Patch Homes has rebranded to Noah in 2020 and has raised more funding. This post is a Patch Homes / Noah review.
I've got around $1,800,000 in home equity locked up in one property. The property was originally purchased for $1,520,000 at the end of 2004 with $305,000 down and a $1,217,000 mortgage. The property is now worth an estimated $2,600,000 with a remaining $800,000 mortgage at 2.375%.
Although it's nice to have $1,800,000 of home equity (31% LTV), it's essentially “dead money” that's doing little to improve my net worth or lifestyle. I controlled this property when my equity was only $305,000 after the initial downpayment, so the leverage power is no longer as strong.
Because roughly 67% of the average homeowner's wealth is trapped in home equity, being “house rich, cash poor” is a common situation. As a result, homeowners have traditionally turned to home equity lines of credit (HELOC) to extract equity to pay for life's many expenses.
One look online and you'll find that HELOC rates are generally 1% – 2% higher than your current mortgage rate e.g. 3.75% for a 30-year-fixed vs. 5% for a HELOC. In addition to higher interest rates, using a home like an ATM machine may get homeowners who lack discipline in trouble down the road.
If only there was a better way to extra home equity at a lower cost. Enter Patch Homes.
Patch Homes Review
When Sahil Gupta, Co-Founder of Patch Homes reached out to me to do a sponsored review, I obliged because I've known Sahil since my consulting days at Motif Investing. After five years at Motif, Sahil started Patch Homes with industry veteran Sundeep Ambati. They got incubated by Techstars, and this past April raised $1M in seed funding.
The San Francisco-based firm enables homeowners to extract equity at 0% interest and no monthly repayments. In exchange for 0% interest, Patch Homes shares in future appreciation or depreciation of the home's value. Given I've decided not to take on more debt, I thought this was a brilliant solution that's incredibly innovative.
After a ~68% increase in San Francisco home values since 2012, I've been thinking more often about about cashing out and simplifying life, especially with my last tenant situation. In retrospect, my tenants weren't that bad. I just have a much lower threshold for inconsiderate people now that I'm more financially independent.
Unfortunately, every time I run the numbers to list my home for sale, I balk at the ridiculous amount of commissions and transfer taxes I must pay.
Here's a cost breakdown if I sold my home for $2,600,000.
It seems absolutely absurd to spend $130,000 on commissions and $19,500 on taxes to sell my home. I'd rather use that money to take a private jet with my buddies to some remote island and reenact scenes from the movie, The Beach. Selling to extract equity is a less than optimal solution, unless the right buyer offered me much more.
Instead, if possible, why not extract all my equity ($1,800,000) via Patch Homes at a 0% rate for 10 years, pay down my $800,000 mortgage at 2.375%, and invest the remaining $1,000,000 in a 10-year, AAA-rated zero coupon bond with a yield to maturity of 3.5%? Not only would I save $19,000 in mortgage interest expense each year, I'd earn over $350,000 in interest income when the zero coupon bond expires in 10 years! Of course I'd still have to pay back the $1,800,000 I borrowed from Patch Homes as well.
This arbitrage of ~$540,000 in net worth creation over 10 years seemed like a no brainer, so I applied. Here are the three steps:
1) The first step was to input my property address and for us to agree on my home's current value. See their eligibility guidelines for more details.
Patch Homes decided to use Zillow to estimate my home value at $3,284,000. Zillow is ~$700,000 too high in my opinion, but that's great since a higher base means a higher hurdle before Patch Homes can share in any of the upside profit if I were to sell within 10 years.
Do note that if the estimated home value comes in below what you expect, there's a nice adjuster you can slide to increase your home's value in the application. You can also decrease your home's estimated home value, but that would be a silly move.
2) The next step was to input the following information about my home: use property for (primary/rental), number of loans, mortgage type, mortgage balance, and monthly mortgage payment.
3) The final step was to answer five homeowner profile questions: job type, approximate FICO score, annual household income, cash-out amount desired, and use of funds.
The entire application process took only two minutes to get my offer below:
Darn, no $1,800,000, 0% interest loan for me! I knew my arbitrage idea was too good to be true. Instead, Patch Homes came back with a $150,000 financing amount with no payments for 10 years. Not bad given most banks would maybe give me at max a $250,000 HELOC at a 5% rate in today's market.
Patch Homes limits the borrow to 80% Combined Loan To Value or cash-outs for up-to $200,000, which makes sense from a risk perspective because there still needs to be enough equity in the property in case a borrower decides to default. Skin in the game is what it's all about after the financial crisis burned so many financial institutions.
Despite not being able to get $1,800,000 out, $150,000 is still a nice sum of cash which can be used to pay down $150,000 of my vacation property's mortgage at 4.25%. If I made this move, I would save $6,375 a year in interest for 10 years = $63,750.
Below is a snapshot of what my offer means. Given I don't plan to sell my home, sharing in the upside or the downside doesn't really matter. However, it's nice to know that if my home does decline in value, I get to offload $150,000 of the risk onto Patch Homes.
Let's say my house drops in value by 20% from $3.28m to $2.62M. Here's the math:
Total loss = $3,284,000 – $2,627,200 = $656,800
Patch Homes Share = 14.27% * 656800 = $93,725
Final Payment to Patch Homes = $150,000 – $93,725= $56,275
This is a huge benefit, especially if I believed my home was only worth $2,600,000 to begin with. By selling for $2,627,200, I actually gain $27,200 based on my expected home price AND I save $93,725 from the Patch Homes contract for a total gain of $120,925! But wait. I will have used the $150,000 to pay down a 4.25% mortgage for 10 years, so I'm also saving up to $63,750 in interest expense.
Of course, nothing is truly free since there are always costs associated with doing any type of business. I'll have to pay a servicing fee of $4,500 (3% of $150,000), $400 in title and escrow fees, and a $540 home appraisal fee for a total cost of $5,440.
