The Keith Andrews Podcast

Revolutionizing Homeownership with Fractional Equity | Frank Rohde E25

• Season 1 • Episode 25

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In this episode, Keith is joined by Frank Rohde, CEO of Onify, a groundbreaking company reshaping homeownership with innovative fractional equity solutions. Discover how Onify empowers first-time buyers to step into homeownership with as little as 2% down and a unique "brick by brick" ownership model. Frank shares insights into the challenges facing today's buyers, the mechanics of fractional ownership, and the exciting opportunities this creates for both buyers and investors. Tune in to explore how Onify is redefining the future of real estate, making homeownership more accessible and sustainable for everyone.

Learn more about Onify: 
https://ownify.com/

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So you don't have to worry about the water heater blowing up or the roof starting to leak because we will take care of that, right? And for, especially for younger first time buyers, that's big change to say, Hey, it's like home ownership on training wheels. I don't have to worry about becoming a handyman because I bought this house all of a sudden, you know, I got to figure out where the water is coming in from. you All right, welcome back to the real estate junkie. Today we're joined by Frank Rode, the CEO of Onify, a groundbreaking company that's redefining home ownership through innovative creative financing solutions. Frank, man, thank you for joining us today. I'm really happy to have you on here and you're doing some exciting things at Onify. I'd like to hear your backstory on like how this all came together for you. Cool. Yeah, first of all, thanks for having me. Really appreciate it. It's great to catch up again. Yeah, the backstory here is, I think everyone kind of hears this story anecdotally, right? First time buyers are struggling. It's harder and harder to buy your first home. And when you dig into it, there's a bunch of different reasons that are coming together that really create this... challenge for first-time buyers today that is worse than it has ever been, quite frankly. And you have home prices that continue to go up. And the fundamental reason for that is we're just short housing. We're short supply in the United States. You have mortgage rates that are now at 6 and 7%. They might come down again, but they're never going to go back to the 2s and 3s, right? Probably not. At least not anytime soon. You have a tax policy where the mortgage interest tax deduction for the average first time buyer who buys a three or $400,000 home, that's no longer an itemized tax deduction. You're taking the standard deduction. So that benefit went away. You have corporate buyers, So private equity, Blackstone and others who are buying single family homes. So, and then you have student debt, which weighs on a lot of people. So if you're a, you know, in your late 20s and early 30s, maybe you're starting a family, you're looking to buy a house, have all these things that are coming together and you're competing against cash buyers out there in a market that is still pretty competitive, right, because of the lack of inventory. And so the backstory is that I spent 15, my last 15 years in the mortgage business and I built a software company that does mortgage pricing. We sold it to a lot of the large mortgage lenders. So, deep in the bowels of mortgage pricing, mortgage math, and I saw this problem and come up a couple of years ago and starting to push more and more first-time buyers out, right? The win rates were terribly low. If you look at our launch market in Raleigh-Durham, the number of transactions done with a low down payment mortgage is less than 2%, right? So that kind of challenge, right, is real. You see it in the data. I saw it with my last company. I sold that company and started Onify really to tackle this challenge, to help first time buyers make that jump into ownership, overcome some of these hurdles. And the question that we asked and challenged us was this question of why do you have to buy 100 % of the home upfront and then pay off some amount of debt over 30 years? And so the way we've bought real estate in the US has been pretty much the same for the last 70, 80 years, right? With a mortgage, right? And so you have your down payment and then you borrow the rest and you buy the house and you pay it off. And so the challenge that we pose ourselves is, there a different path? Can there be a different way of owning real estate? And what we've built with Onify is really an equity-based path or a fractional ownership path where we allow the customer to buy their home brick by brick, right? So fraction by fraction, and I'll explain what that means. But really rethinking the, it's not mortgage, it's not debt, it's not the traditional way, it's a different financing mechanism that as we work through it, creates a bunch of benefits for the first time buyer and makes it easier as an on-ramp. Got it. So you've basically, I know you're gonna get into it, but you basically figured out how to turn the... purchase of a home into almost like a stock, right? Where the buyer can buy a part of the house, but not the whole house, and then eventually own the whole thing. Something along those lines. Eventually, exactly. And so the way the Onify works is really, if you think about it as a co-ownership structure or an investment partnership around the home, where we fractionalize the equity in the home into 10,000 bricks. Now, what is a brick? A brick is a share or a membership interest in the LLC that holds title to the home. So it gives us the ability to sell a fraction of the home to the occupant, to the customer, we call them the only. And by virtue of doing that, actually create real ownership over time. And so the way the program works is that customers come in, We underwrite them, we do credit and income and the underwriting process to make sure they're qualified. And the customer starts with a 2 % down payment, so lower down payment than pretty much any other mortgage option out there. And on day one, that buys you 2 % of the equity of the home, or 200 of the bricks that are issued for that home. 10,000 bricks total, right? 