- Americans have trillions of dollars tied up in home equity thanks to soaring home prices.
- A new startup, Splitero, is offering homeowners cash for a percentage of their homes’ appreciation.
- The company has lined up more than $ 1 billion from investors looking to get a piece of home equity.
Soaring home prices over the past few years have made millions of American homeowners richer than ever, though in most cases that’s just on paper.
This phenomenon has given rise to a new breed of companies offering equity-rich homeowners a way to tap into that wealth, without taking the common routes of refinancing or taking out a new mortgage. The scope of the business is so large – US homeowners have roughly $ 26 trillion in equity, according to estimates from the
– that established firms like Point, EquiFi, and Hometap are seeing increased competition.
The latest startup to enter the fray just rounded up more than $ 1 billion to get its piece of the pie.
The company, San Diego-based Splitero, is drawing its funding from Wall Street, where investors have been clamoring for assets tied to the residential housing market and its rising fortunes. Like its competitors, Splitero is selling products known as home-equity investments, or HEIs, which offer homeowners cash in exchange for a share of their homes’ future appreciation.
Homeowners looking to access their home equity without selling their homes have typically turned to a cash-out refinancing or home-equity lines of credit, commonly known as a HELOCs. But for consumers who do not qualify for those options or are unwilling to take on more debt, companies like Splitero provide an alternative that does not require monthly payments, CEO Michael Gifford told Insider.
Splitero, which officially launched its services in March, raised $ 5.8 million in seed funding. Two notable investors are Gemini Ventures, a venture-capital firm that specializes in real-estate technology companies, and Redwood Trust, which last year partnered with Point to issue $ 146 million in securities backed by HEI contracts. Other participants in its seed round included Permit Ventures and Fiat Ventures.
Investors have also agreed to buy more than $ 1 billion of HEI contracts directly from Splitero, a signal of the robust appetite for such products on Wall Street.
The companies are anticipating rapid growth as traditional ways of tapping home equity become unattractive. Rising interest rates mean fewer people will want to refinance out of their existing mortgages or will even qualify for other bank products such as home-equity loans. Homeowners could cash in on their equity by selling their homes, but that poses its own challenges.
“Right now if people sell, they know it’s hard to buy, so they probably can’t buy anything,” Gifford said. “They know that rents are going crazy because there’s no inventory to buy houses. So they just do not have a lot of options.”
When homeowners make a deal with Splitero, they agree to typically give up 25% to 40% of their home’s future appreciation in exchange for cash up front. At any time during the next 30 years, they can pay back Splitero’s initial investment plus the agreed-upon percentage of appreciation, usually by refinancing, getting a HELOC, or by selling their house.
To originate a home-equity investment, companies generally start by assessing the home’s value and applying a discount – in Splitero’s case, of about 15% – to cap their downside risk. If the home’s value falls further, Splitero shares the loss.
The home appreciation is calculated from that discounted starting point. Splitero also charges an origination fee of between 2% and 4%.
In order for home-equity investments to truly catch on among consumers, Gifford said, the cost of such a deal needs to come down. But that would likely require broader interest in the capital markets, which price risk and determine how much companies like Splitero need to charge in order to make a profitable return.
The capital-market outlook has been clouded this year by high inflation, rising interest rates, and volatile equity markets. Credit-risk premiums have increased, and investors have begun to ponder whether inflation could have a detrimental effect on the economy and ultimately home prices.
“The need for this product is there. I think a lot of folks on the capital side realize it,” Gifford said of home-equity investments. “I think a lot of folks also realize that to really grow this space, it needs to be priced like a HELOC or lower.”
Gifford cofounded Splitero in August alongside David Zvaifler, who ran a residential real-estate brokerage firm and now serves as Splitero’s chief operating officer.
Before Splitero, Gifford was part of the founding team at Sundae, a company that connects homeowners with vetted investors who are willing to pay cash for their homes. He was also an early member of the team at LendingHome, which has since rebranded to Kiavi and is one of the biggest fix-and-flip lenders in the country.
Splitero is only active in California but plans to expand its reach next year, Gifford said. It also plans to quadruple its staff of roughly a dozen by the end of the year, he said.