The home appraisal is a third party assessment that will be used by Patch Homes to come to a reasonable market value. Therefore, my $3,284,000 Zillow estimate may be at risk.
If I decide to pay back the 0% Patch Home offer in one year, my cost for borrowing $150,000 will really be $5,440, or 3.6%. That's still competitive compared to taking out a HELOC at 5%+. However, if I borrow for 10 years and then pay back my 0% interest Patch financing, then the fee is 1/10th the amount or 0.36%.
Finally, and very importantly, there will be an appraisal at the end of the 10 year contract to calculate what Patch Homes pays you or earns from you based on the contract. It's unknown whether all parties can agree on the final market price since the price of a home is only what someone is actually willing to pay for it. Any estimate is just a best guess.
A Growing Market Place
Based on my research, Patch Homes is a very innovative tool for homeowners to tap their home equity. What's not to like about an interest free 10 year contract? Yes, you'll have another lien on your house in addition to the primary lender. But if you plan to never sell or default, it doesn't really matter. Further, you can still pay off your primary mortgage however quickly you like regardless of the Patch Homes contract.
For those of you who are thinking of taking the Patch Homes contract, defaulting, and escaping to Mexico, so sorry. You will unlikely get approved for the 0% interest Patch financing since you'll either have too little equity in your home, too poor credit, or not enough income. But I guess you'll never know unless you spend the two minutes applying.
I asked Sahil, the CEO how they plan to make money if homeowners like me never sell. The simple answer is they won't beyond the upfront servicing fees. But according to their data, most homeowners turn their homes over every 7-8 years, hence their 10-year contract duration.
Essentially, Patch Homes is betting on the average homeownership turnover rate remaining below 10 years, an upward trend in home prices, and their ability to raise enough money to keep the company operational until the first home sales take place.
For anybody looking for a low cost way to tap into their home equity, Patch Homes looks like a good solution. I'm all for taking advantage of startup innovation to save money and grow wealth. Patch Homes is currently only operational in California. But they plan to be operational in other states such as New York and Texas by the end of the year.
If you are bearish on real estate for the next 10 years, or however long you'd like to extract your home equity for, check out what you can get from Patch Homes here. I'm curious to see what your offer is as they'll still give you quote even if they don't operate in your state yet.
If you're bullish on your area's real estate market, there are probably more cost effective ways to borrow money from your home.
Explore real estate crowdsourcing opportunities:
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look.
Just a heads up – if you read the contracts issued, there are some restrictions and clauses which could give one pause. Noah (prev. Patch) has the ROFR (Right of First Refusal) to acquire your property, and also takes the right to review offers received for it. For owner-occupied, default terms limit your use to non-rental. Also, in case of owner death, their ROFR may interfere with any probate/inheritance/trust structures if you don’t run this past your legal counsel first.
As always, buyer beware. Could be useful if you have strong cash flow, but need bridge funds for a solid, profitable investment elsewhere.
I just went thru the Patch process to get a “final estimate”. Two items consumers should be aware of, one is not forthright at all with Patch (it is with Point)…
1. The share is closer to 40% (!?) than this example’s 14%. I think most shares are closer to 40% (according to Patch also). This is obviously not advantageous for the consumer in our typical appreciative real estate markets. So, the author’s example is definitely not typical.
2. WARNING: The offer from Patch suddenly included a 9% “risk adjustment” that was not disclosed up-front….it was not disclosed on the website, in the FAQ, or in a detailed phone call with one of the founders.
Essentially, they take the “agreed-upon” value of your home (verified by a paid appraiser), but then discount it 10% to get an “Adjusted Home Value”. This changes the whole prodcut for the worse for the consumer.
“If home values rise, future appreciation is computed from Adjusted Home Value (discounted value). If home values drop, the depreciation is computed fro mthe Agreed Home Value (higher value).”
So, what the above quote says is that they’re “packaging-in” from the get-go a 10% “appreciation” for them to share in, while simultaneously protecting their downside “share in depreciation” by using the lower-value to calculate any “losses”. Good for them. Not for you.
This is very misleading and completely changes the product from a potentially-decent deal to more of a “payday loan” type product–in other words, you’re not going to get something where your “cost to borrow” (interest, or “share”) is in line with a typical bank product (HELOC) at 4-9% (closer to 4-5%). In actuality, you’re likely going to be paying an effective APR closer to 15-25% (!?) for these products, at the end of the day.
This is why I say these are more like “payday loans” for people absolutely so desperate for cash they’re willing to pay almost anything to get it, now. If you qualify for a HELOC (or any other bank product), you’re MUCH better off financially to go with those, despite all of the paperwork, headache, etc.
PS: Although Patch does not disclose this “risk adjustment” discount anywhere I could find (and it substantially changes the product…tsk! tsk!), Point DOES disclose this on their calculator page: point.com/calculator.
Very insightful analysis and good points for people to be aware of! Thanks. Although, I wouldn’t equate Patch Home offering to payday loans.
If the housing market does take a tumble, as we are seeing some cracks now with rising inventory, then I would think some homeowners can come out ahead sharing the losses to Patch. What if a home declines by 30%, surely doing business would Patch would help no?
By the “payday loan” analogy, I’m simply shedding light on the difference between the way it’s pitched (“A great alternative! No payments!”) to the reality…which is, in all but the singular & extremely rare case you outline, closer to a 15-25% cost to borrow as compared to a standard HELOC of 5-8%. That aspect is similar to the payday loan pitch.
