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.
Financial Samurai says
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.
Hard L says
Thanks, Googled Point vs Patch Equity Sharing and this article popped, as did Unison.
Can a home in a trust qualify?
Sahil Gupta says
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 email@example.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:
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
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?
Sahil Gupta says
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.
ARB–Angry Retail Banker
Sahil Gupta says
Thanks ARB for the kind words. We hope that Patch Homes’ creative solution can solve the debt and cash flow problem for many homeowners!
Passive Income M.D. says
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.
Sahil Gupta says
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.
Dood, el Farbe says
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 :)
Financial Samurai says
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.
Sahil Gupta says
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.
Abe Voddle says
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 !