you know, everyone wants to say that AI is gonna, I think, change the world. And I fully agree that I think it will in 20 years from now. And I think in the interim, in the near term, a lot of the language learning mo large language models that we have, LLMs, they're going to potentially impact the way customers support orgs or any sort of communication processes happen with customers. I don't think that that's a core technology that's gonna fundamentally change the way we make decisions as at a, as a company. so I'd say that I don't think that that is I think that maybe the weight that people are putting on that to actually impact companies is slightly different than what we're actually seeing in reality.

(42:33)
so that's kind of my take on ai. I'd say blockchain or ways that we can store ledger systems and accountability could be interesting. But I've never seen it actually take off in a way that I thought, hey, this is such a competitive edge into how it is being implemented that it couldn't have been done any other way. So I guess that's a short way of saying I'm not super, I would say bullish on this being an extreme time of innovation right now. I think that I see it, maybe this isn't, this is a little bit too much of my, my realistic approach to the world, but I just see this as a time for the industry to get your ducks in a row focus, focus on your foundation. And it's not a time of extreme flourishing in terms of innovation, or at least that's not what I'm really seeing.

Well, I appreciate your, your realistic focus on the world that that's great. And, and I think that that insight about, you know, the businesses that are recurring revenue focused rather than transaction count focused probably makes a lot of sense. And that we are probably aiming for a low transaction volume for the next several years, at least as, as you know, we have a supply cap and we have, we have a, a restricted supply restricted market. Doesn't matter how much the demand is, there's just not that many homes for sale.

Yeah. And I think there's a lot of companies that made, made a name for themselves in the past two years capitalizing on a, on an economic and macro situation that was not the norm, but the exception,

The zero interest rate phenomenon companies. Yes. Okay. and I think it's an interesting take on, on ai. the, so, so your your point is that like you could see innovation at the customer service level but not in operationally finding things out. certainly now the, the, the LLMs haven't, haven't lent themselves there yet. You haven't seen anything exciting there.

Well, so look, I, look, I can see little implementations here and there. Do I wish that I had a way that I could easily parse through a credit agreement with a lender and say, gimme the core bullet points. Yes. If I can do that and I can synthesize it in a quicker manner, does that have any impact on my ability to be successful as a company? No one's operating, even companies that have gone public maybe at 20 facilities, right? That's not, it's not giving you that much of an, an upside. Now there's, where it does give a slight upside is in customer communication. So taking phone calls, being able to synthesize them, following up with customers, creating workflows that, that come out of that interaction on a call, that is super interesting. I don't think that these are things that can't be handled with humans today.

(45:28)
But instead are things that as you scale and wanna save on the cost side can help you do that, right? And they create more consistency around how it gets done. So we're definitely spending time thinking about that. I'm not sure that I've seen anything to date that when I dig in I'm like, wow, this is gonna fundamentally give me a competitive advantage in the market unlike anything I've ever seen, right? It gives me scalability, it removes cost opex, it gives me more leverage in my business model. But I don't know if I feel like that's a competitive edge. Now, don't get me wrong, I think open AI is probably once in a generation company. If I wasn't, and I say this Deborah out there, like, if I wasn't founding divvy and building this heck go work there. Like go work as this is going to be once in a generation company that's gonna be worth a hundred, 200,000,000,001 day. I, I do actually fully believe that. I think though the implications as to the companies that get built on top of that that I wanna still take time to kind of understand the application and then how you take that application layer that's kind of on top of being built on top of OpenAI and how you actually build a defensible business.

I think that's an excellent synthesis of the technology space. I appreciate it very much and we don't even, I think need to, need to touch on the blockchain conversation cuz it's sort of evaporated there. It's still out there a little bit, but, but man sure that seems like we haven't seen any anything really compelling on that side. So though, let's switch. So two, two sort of last questions. I can't believe it's been almost an hour already. the I'm interested in your view of the market. Like we measure the market and we are interested in leading indicators. Do you have any data that you have that gives you a, like a a, a special indicator of the market? Or do you have something that you like to look at that you say, this is what I'm gonna pay attention to for the future to form your vision of the future of the market prices and supply and demand and all the things.

So real estate market, I pay attention to everything I look at every month. supply on a metro level. I look at existing home sales, I look at mortgage rates, absorption months, the exact inverse of it, just months of supply. I follow all of it. I follow exactly what homes my competitors are buying because it's publicly available and I track all of it. I think that when we were starting this kind of period of, of rate hikes, I said there were a couple things that I wanted to see. One absorption or had to bottomed and starting to increase which is the same thing as just saying months of inventory peak. and so I wanted to see that. I wanted to see fed fund rates hikes were, were kind of at a plateau cause I wanted to know this is, you know, this is the where interest rates are gonna kind of pause at and I can actually take a breather and assess.

(48:35)
And then I wanted to see cap rates widening by enough of margin to offset the increase in interest expenses. And those were the things that I was paying attention to. And I wanted to see that basically what percent of homes that are listed for sale would be able to hit a certain margin. When you take cap rates and you subtract on interest rates, so cap rates essentially you're all in yield on a, on a house and interest rate, obviously you have to pay interest on that house. When you subtract the two, you get what is my actual post interest? It's called fence from operation, what is the margin there? And I wanted to see that there was enough inventory that I could buy at that margin. And so those are kind of the three things that I really anchored my mind to. And I, I like to set up these frameworks early on because it holds you accountable then to go back every corner and say, didn't we hit these?