Yes, if the market crashed pretty big (>20%…rare), the consumer would see a benefit in sharing that loss…but they still “lose” in a big crash, this just helps soften that I guess (a small consolation?). But Patch is even fairly protected there with the 9% hedge. Relying on a crash to make it worth it (and the consumer still loses big, in the market) is a mighty big “if” to definitively say this into a great deal for the consumer. ;)
Talked to this Patch homes, Upside , they do have some risk adjusted price ., making it as Heavier, Bulkier gains at the end of the term or Sale of the home. So apart from the Bulkier gains they realize when you close/pay this loan, they do have 3% service charges + ~$1,000 for the Appraisal & Escrow fee. The interest you pay do not get any Tax deduction. Apart from these, its good to get some loan without any Interest etc. Other +ve is, they do share Downside risk so unlike in Traditional HELOC’s, you do not share the burden or responsibility fop downside risk. One thing however to note from current 2017 Housing market is—the Inventory is low and We may never re-visit 2008-2011 Crisis low pricing in next 50- or 100- years or so as current home owners have been thoroughly checked before getting approvals. So the Downside risk for real estate is very low going fwd.
Thanks, Googled Point vs Patch Equity Sharing and this article popped, as did Unison.
Can a home in a trust qualify?
Good l7ck
Hard – Yes, a home in a trust qualifies. We’ve worked with homeowners who have properties in Trust in the past.
Please email me at sahil@patchhomes.com directly and I’ll be happy to assist you.
What do you feel is a key differentiator from a similar product like what Unison offers (however with a 30 year term)?
Am I wrong or does Patch take ALOT more than Point if your home does well? We’ll take my home as an example. Assuming a 3.7% (national average?) increase year over year:
Patch
Home Value: $630,000
10% Loan from Patch: $63,000
% of appreciation to Patch (my rate from their calculator): 29.8%
10 Year est. home value at 3.7% year over year: approx $905,000 (yeah right)
$905,000 less $630,000 = $275,000 appreciation in ten years
Patch gets: $63,000 + $81,950 ($275,000 x 29.8%) = $144,950
Point
Home Value: $630,000 “risk adjusted” -15% to: $535,500
10% loan from Point: $63,000
10 Year est. home value at 3.7% year over year: approx $905,000 (crosses fingers)
$905,000 – $535,500 = $369,500 “risk adjusted” appreciation
Point gets: $63,000 + $36,950 ($369,500 x .10) = $99,950
tl/dr: I get $63,000 today from either company. In ten years in a good market scenario Patch gets a total of $144,950 and Point gets a total of $99,950?
My math has gotta be wrong somewhere here?
Skutch – The one number you’re missing in your analysis is the % sharing of Point. You are multiplying the Appreciation with 10% (loan amount). Instead, the Appreciation should be multiplied by the % Sharing (which is at-least 25% based on calculator from Point). In actual, it could be 35% as well based on what we’ve seen in the past.
So then with Point, you end up paying $155,375 (calculation below)
Home Value: $630,000 “risk adjusted” -15% to: $535,500
10% loan from Point: $63,000
% of appreciation to Point: 25% (min. – would be closer to 35% for final offer)
10 Year est. home value at 3.7% year over year: approx $905,000
$905,000 – $535,500 = $369,500 “risk adjusted” appreciation
Point gets: $63,000 + $36,950 ($369,500 x .25) = $155,375
So, Patch Homes does not take more money than others.
Also, Point does not share downside risk with homeowners unless the home drops below the “Risk Adjusted” value. So, if home goes from $630,000 to $575,000.
With Point, you pay $63,000.
With Patch Homes, you pay back only $47,050.
Hope this helps!
ahhh i missed the 25%. I thought they were only due 10%, per the amount they invested. Thanks for clarifying
In fact, Patch also uses “risk adjusted” appreciation to calculate the share. So they will get more than $144,950.
One interesting aspect is that it is negatively correlated with the market. When the economy does badly and one most need some relief, you might find some of your debt reduced!
I see there are 2 catches at least.
1. If homeowner exits in 3 years, the value will be at least the appraised value. So basically PH will not share any loss within 3 years.
2. Future appreciation is computed by a adjusted value which is lower than the current value. If the house is sold at the same price, PH will still get a share of appreciation between the current value and adjusted value.
At first, I thought this sounded ridiculous. How were they making money!? But looking at it again, I can see how great it is for both the homeowner and the company. The former gets access to free credit, and the latter owns a piece of the property on top of taking the fees.
The only thing I would say is to compare the APR of these loans (NOT the interest rates) to that of a traditional HELOC. With many banks giving HELOCs with no closing costs, an interest rate of 0% may STILL not be cheaper. It would depend on your property type and the amount you actually draw from the line, and it’s still a pretty damn interesting alternative to traditional bank home lending.
If fintech companies are nothing else, they certainly are bold and creative. I wouldn’t be surprised if this company is bought out by Chase or someone in ten years and rolled into a separate home lending division.
Sincerely,
ARB–Angry Retail Banker
Thanks ARB for the kind words. We hope that Patch Homes’ creative solution can solve the debt and cash flow problem for many homeowners!
These comments are awesome and clarified this business model better for me. Patch may want to think about taking some of these questions over to their FAQ. Thanks everyone.
Unfortunately it said I didn’t qualify even though I live in Southern California, have a 40% LTV on my home, and make a decent income. Was interested to see, ah well.
Spoke with Passive Income MD on the phone. Great conversation!
Just wanted to drop in a note to mention that property qualified with 40% LTV :)
This is very interesting – I am offered cash representing 12% of the home value for 38% of appreciation, before taxes and insurance. What’s more interesting is existence of a mortgage does not seem to affect these numbers.
Hi GZ. My understanding is that the existing mortgage does affect the numbers at least to the extent that your total, combined LTV (existing mortgage + what % Patch may offer) puts a cap on the amount Patch may offer, since the combined LTV must be under 80%.
Of course, if you own a $500K home and only owe 150K on it, theoretically there is $250K left in the bucket potentially from Patch, but they also currently have an overriding cap at $200K regardless of combined LTV still being under 80%.
I was commenting on the actual results from your website if I type in different scenarios.
I am sure it’s because my mortgage is small compared to total value of home and income.
In the U.K. this is called a shared appreciation mortgage.
It was all the rage 20 years ago. Typically 25-50% LTV loan with 0% interest, 75% of the upside of the property, 20-25 year maturity.
