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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Replying to @patio11
I think the whole scheme sounds terrifying because it's putting a ton of risk on individuals in the sense that your "equity earned" in the home is much much lower than if you actually did a traditional mortgage at 20% down and 4% interest which would put you at 30% of principle.
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Although if you remove the 20% I guess that's only 100k / 800k which is ~12.5%... which would make it better for individuals... hmmm
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I suppose that distinction is where the company is making it's money. If we assume (for a thought experiment) that all people defaulted on their "loans" or rent payments, and the houses lost value, then the company would be vastly in debt
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But they're counting on being able to properly vet individuals and investors being willing to hedge on either the people's credit score or the property value. Pretty clever!
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I think that's the galaxy brain view on this: "I'm just a landlord that wants to own 10,000 really good homes at all times. Everything else is an implementation detail. Where do I earn my money? By being a landlord of 10,000 really good homes."
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