(49:24)
Like what actually happened? A lot of times I get them wrong. I'll say that what I think is important at the beginning is not necessarily as important as what actually comes out and actually think that that that is a beautiful life lesson learned, which is the ability to then change and alter and say, what did I miss? Why did I not see this other thing? And instead I was focused on this. And I think the key thing that I kind of had a take away comment about, I write these all up as memos when I'm thinking through these decisions. Cause I find it helpful to actually truly hold myself accountable with a memo. We do it across all of dvy. It was actually something I used to do at my former employer. TPG used to be OID memos for everything and I kind of stuck with it over time.

(50:04)
and one of the things that it said is available capital readily available <laugh>. And I put this like flyaway comment and turns out that was probably the most important comment. and I didn't actually buff it out enough to say equity capital markets, how open will they need to be? Who's gonna be out there buying? Like what is that going to look like? But I think that that is probably the linchpin thing is just that right now, equity capital is not readily available. Sources of capital, US pension funds are dealing with denominator effect. And so they're not putting a lot of money to work. Sponsors are mostly sitting on the sidelines and most people are having to go to sovereign wealth funds to essentially source capital. And so I think that that was something I maybe should have put more emphasis on. That was a good lesson for me going back and will hone my thinking for the next right cycle that I get to hopefully not live. I don't wanna be around for the next one. One is enough in my, my, well I guess two to three in my lifetime.

The okay. So that's terrific. And so let me ask you this about, about, you mentioned cap rates. So, so in places like Phoenix cap rates improved for about four months last year. And now they're, you know, prices are pretty, so how do you look at a place like Phoenix and, and like, you know, we had about, you know, we had four months of correction and then maybe it was six months and now it's like, you know, the, the momentum is switched back the other way. What do you look at? Like, how does the future look in a place like that?

Yeah, so for folks who maybe aren't as familiar with what we're talking about, we look at rent and if you take rent and you divide it by the purchase price, you'll get a rent yield, right? How much rent's I making for the dollars I had to invest? And then you subtract maintenance, taxes, insurance, HOA fees, vacancy adjustments, bad debt for, for rent not collected. And you get to essentially like a true measure of profit per home and you divide that by home price and you get to what the yield is on that profit. and you hope that that's more than your cost of interest. Cuz then you have to pay interest after that. And so if you make, for example, in the market a 5% cap rate and interest rates are 6%, well guess what? You're probably not gonna, you're not gonna buy that house.

(52:20)
That's a negative, right? You don't wanna be in the position. And so we're constantly looking at this spread in between interest rates and cap rates to kind of say, are we gonna be making money or not? And to impact this, you're not really moving. Your cost around costs don't move very much in real estate because maintenance is pretty much known for home and taxes, the government sets for you and insurance. It's pretty much set. And so the only things that really move these numbers are you can get more rent, you can pay less for a home so that rent dollar gets you a better return or you pay less in, in interest expense or take less leverage. But I'm just saying like total interest cost, those are three options. and so if you want investors to kind of come back into the market and make this all work, one of those three things has to happen. I don't think home prices are going down. So that one's gone. And so then you're like, okay, well rent, rent can go up or interest rates have to come down, and those are kind of the catalyzing events. Yeah.

You have a take on which one's going.

I think we're all gonna be hanging out here for about another 12 months until interest rates start to come down. Although I will say that I think rents are gonna get pushed off consumers.

Okay. Maybe so maybe a little of both.

Somewhere in the middle is usually the right answer. It's a nice way to hedge your answer too, so you don't get anything wrong. That's

Right, <laugh>. That's right. Sometime in the future, rents will be up and rates will probably be down.

There you go. That's that's good advice, right? That's what the people come here to hear. Just that. Yeah. No, I, I think that rents will be going up probably sooner than interest rates will be going down. So I'd probably say I think rents are gonna continue to tick up the rest of the year interest rates, I think we've gotten till the first half of next year before Jerome maybe starts taking 'em down.

That will be you know, fingers crossed, as I say, I measure, we measure every home for sale in the country every week and all the prices and all the rentals, but I don't have any idea where mortgage rates are going. Like that's, that's beyond my pay grade. so so okay, well look, it's, it's been really terrific. I love the story of Divvy. I love the, the vision and, and what you're accomplishing there and, and really, you know, we have an affordability challenge and so I am always interested in the models and the people that are tackling affordability for homeowners in the us and it's so I appreciate that very much and, and appreciate your time. where, where should people go find you and or about you and Divvy and should I follow you on social media and stuff? What, what's, where do you communicate?

Oh, that's a good question. well, they can find divvy@divvyhomes.com or just divvy.com dv y. they can tweet at us at Divvy Homes. They can tweet at me at Dina Itz. I am not the best on social media, so if you send me a message on Twitter or LinkedIn, I, I will get back to you, but I am not as hip as I should be, and I'm not on like TikTok and all of those things. but if you, if you message at Divvy Holmes on Twitter, our social media team are 10 x better than I am and they'll probably get back to you sooner, but you can also message me.

Terrific. I really appreciate that. Adina Vez, thank you so much for your time. It's really insightful. good luck on the journey with Divvy and in this next era of, of the whole industry.

Thank you for your time. Take care.

All right everybody, that's the top of mind podcast. we'll be back. See yo