They’re reaching maturity now and it’s ending up in tears. House values are hugely up in 20 years, and plenty of retirees are claiming that they got missold/misrepresented the product. Huge reputations risk for the British banks who still have these loans on their books.
But this time it’s different :)
Wow! Who would sign up for 75% of the upside? That is way too extreme. Anything over 50% of the upside is too extreme in my opinion.
You’re being offered 4.27% LTV for 14.27% of the upside. Scale this up and it would be 24% LTV for 75% of the upside. So in your case it’s just that the total amount is a smaller fraction of the house price, the economics are the same.
The biggest issue I can foresee is the possibility of foreclosure at the end of the 10 year period. Hypothetically small homeowners could be forced to pay back loan plus 100k, 200k, etc. Patch homes will have to initiate foreclosure as second position lender. I don’t see that ending well on a large scale.
Anonymousinbk – We are already working on solving that problem through a couple of product development and partnership oriented measures. These initiatives will help to avoid the foreclosure or sale process and help homeowners manage the contract exits with Patch Homes through an affordable and cost effective manner.
I can see the appeal of the product, but this can be very dangerous for the unsophisticated and undisciplined homeowners. They can borrow and spend the money, then at the end of 10 years they may really have to sell to pay back. And even for the disciplined investors like many readers of this site, in the event the house appreciate significantly you would have to pay back a lot more than you borrow. Let’s say, your house goes up by $1 million after 10 years and you need to pay Patch 15% of the appreciation. The appreciation is again locked in the house, but now you have to pay Patch $150K more in real money than you borrowed. Did I miss something?
Super interesting concept and the first time I’ve seen anything like this. It essentially gives the borrower some “crash risk” protection by having someone share in the downside risk and lets the borrower get cash out of their home. Of course Patch Homes is going to take a large enough stake in the appreciation (or depreciation) to make their expected return high enough, but obviously there needs to be a benefit for both parties.
My biggest concern would be whether they would be able to withstand a market like we had in 2008 and the following couple years.
Great article!
Innovative concept. Could not locate my address in San Francisco. I’m doing a 1031 exchange into a significantly higher priced home and working with the banks is a nightmare!
@ Brian :
I would double check on the IRS rules and impact (if any) on Taxation.
This reminds me of a scheme floated several years back that gave Silicon Valley folks money in lieu of stocks, not requiring them to sell the stocks; but IRS came after them and few folks I know had to pay taxes. Here is a link for reference : https://www.justice.gov/opa/pr/california-court-permanently-enjoins-developer-derivium-90-loan-tax-scheme
While it may not be applicable here, do your due diligence !
What about taxes…does the IRS consider these loans like cashout refi so no income taxes until property sold?
Brian – You’re right. As per the IRS, the money you cash out from Patch Homes is tax deferred i.e. you do not pay any taxes on the financing amount today.
In the future, if home values go up, and you end up paying Patch Homes more than you took out, then you can use the extra dollars paid as offset that against your investment gains/losses.
For example, if you took our $100,000 today and ended up paying us $140,000 in 10 years, then the $40,000 is considered an “Investment Loss” for you (homeowner). You get to deduct this from
– Your overall portfolio gains if you’d like OR
– Your $500,000 in tax credits that the IRS provides homeowners (married couples) against the sale of their primary home.
We realize that each homeowners tax situation is unqiue and tax brackets are different. That said, the above holds true in general for most homeowners.
Best,
Sahil
Sam –
Long time reader first time post. You are missing a key piece of the equation and Sahil seems to be skirting the question a bit (I re-read the article to ensure I did not miss this but could have). At the end of the 10 years if you have not sold you pay back the original amount PLUS any % of appreciation. They do an appraisal at that point to determine the value you must pay back. This is a critical point that is not being represented correctly to your readers and seems a bit disingenuous on Sahil’s part. The way it is depicted in the article falls into the “too good to be true” camp.
Very interesting business model though and I love the creativey and options as an investor/homeowner.
Keep up the great and interesting points.
MD – Thanks for the query. I hope that we have been clear in our communication about the final payout and would like to take this opportunity to further spell out the payoffs in the future from a homeowner’s perspective.
As Sam has shown on the blog example, that the payout is:
“$150,000 + 14.27% of gains” if prices rise
“$150,000 + 14.27% of losses” if prices fall
This would be payout at the time of contract exit (10 years or earlier) independent of whether the homeowner sells the home or uses a refinance to pay us back.
Now, many users may sell the home and in that case, the home sale price would determine the gains/losses shared by Patch Homes.
In case users don’t sell the home, we would do a home appraisal at the time of exit to determine the gains/losses shared by Patch Homes. Users can then pay us via a cash-out refinance or cash as well.
The appraisal at the end is conducted by an independent 3rd party. As of now, we work with Landmark Network AMC – one of the largest AMCs (Appraisal Management Company) in the US that is used by many lenders.
Hope this is helpful!
Interesting – avoids some of the “let’s burn money” excesses of 2006, and seems to have some upside for both sides – a risk limiter. Now if only they would take a position in my extensive Pez Dispenser collection . . .
I’m not clear on following…
“Patch Homes limits the borrow to 80% Combined Loan To Value or cash-outs for up-to $200,000”
Does the Combined loan to value includes the cash-out amount i desire when I input my numbers or you guys consider just the existing loan i have on property?
Bobb – Happy to address the question.
The maximum amount of cash-out is the lower of (1) and (2)
1) $200,000
2) Amount that results in 80% CLTV that includes the cash-out amount
Yes – The combined loan to value includes the cash-out amount you desire.
Best,
Sahil
Thanks for clarification Sahil.
Hi financial samurai, I always read your page; I live in the Bronx ny, bought a two family home in December 2016, my lender send me an offer about equity, reading this post and the comments (always do that) .. like the idea of patch homes but when I enter to the page it said is not in your area.. my question is do you think the line of credit is worth it ???… thank you (sorry my writing English no my first. I’m Latina)
Interesting company and they are definitely on top of your comment section. Be interesting to see how this pans out for you.
