I ran into ZeroDown ( https://zerodown.com/ ) on the YC podcast. What an interesting company. The problem they're attempting to solve is "Professionals who are good credit risks are priced out of homeownership by down payment requirements in SFBA/etc due to $$$ houses."
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It almost makes more sense to think of the tech company's main customer as being the real estate fund. Actual users are great, too, but this is a multiparty transaction like ridesharing is and (like those marketplaces) one side sort of structurally matters more.
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What's the real estate fund? It's, to the best of my ability to discern from outside, a single-family home (SFH) REIT focused on booming metros, which happen to be colocated with young, well-paid professionals for the obvious reasons.
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If you were starting a plain vanilla SFH REIT, you'd probably do it the way that most started, which is identifying a large portfolio of distressed properties owned by e.g. a bank and then buying the portfolio so that you could immediately get to operational scale.
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This is a problem from an investment thesis perspective, though, because you're betting on appreciation of distressed properties rather than on appreciation of non-distressed properties, and it is very not obvious that that is the winning thesis.
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Banks don't end up with portfolios of well-maintained homes which are attractive to well-monied professionals, because they write mortgages on those homes and then the homeowners pay as agreed. So how would you assemble that portfolio, if you believed in it?
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Answer: you say "You know, if I buy this investment thesis, I'm basically agnostic with respect to *which* houses I own given the rough profile of them. I want ten thousand houses, with some diversity in terms of geographic area and price point and the like."
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"Heck, if there were a way to buy a purely virtual house, which tracked the economic value of a real house but didn't involve any pesky atoms, I would buy 10,000 of that. They'd only be IDs in a database at that point."
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I'm reasonably sure that, on paper, the customers of this company are renters and the real estate fund is a fairly conventional landlord. But they just take the traditional bundle of rights that get subdivided by contract and statute and allocate them a bit differently.
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Something along the lines of "Don't call us if your toilet overflows; we really could not care less if you hung a photo in the entrance hallway of #35234 because we expect to sell you that entrance hallway when #35234 ages out of the portfolio anyhow."
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And, given that it is a REIT with desirable collateral, presumably they're leveraged 4:1 or higher. While banks can't lend to their individual homeowners without a downpayment cushion, the REIT should have many, many willing sources of cheap capital plus some more expensive.
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"What happens if prices go down?" Well traditionally "If you are an investor in a firm which exists to go long real estate and real estate prices decline, you are going to lose money" but it isn't obvious to me that this functions in that fashion, which is fascinating.
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Effectively and synthetically, the user's capital takes losses first, since they (presumably) forfeit their purchase credits (pseudo-equity in the house) if they decide to walk away, which they can do approximately as easy as any other renter but for sunk cost of those credits.
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So if between 2020 and 2025 when the purchase option comes due a house declines from $1 million to $900k, the user might say "Well, I have $150k in *this house* already and *already live here*, so in lieu of *moving* to an *entirely new* cheaper house, I will buy this one."
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(Not obvious to me whether the user gets pricing at the new mark or not; could see arguments for either or both.)
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"What if users default on the loans?" An interesting fact you'll learn if you enjoy reading bank annual reports: First Republic, which is effectively a community bank in Silicon Valley/etc, suffered a total of zero mortgages defaulting during the dot com bust. *Zero.*
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(They're not loans, etc etc. Just trying to show that the most obvious objection to this is a lot less powerful than people probably think it is, as is frequently true of most obvious objections.)
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Another interesting wrinkle in the model, from the user perspective: when you pick out a house, you're making a cash offer (and therefore can close *extremely* quickly) rather than going through a mortgage approval dance. Your mortgage approval happens ~5 years later.
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This model, OpenDoor, and the like arming lots of buyers with cash offers will have interesting downstream impacts on many, many assumptions about residential real estate purchase, because "financing takes about a month to arrange" is all but a law of nature there.
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