200 is 2%. And over the next five years, the customer makes a fixed monthly payment. So the payment is fixed for five years. And within that payment, there really two components. One component pays rent on the fraction of the home that you haven't bought. So your fractional tenant of the entity that holds title to the home of that same LLC that you're also a shareholder in. And then the second payment increases your share or buys more bricks. And so on average, 13 bricks a month. And that might go up or down a little bit because the bricks are valued at current market value. So you're really buying your home over time at whatever the price of the home, just like you would dollar cost average, let's say a stock, right? You see example, right? If you're buying into a stock portfolio or a mutual fund, right? And you're making your fixed monthly payment. depending on the price of the stock you buy more or less. And so that effective dollar cost averaging actually is really beneficial over time. And so the way the math is dialed in is that the customer starts with 200 bricks and works their way up to a thousand bricks or 10 % of the equity of the home at the end of five years. And the reason we get them to 10 % is that that's really where you can use the 10 % as a down payment for a traditional mortgage, conventional, you know, FHA loan. and buy the home from the LLC at that future point. And so as an ONI, as a customer, I really signed three agreements that work in parallel. The first one is a tenancy agreement that gives me the right to live in the home. The second one is this equity share that allows me to buy bricks over time and build true ownership in the home. And the third one is this option agreement that allows me to buy the remaining equity or technically the whole house. from the LLC at any point. And that structure creates the ability for the customer to come in, pick a home off the MLS, we underwrite it. We can present a cash offer on behalf of that customer that's been very powerful. On average, we've seen a little over 3 % reduction in the sales price because you can come in and be aggressive and say, we're an all cash buyer, no financing contingency, no appraisal contingency. we're coming in, this is the price, right? So we can be aggressive with the seller on behalf of the customer. And so that's another benefit for our customers. You can come in with a slightly lower entry price, build equity over time, and then take it out kind of the traditional way with the mortgage at some point in the future. So it's like a lease option, except the tenant buyer actually owns a chunk of the house. It's not just an option. They are an actual owner of this LLC, right? Because the LLC purchased the home cash, right? And then you, you've fractionalized it over 10,000 shares and then they, they own a slice and every month they're buying more shares. They're buying more shares. now you mentioned that once they get to 10%, now they can go get a traditional mortgage. That's, that's the probably the next step in the process, right? Now, can they buy more bricks? so that's the, know, get to 10%, get a mortgage, the home. That's kind of the golden path, if you will. Yes. There are other choices the customer has. The second choice is you just renew with Onify and you keep going and you buy more bricks at your leisure, right? So we have some customers who intend to do that. And then the third option you have is you can also walk away, right? mean, you can non-renew or terminate. Right now, when you terminate, you still own whatever number of breaks you have bought, and we will buy them back from you at whatever future market value. We charge you what we call a relisting fee, which is really the equivalent of a brokerage fee. If you had bought that same home, right, and you put it on the market because you got to move, you would pay a broker 6%. So we charge you 4%. And that actually goes down to 2 % by the end of five years. So it melts away over time. So the customer, and this is really one of the big benefits, the customer has equity. And even when they move, they don't lose that equity. One of the big knocks on rent to own programs has been that a lot of the shady operators out there have created these sidecar vehicles where you're saving money, you're putting something in, in addition to your market rent. but when you leave, right, or you default, you lose that. Yeah. And we wanted to make sure that we protect the customer and say, you know, if you exit as a, it can be a good leaver, meaning you give notice, right, you work with us, et cetera, great. Or, you know, there might be a bad scenario at some point where someone just defaults and you have to go through an eviction. In either scenario, they retain their equity, right, and we will buy it back subject to that relisting fee, right? So real quick on that, I know you said like five years is the term, right? Within five years, but they can terminate after one year. Let's just say they go, you know what? We really don't like this neighborhood. We want, we want out of this. Is that, are they able to do that? Or is the, is it a five year? They're able to do that. The, the, you know, it's not a smart financial decision because at the end, if, you think about the math, right, the customer puts 2 % down, then they build. roughly 1.6 % per year. So if you terminate after a year, that 3.6, because we charge a 4 % realistic. Got it, it, got it. Yeah, yeah, yeah. It wouldn't make financial sense to do that. However, there could be a situation where, I mean, it'd be a lot better for them than, you know, walking away from a home that they just purchased. So it's a better opportunity is all I'm saying. And what I really like about this is there is so many people Because they don't want to pay PMI. They don't want to go with like an FHA or something like that So they go. Okay. Well, we're gonna save our money for the next three to four years for the down payment Meanwhile, the house prices keep going up. And with this they can lock in the price today and they can get a really good price because they're able to offer cash Which is incredible and lock something in a day and then while they actually live in the home, start saving by just buying more bricks, buying more bricks, buying more bricks until they get there. That is awesome, I really like that. To be super transparent, they're not locking in the price, right? They're locking in the price of the bricks that they've bought. Okay. whatever future number of bricks, right? Because the bricks float in value. based on home prices. So every month, we revalue each home and the bricks are a reflection of that current market value. So a $300,000 home on day one, the brick might be $30. You buy your 200 bricks at $30. That's locked in. You're absolutely right. Next month, the price might be $30.50, right? So the house went up a little bit. You're buying bricks at that