Offered:
Finance Amount: 100k
% Future Appreciation: 32.45%
Term: 10 years
Question:
If I pay back the original 100k amount before the 10 year term is up, instead of selling, do I have to pay any % of appreciation my home may encounter?
Anthony – Yes. At the point of exit of the contract (10 years or earlier), the final repayment to Patch Homes is computed as
‘Initial Amount + % gains’ if home values rise
‘Initial Amount – % losses’ if home values fall
The gains/losses are computed based on the sale price (if home is sold) or a home appraisal (if home is not sold) at the time of exit.
Love the concept. When will this be available in other states? I’m just north in Oregon where deploying the equity in my home is of high interest to me right now.
Kevin – We are planning to expand to Oregon soon. Please email me at sahil@patchhomes.com, so we can see if our timeline works for you.
Best,
Sahil
I am currently in New York and I wish these offers are available now!
A question on the payment structure. If Patch Homes shares the downside of the home values and it doesn’t have any pre-payment penalty, what happens on below scenario?
Take the offer (say $60k) from Patch Homes with the current appraised value of the house (let’s say $600k). No plan on selling the house in the next 10 years, so either at the end of the 10 yr mark or during the 10 yr term, I would need to return $50k back to Patch Homes with any gain or loss of the fair market value of the house at that point. Let’s say the housing market takes the downturn during yr 4 into the loan, making the value of the house drop 30% (with expectations/hope of it going back up in the next few years). In this scenario, I would strategically decide to pay down Patch Homes when housing markets go down so I only have to pay $42k as opposed to the full $60k (30% drop on $600k with 10% share on Patch Homes) to save on $18k in CASH with all else still being unrealized. Is my above assumption correct? It sounds too good to me in this scenario.
DavidL – This is Sahil here, cofounder of Patch Homes.
Your example is correct. If you took out $60k when the home is valued $600k for a 10% share. Then, if home values drop 30% to $420k, then you would owe us only $42k back. The expectation is that you’d either be paying cash or refinancing the home in order to generate the $42k in proceeds to pay-out Patch Homes.
As a company, we believe in the long term home appreciation, which tends to be 2% to 3% in general based on inflation and other factors. As a result, if the market downturn occurs, we are happy to share the loss with homeowners and help them diversify their wealth base — The core idea with Patch Homes.
Best,
Sahil
Sam, I think your site ate my post (not the first time)! I worked out a lot of numbers why I think this isn’t a good idea and they were eaten!
Essentially I figured out at 1% annual growth and $3M value your $150k with an assumed annual accrual would have an equivalent rate of 2.5%, 3% growth a rate of about 7% and 6% growth a rate of 8%, plus origination costs. I don’t find that terribly compelling.
S.G – Thanks for your detailed comments. One thing I’d like to add to the above is the fact that Patch Homes has ‘no monthly payments’. For many consumers, monthly cash flow is an issue since they have a mortgage, some credit card debt and maybe student loans. Not much is left for savings after all that spend. Adding a HELOC at 7% interest is not optimal in these situations.
Hence a Patch Homes financing becomes a good alternative to optimize cash-flow and access equity without any debt or payments burden. Also, Patch shares in downside risk with homeowners, so in case another 2008-09 happened, you’d be covered for some of the losses!
Sam,
I’m not sure what your point is about the cost of selling your property. The costs will be the same if you sell it with a second lien on it or not. And it will be there no matter when you sell your house (adjusted for potential changes to the real estate fees in the future).
If I understand the mechanism here, at the end of 10 years if you don’t sell your house you don’t get to keep the money, you simply owe a balloon payment of the to date appreciation. Based on that assumption, what you are agreeing to is a sixth to a third of the appreciation of your house. So assuming $3M value for ease of numbers, if after 10 years your house has appreciated by 10% or $300k you pay them $42,810 for the sake of borrowing $150k. Assuming annual accrual [B=P(1+rate)^10] that is a low 2.5%. But if you are closer to the national average of the last 40 years (but still significantly below) at 3% annual appreciation you are at 34% growth. You would now pay them almost $150k for the sake of borrowing $150k. That is a significantly higher rate of just over 7%. If you have bay area appreciation? 6% appreciation = 79% growth, $338k, and 8.5% rate [I could have some errors on these numbers, as I didn’t double check them]
This is how you get the varying rate of appreciation owed. If you are basing the percentage on the value of the property instead of the amount borrowed you need to adjust the rate accordingly in order to compensate for it. This is also why you need to limit the amount one can borrow, not just for exposure but to have a low loan to value ratio for the sake of return against that investment.
It doesn’t look necessarily like a bad way to go, you are simply risking against a different set of circumstances. If you live in an area that you don’t project much property appreciation over the next decade then you’re good, and it is a way of diversifying the risk of your property if you expect a contraction of the market. However I don’t think it’s significantly cheaper than a simple loan, especially considering, as I pointed out before, the costs of selling the property don’t change based on what and how you owe money on it.
It couldn’t even find the address to my house. Seems a bit weak
Hi ronnie james sorry we were not able to locate your address. Can you please send me an email with your address? My email is sundeep@patchhomes.com.
Interesting notion overall. I wanted to see what a conditional offer might look like, but unfortunately during the process the website (on the one hand) recognized my address well enough to know Patch does not currently offer service in my area, it (on the other hand) said it could not find any data associated with my address.
Strange. Buggy?
Dood, el Farbe – I’m sorry to hear about your experience with the site. If you can email me at sahil@patchhomes.com, I’ll be happy to take a look at the address and get you a conditional offer.
Thank you Sahil. I emailed you.
This is a really interesting alternative to a HELOC. I put in my address in the Midwest, and they couldn’t find it. I also put in my rental property’s Southern California address and I also got the “Couldn’t find any associated data with this address.” I’m not sure if it is user error or a bug, so I will try again later because I would love to see what a conditional offer would look like.
