Seniors aged 55 and above are entering retirement with little to no savings. Over 70% own their own homes, which represent 60–80% of their net worth. Many of these seniors that are “house rich and cash poor,” with little to no liquidity: They have equity tied to their home but are unable to access it to pay for day-to-day expenses.
Furthermore, an overwhelming majority of seniors would like to age in the comfort of their homes home instead of going to an assisted living facility or a nursing home. With home equity at an all-time high on the one hand, and strict lending requirements making it difficult for seniors to acquire financing on the other, seniors are looking for new ways to tap into their home equity to pay for home renovations, debt consolidation and long-term care costs.
Existing products, such as the reverse mortgage (HECM) and the home equity line of credit (HELOC) have several shortcomings, such as high fees, loan-to-value limits and other restrictions that prevent seniors from accessing these products. Predatory marketing and foreclosures decades ago caused seniors to shy away from reverse mortgages, even though several rules have been put in place to protect them. HELOCs are bouncing back but at a very slow rate due to restrictions and the hangover effect from the 2008 financial crisis.
Unlocking home equity is becoming more and more critical for long-term care financing. More than half of seniors over the age of 65 will have long-term care needs. Alzheimer’s Dementia, a devastating chronic disease, affects 10% of seniors over 65 and 38% of seniors over 85. The number of people affected with Alzheimer’s is expected to double by 2050. With the average national cost of home-care aid close to $50,000, assisted living at $45,000 and nursing home care close to $98,000, and the private long-term care insurance market only covering 7.2 million people and government program expenditures increasing at unsustainable rates, the home could be the only answer for a good deal of seniors.
Start-ups are coming up with innovative ways to help seniors unlock the equity in their homes.
A start-up called Figure, by SoFi’s founder Mike Cagney, is coming up with home equity loans at competitive rates that one can qualify for in a few minutes and are far less restrictive than HELOCs. They are leveraging blockchain technology to sell these loans to investors. Startups like Easy Knock and Irene Retirement are offering sale-leasebacks, a new product in residential real estate that allows seniors to sell their house and stay as renters for as long as they live. It’s an alternative to the reverse mortgage, but with lower transaction fees and no restrictions on the amount of equity one can receive. Another start-up, Divvy Homes, will buy a home of your choosing (in certain markets) and rent it back, with the rental payments counting towards building home equity in case the senior wants to purchase the home eventually. Such a model could be beneficial for seniors looking to downsize. Other start-ups, such as Point, Unison and Fibo, are trying to become home-equity partners with seniors, providing home equity loans in exchange for home-equity appreciation above the risk-adjusted home value. If the home decreases in value, they allow the client to hedge their bets by sharing on the downside. While the sale-leaseback might be more suitable for seniors as an alternative to the reverse mortgage compared to the home-equity sharing, more suitable for younger adults and first home buyers, both would be great for seniors that are looking for debt-free, no-payment products.
It’s too early to tell if these start-ups will be successful. For start-ups offering fast home equity loans with few restrictions, their success depends on their ability to secure a large volume of loans and sell them off to investors. For new products such as sale-leasebacks, success depends on their ability to educate consumers on these products and partner with suitable real estate agents and financial advisors that can help them spread the word. Success for home-equity partners, even more so than sale-leaseback providers, is tied to underwriting and appreciation risk. It’s unlikely that they will operate in high risk neighborhoods and zip codes. Furthermore, in order to mitigate some of the risk, their risk-adjusted home valuation up-front provides a margin of safety for the client.
But what happens if the real estate market tanks? Would all of these start-ups go out of business? Not necessarily. Most of the loans offered by home-equity partners have 10-year terms, which would likely give the market ample time to recover. Furthermore, these are equity products: unlike debt, they don’t lead to missed payments and foreclosures as we saw during the 2008 debt crisis. For sale-leasebacks, even if someone buys a home before a market drop, they could continue to generate revenue via rent.
Beyond innovative product features such as speed, simplicity and flexibility — as well as their ability to use data to reduce underwriting risk or blockchain technology to more effectively sell off pools of loans — the success of home equity start-ups depends on the ability to create a brand to gain an edge, capture market share and lower customer acquisition costs. Time will tell if these new home equity solutions will provide seniors with the cash they need to finance their long-term care needs and age at home as they please.
Ezequiel Halac is an advisor and consultant for healthcare and eldercare related startups. He is enthusiastic about all tech-enabled services that exist to improve people's lives.