For homeowners that have seen home prices rise faster than wages since the Great Recession, tapping into home equity can be a tempting option in cash-strapped times.
In fact, more than 80% of borrowers who refinanced mortgages in the third quarter chose the “cash out” option, withdrawing a total of $14.6 billion in equity out of their homes, according to Freddie Mac data cited by the Wall Street Journal.
But for homeowners who might not qualify for refinancing or reverse mortgages due to poor credit or stricter lending requirements, one New York-based startup is offering an alternative option through what is known as a sale-leaseback. EasyKnock pays homeowners 70% of the home’s independently appraised value — providing often much-needed liquidity to homeowners. The company then rents the home back to the homeowner at an average of 8.9% the home value. Clients always have the option to rent indefinitely or buy back their homes at a price tied to independent appraisals. If a homeowner decides to buy the home back after it appreciates in value, the homeowner can repurchase the home at the same price that it was initially sold for. EasyKnock makes money by charging clients fees attached to each transaction.
“People say your house should not be an ATM, but as long as you’re being responsible it’s a better way for people to get a foundation in their life as opposed to selling their home in a fire sale,” EasyKnock founder Jarred Kessler, a former Goldman Sachs vice president, told Yahoo Finance. “The only option for these consumers today is to sell their home, but people don’t want to and often more expensive to move.”
As rising interest rates continue to cool what was once a red hot housing market, a sale-leaseback could feasibly provide liquidity faster than the process of selling a home. The option to rent as long as needed is also a perk that appeals to homeowners who don’t want to move their families. According to Kessler, it’s a top-cited benefit among the homeowners aged 45 to 65 living within 50 miles of major metropolitan areas that make up the bulk of EasyKnock’s clientele.
Because the company is not a lender, EasyKnock can close transactions within 15 days, according to Kessler. The company can also operate under less stringent standards, overlooking credit history concerns and focusing on a client’s cash flow. As such, a solid percentage of the company’s clients in its first year have been homeowners who could not tap into their home equity.
“We realized very early on that there were major unintended consequences of regulation in the housing market and we felt there was an opportunity to solve that,” Kessler said, adding that his startup has now partnered with LendingTree and other lenders to source homeowners who have been turned away from other equity-tapping options. In the partnership, LendingTree receives referral compensation.
EasyKnock, which has raised over $4 million in venture funding and $100 million in debt financing so far, currently operates in Texas, Georgia, Florida, South Carolina, and Tennessee, but hopes to roll out to 30 more states in 2019 with the goal of hitting 2,000 sale-leasebacks.
Zack Guzman is a senior writer and on-air reporter covering entrepreneurship, startups, and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.