Hi Jax my name is Sundeep Ambati I am one of the co founders of Patch Homes. I am sorry your address was not recognized. Can you please send me an email with your property address? My email is sundeep@patchhomes.com.
Sounds like a terrible business, for Patch. Will look into going all-in and hold forever, thanks!
Yes their research shows homeowner turnover every 7 to 8 years, but they may not be attracting the typical homeowner, plus CA is probably close to a short term market top…
I’ve heard of Point, which seems to be similar to Patch. Sam/Sahil, could you detail the difference between the two startups?
Mrs. BITA – This is Sahil here, cofounder of Patch Homes.
The biggest difference between Patch Homes and Point is that — Patch Homes shares the downside loss with you in case home values drop. With Point, they require the homeowner to take the first 20% or so loss on the downside before they take a loss. As a result, Patch Homes is a more homeowner friendly and equitable deal compared to Point’s model.
So, in the above example mentioned by Sam, in case the home dropped by 20% to $2.62 million, Sam would have still paid by Point a full $150,000. However, with Patch Homes he only pays back $56,275. That is almost $100,000 benefit to homeowner with Patch Homes.
We want to make sure that we are completely aligned with our homeowners in the future upside and downside, hence we share in downside risk as well.
Hope this helps!
Thanks for the clarification Sahil. Another question:
The Point website says “If you don’t sell, you can buy back Point’s stake at any time during the term at the then current appraised property value.”
Is this true for Patch as well? If I choose to pay back instead of selling, do I have to pay you back based on the current value of my home, or just the original loan amount at 0%?
Yes. That is true for Patch Homes as well. You can exit the contract anytime via
– Sale
– Cash-out refinance
– Buy out via cash payment
At the time of exit, you pay us based on the then value of the home as determined by an appraisal. The final repayment to Patch Homes is computed as
‘Initial Amount + % gains’ if home values rise
‘Initial Amount – % losses’ if home values fall
The gains/losses are computed based on the sale price (if home is sold) or a home appraisal (if home is not sold) at the time of exit.
Thanks,
Sahil
Sounds like an excellent idea. Unfortunately they are not in my region of California at this time. Guess I will check back later to see if they have expanded what parts of California they do service.
jdhansen – We are available in most of California. Can you please email me at sahil@patchhomes.com with your address/details and I’ll look into the offer for you.
Thanks,
Sahil
Hi jdhasen my name is Sundeep Ambati I am one of the co founders of Patch Homes. Can you please send me an email with your property address? My email is sundeep@patchhomes.com.
Sam, if the market is as hot as you report it is in San Francisco, why do you need to worry about using a real estate agent? You should be able to list it and find a buyer using FSBO and save yourself $65k. In the end, all you need is a good title company or closing attorney for the two of you.
This sounds like a rebranded reverse mortgage.
Jane – We are quite different from a reverse mortgage in a couple of ways
1. Reverse mortgages are available to homeowners only above 62 years of ago. Whereas, Patch Homes is for homeowners across all age groups.
2. With Reverse mortgages, you’re essentially getting a negative amortizing loan i.e. your principal increases each month based on your interest rate and terms. With Patch Homes, there is no increase in principal amount. The final payoff is based on home values and not interest rates.
3. With Reverse mortgages, invariably consumers lose their homes due to the nature of the product and are unable to pass the home to their heirs or family members. With Patch Homes, we do not take possession of the home at exit, since our payment is linked to future home values. Hence, its a much more flexible solution.
4. The fees on reverse mortgages are very high and often an impediment to many borrowers. For example, we recently heard of a homeowner paying 18% fees on his reverse mortgage. However, with Patch Homes we have a low fee of 3% only. Its a one time fees paid to us with no other ongoing fees or charges.
Hope this helps!
Best,
Sahil
This seems like a pretty sweet deal to me. They offered $35K on my rental property worth $270K with a loan of $155K. The % of appreciation was 37.5% like some others have stated above. I’m curious to learn what the criteria is for calculating the appreciation %. Also, I don’t plan to ever sell my property so it seems this is a great way to get virtually free financing? Or else I am not understanding something clearly. I will definitely be doing some more research on this. Thanks for the great info, as always!
Danielle@wenthere8this.com – We generally go upto 80% CLTV in funds or about 40% or so in sharing percentage. Hence the offer you received.
We can offer more money but in that case the % sharing would go up beyond 40%. We generally want to keep % sharing lower than 40% since we want homeowners to receive the majority of the gains from future appreciation. I’ll reach out to via email and see how we can offer more funds.
Also, you don’t have to sell your property. Each Patch contract has a duration of 10 years. This means that the final payment is due at the end of 10 years, based on the value of the home then. That value is determined via a home appraisal.
Best,
Sahil
Hi Sahil,
Thanks for getting on here and answering everyone’s questions.
Does this mean Sam’s comment isn’t quite right?
“I asked Sahil, the CEO how they plan to make money if homeowners like me never sell. The simple answer is they won’t beyond the upfront servicing fees.”
It sounds like even if you don’t sell your home you still have to pay back the +/- appreciation difference at the end of 10 years?
What if the loan is paid back in 5 years? Is the appreciation amount due back to you based on the home’s value after 5 years? Or is there another amount due at 10 years?
Thanks
This is my exact concern. The article paints a picture that if you keep your home past the 10 year loan period you simply pay back the original loan amount + the upfront service fees and cost of appraisal.
After researching the product it turns out that they do the appraisal at the end of the 10 year period (or when you’re ready to pay off the loan) and they attach the +/- appreciation.
With the uncertainty of the market you don’t know what your final payout will be and this deal starts to look more and more like a variable rate loan.
This is why I like my community (example: https://www.financialsamurai.com/crowdsourcing-knowledge-for-a-real-estate-crowdsourcing-investment/ You point out things which I miss so that the final article can be in the best possible form.
These new innovative companies are still evolving. Most of us have never seen this type of stuff before, which is why I think it’s pretty fascinating to at least try to understand. Like taxes, things can get confusing. I’m always trying to find the solutions for problems that I may have, which other people might also have.
I’ve updated the post with this passage:
Finally, and very importantly, there will be an appraisal at the end of the 10 year contract to calculate what Patch Homes pays you or earns from you based on their contract. It’s unknown whether all parties can agree on the final market price since the price of a home is only what someone is actually willing to pay for it. Any estimate is just a best guess.
So I’d like to ask Sahil and team, how do all parties finally agree on the market price of the home 10 years later?
Sam,
At the end of the 10 year term, we do a home appraisal to determine home value. The appraisal is conducted by an independent 3rd party. As of now, we work with Landmark Network AMC – one of the largest AMCs (Appraisal Management Company) in the US that is used by many lenders.
If the homeowner does not agree with the appraisal, we can order another appraisal as well.
In general, most appraisals will come in within a small range of each other and we make sure that homeowners are happy with the appraisal at the start and end of each contract. We share a copy of the appraisal with them as well for their review.
Grant,
At the time of exit – whether its 5 years or 10 years, you pay us based on the then value of the home. The final repayment to Patch Homes is computed as
‘Initial Amount + % gains’ if home values rise
‘Initial Amount – % losses’ if home values fall
The gains/losses are computed based on the sale price (if home is sold) or a home appraisal (if home is not sold) at the time of exit.
If you exit in Year 5, then the contract is terminated. There is NO other payment due anytime after that.
Hope this helps!
That is pretty cool. This service isn’t available in Raleigh, NC but they gave a conditional offer.
My home is worth $247,000 I owe $152,000.
Max Financing Amount: $29,640
% of Appreciation: %37.5
Term: 10 Years
What happens if Patch Homes goes under in 10 years? This seems like a risky model for them. People would be motivated to hold the property longer than 10 years unless the value you drops.
Thanks for sharing! Another 37.5% % of Appreciation figure. Very interesting. Still could be good if you think housing prices have peaked and you plan not to sell and use the money responsibly.
If Patch Homes goes under in 10 years, they still have a lien on your property as a second or third lender.
I sold our primary home last spring and moved to an apartment. I didn’t like paying the high commissions either.
But given that you want to simplify your life, doesn’t that mean you must ultimately sell and pay commissions? Do you think the Realtor market is going to change so that commissions are dramatically reduced?
I recently finished Ric Edelman’s new book and he talks about how Realtor commission are going to ultimately disappear because the whole process will become more automated. Any thoughts?
I have seller agents offering to sell for 2% now versus 3% in the past, and 2.5% just last year. So 2% + 2.5% to the buyer’s agent = 4.5%.
I do believe in 10 years, the total cost will be closer to 3.5%. So, it behooves all of us to hold on for as long as possible. Im trying, but I also don’t mind simplifying life with a great offer.
Interesting concept, I hadn’t heard of Patch Homes before now. I have a HELOC but only for an emergency fund. That allows me to put my investments in riskier assets knowing I have $200k I can tap into if needed.
Have you considered getting a real estate license? That way you could pay yourself the $65k when you sell. Here in Texas it is relatively straightforward and inexpensive to get your license.
I have. I would save money, but I wouldn’t have as wide of a real estate net work. Then I fear I might screw up the negotiation process because I’d be too emotionally attached to the home.
And then of course I’d have to spend time and money getting the license in a situation where I’m not exactly wanting to sell.
But still… I should look into it. I’m seeing commissions go down a little bit e.g. 4.5% now. So, slowly but surely!
The cost to become a realtor is about 5k in Canada and the exam is pretty easy. For 100k I’d write the RE exam and list the house myself. In Canada you don’t have to offer the buyer’s realtor the whole commission and you might find someone acting without a realtor to buy bringing your savings up another 20k or so. Not sure how much a discount brokerage would charge you, but here there are flat fees that are not based on the commission amount.
Who is actually underwriting this loan? Meaning… who do we pay back if/when Patch Homes goes to zero?
The same question comes to my mind. With a 7-10 year payout range patch homes not only has to count on you turning over your home, they have to count on being still in business seven years from now. That’s a long time for them as well, and if they go bankrupt what happens to those loans?
I think it is them in the beginning, and then I foresee them packaging their loans and selling them to third party institutions to 1) offload risk, 2) make a profit, 3) liquify.
As a borrower, if my lender goes bankrupt without selling off their loans to a surviving entity, I wouldn’t mind!
Hi MrB – The home equity funds and entire financing is underwritten by Patch Homes itself. We perform all underwriting and application processing inhouse. This ensures that you always have the best experience.
In case Patch Homes is not around, your contract will be transferred, your contract will be transferred to one of our financing/servicing partners. This will have no impact on the homeowner and without any changes in the term i.e. You will not see any change in your financing agreement regardless of our being around. Once you decide to exit / pay back the amount, you will pay the financing partner directly.
Thanks.
Sahil
Hi Sahil,
Really interesting concept!
How are you able to self-finance the entire underwriting of new loans, since you’ve only had $1m in Seed Capital so far?
All the best and I hope you conquer the whole of the US!!
Thanks
Sam
Thanks for the kind words Samuel. Awesome to have a champion voice like yours!
On a side note, the $1m in seed capital is only for the operations of the company i.e. technology, business operations, team etc. We have separately raised additional capital for the underwriting of the Patch contracts with homeowners. The size of this capital is not public.
If you’re looking for home equity or know anyone who is, please let me know.
Thanks,
Sahil
This is an interesting concept and seems like a new business model. I’m intrigued but will need to have time help me figure out if this is a great strategy. Thanks for sharing though!
Sam, Not sure if I understand the future gain and losses portion of the no interest loan.
If your property loses 20% in value based on your example, wouldn’t the amount you owed be $150,000 – ($30,000 X 14.27%) = $145,719? Paying back $120,000 of a $150,000 loan would represent a 100% of the hypothetical 20% future loss, as opposed to 14.27% of the future loss as stated.
I’ll have Sahil clarify when he wakes up. It’s only 5:59am here. If that’s the case, even better in my example.
If it’s a 20% GAIN in my example, I don’t mind paying $180,000 back on the $150,000 in 10 years because my house would be up $656,800 ($3,324,000 X 20%). Paying $30,000 more is only a 1.85% compound interest payment for 10 years.
Hi Charleston.C – I’m happy to explain our model more here.
We share in the loss % based on the $$ loss from initial home value. So, in the case mentioned in example, if the property drops 20%. Then its dropped from $3.28 million to $2.62 million.
Total loss = $3,284,000 – $2,627,200 = $656,800
Patch Homes Share = 14.27% * 656800 = $93,725
Final Payment to Patch Homes = $150,000 – $93,725= $56,275
So, implied interest rate = 0% for homeowner, since home value went down.
Hope the above explanation helps with showcasing how our model works.
You can also take a look at our Scenario Page for a example – https://patchhomes.com/scenario
Thanks,
Sahil
Wow! Thanks for the clarification. Even better for the homeowner! Will update my post now. Thanks.
Thanks for the explanation Sahil! I can’t believe how much of the risk Patch Home will be absorbing!
Sure thing Charleston.C. We believe that homeowners should have new solutions for home equity, since existing lenders are not offering HELOCs or have poor rates for consumers.
Our philosophy is that if we partner with homeowners with invest for the long term, we’ll be fine. Happy to share the risk with you!
Wow, I had no idea that this was out there, thanks! I tried it, but: “We’re not available in your area right now”, but they did let me continue with a conditional offer. I live in a much lower cost of living area, but they want 37.5% of my appreciation! Very, very interesting, thanks for sharing! Food for thought. I assume if I don’t sell, I owe one lump sum at the end? (One last note, my estimate seemed low, in light of the current market here).
Thanks for sharing the feedback. The percentage of appreciation is the variable that’s very interesting! I guess my 14.27% share of gains/losses reflects #1) lower risk, 2) higher dollar amount, 3) potentially higher appreciation growth so they are willing to take a lower percentage.
I’m fascinated by how their credit risk algos will work.
Patch Homes is currently only operational in California. But they plan to be operational in other states such as New York and Texas by the end of the year.
Hi The Tepid Tamale – I’m Sahil Gupta, cofounder of Patch Homes.
Thanks for trying out Patch Homes and getting an offer. The initial estimate for your home value is an approximation based on Zillow and other valuation metrics. You can definitely move the slider around for a better estimate of the home value.
Also, in order for the final application, we do an actual home appraisal conducted by an independent 3rd party appraisal company – to determine actual home value for final offer.
Wow this is incredibly interesting and it seems like Patch Homes may make a major play with older retirees looking to cash in on the equity of their homes while not moving. Seems like a really interesting proposal. Thanks for sharing!!
Another example about how much more financial opportunities you have in the States. I’m wondering how many years it will take until companies like this appear in Europe. I’d say at least a decade…
This looks like a great opportunity for you. Even if you don’t get the maximum amount, putting this 150k against a 4+% mortgage sounds like a good deal…
The good thing with Europe is that all they have to do is copy what US companies are doing and learn from any of our mistakes. It’s worked very well with China for example.
San Francisco is ground zero for startup guinea pigdom.
I really like sharing in the upside or downside of my homes appreciation for diversification and arbitrage purposes.
Interesting idea and have forwarded this to a buddy who is about to take out a heloc to redo his kitchen.
What happens tho if the market flatlines or drops for a while. I could see this company struggling as a result but certainly as long as the market is as hot as it’s been it’s certainly a win win.
They are banking on the servicing fee and equity funding to keep the lights on until the first homes sell where they get to hopefully share in the upside appreciation.
For example, Uber lost a couple billion or so last year, but they are still going since they have so much funding. It’s how many startups operate here in Silicon Valley. Years of loss making to gain market share until there is the EBITDA inflection point.
In the meantime, the consumer benefits from all the lower costs.
Since I’m risk-averse, I feel a bit nervous about banking my most important/expensive asset on a new business. I hope they will do well, but just thinking about an unexpected global crisis like the one in 2008 makes me want to take a step back and track the performance of the company before I take any action.
The irony is that as a borrower, you kind of hope your lender disappears into thin air so you never have to pay the money back. Always remember to think Yin Yang when it comes to your finances!
Oh no I don’t hope that at all. My hope is that I’ll pay off the lender asap so that they won’t be part of my life anymore. I don’t believe in magic. Thanks for the advice though!
Exactly. This comment makes no sense. The company is taking all the risk – not the “borrower”.
Hi Ms. Frugal Asian Finance – Happy to address your question. I’m Sahil Gupta, cofounder of Patch Homes.
I understand your concern about banking your home with a new company. That said, we’ve addressed this concern in the way we’ve developed our product.
After you take out a Patch Homes contract for your home and in case we are not around, your contract will be transferred to one of our financing/servicing partners. There is the option to transfer the ownership of Patch Homes contract to someone else, without any impact on the homeowner and without any changes in the term i.e. You will not see any change in your financing agreement regardless of our being around.
I’d encourage you to try out our offer and see if we can assist you with home equity financing. We’re helping many homeowners in California help repay debt, improve their savings profile and remodel homes.
Best,
Sahil
The idea of being worth millions without making a profit. Amazon did it for years and now Bezos is one of the richest guys around.
Very interesting idea and glad to see people are making an effort to redefine banking.
Hi Alex – Thanks for your question. I’m Sahil Gupta, cofounder of Patch Homes.
In case the market flattens or declines, Patch Homes shares in the downside loss of the home value with the homeowner. So, yes, in case many homeowners end up selling their homes in a downturn, Patch Homes will take losses on its initial financing amount.
Hope this helps!