value. The following month, let's say market prices go down and they do every now and then go down. You're buying bricks at $29, that's great. You're actually getting that benefit. So you're not locking in the price, but your dollar cost averaging based on current market value, right? Every month. And once you've bought the bricks, obviously just like shares you put into your portfolio, that price is locked in. Yeah. So, I mean, I guess you could look at the other side of the table then is if the house goes down over five years, you're... It's actually a benefit to you, right? As the buyer. It's not a benefit in that you still, you you bought bricks at 30 and now they're worth 29 and then they're worth 28. True. so that investment loses value. However, if you compare it to a mortgage finance transaction, it is a huge benefit because with the mortgage, you have a fixed balance. And if home prices go down, you end up with negative equity, right? This is the scenario of 2009, 2010, 2011. A quarter of the country had negative equity in their housing stock. for a first time buyer who is not diversified, who doesn't have a 401k, doesn't have a portfolio, right? Whose entire net worth is in that home, the effect of high leverage can go both ways, right? Sure. House prices jump by 20%. Fantastic. High five. Right. We're doing great. But home prices fall, right? If you have a 97 % mortgage, LTV mortgage, all of a sudden you're underwater with negative equity, that's not a good scenario. And so what Onify kind of creates is because it's an unlevered ownership stake, the bricks are not levered, they always have value. They could fall in value, right? Back to the $30 goes to 29, goes to 28, but it can't go to zero. I mean, it's almost impossible. It is a house, right? You'd have to rent a house, right? So your equity sliver is safer in the sense that it doesn't appreciate as much as it would with a mortgage because you don't have the effective leverage, but it also doesn't depreciate and it can't go to zero, right? So we call it evergreen equity for our customers to say, your stake in the home, the number of breaks you've bought will always be worth something, right? Yeah. So there are really kind of for the customer three things to think about, right? The first one is how much do I have to put down compared to my other choices, right? And how much I have to put down depends on mortgage choices, but it also depends on closing costs and now buyer's agent commission, which may or may not be the responsibility of the buyer, right? And so where we've seen a lot of benefit for the customer base is to say it's 2%. And we cover everything else. We cover closing costs, da-da-da-da-da. The second piece that you need to think about as a consumer is how much am I paying over, let's say, five years? Like all my monthly payments, right? What does that add up to? That's my total housing cost. And one of the things that, again, we do there is we say, here's your fixed monthly payment. It covers your rent, it covers your equity purchase, but it also covers insurance, maintenance and repairs, taxes, right? So you don't have to worry about the water heater blowing up or the roof starting to leak because we will take care of that. Especially for younger first-time buyers, that's big thing to say. Hey, it's like home ownership on training wheels. I don't have to worry about becoming a handyman because I bought this house, all of a sudden, I got to figure out where the water is coming in from. And then the third real question is, how much in equity do I gain? And so what we're doing with Onifi is we're saying, you're trading the equity gain or you're sharing that with the investors through this fractional ownership structure, but in return, you're getting a lower down payment, lower upfront payment and a lower monthly cost and a safer monthly cost, right? Because you're not gonna have other expenses related to your house. And so that's in a sense, the value proposition to the consumer, right? It's to say lower entry costs, lower monthly payments, but you're giving up some of the equity gain, right? Yes, yeah, I could see that. Now on the flip side, there's an investor value proposition, right? So on one side of the business, we have customers coming in and becoming ownies. And on the other side, we have investors coming in. Those are accredited investors who invest into these homes, right? Either through a fund or sometimes directly into specific homes. And for the investor, the value proposition is you're investing in those bricks that the customer hasn't bought. So those bricks earn rental income, right? And we're kind of a mid six cap rate on those bricks and they're earning home price appreciation. And at the investor side, you can obviously use leverage as well to lever up, right? And as an accredited investor, you can take the risk of leverage, right? And in a sense, you're much more able to, right? To deal with leverage and you're more knowledgeable. So For the investor, there's a value proposition that investing in these bricks with a target return of 15%, that's a solid value proposition for a portfolio of single family homes. So the investor is like a limited partner then in this transaction, right? That's exactly right. And do they get any of the tax benefits that come along with traditional? Yeah, they do. So there's pass through depreciation on the home, right? OK. That's a tax benefit. So generally, the income is, I don't wanna say entirely, but largely tax free or tax advantaged, right? So if you think about kind of a mid 6 % cap rate, 6 % net income after financing costs, and some portion of that, 3.5, 4 % is tax advantaged, that's the equivalent deal to an 8 or 9 % pre-tax bond yield, for example. So it's an attractive value proposition to the investor. the reason, this is interesting, because the reason the yield is good is because the customer is willing to pay a slightly above market rent in the first couple of years. So you're getting that yield enhancement upfront because we're fixing the rent. actually higher than market in the first couple of years. It's lower than market in the out years or where market might be. We don't know what we're getting. So there's a yield enhancement piece, but then there's also this piece of we don't have vacancy, right? Because we don't buy a home until the customer signed the contract and says, this is the home I'm going to move in on day one. So there's no upfront vacancy. There's no turnover. And so far we've seen significantly lower maintenance costs, about 60 % lower than SFR average. I mean, I'll tell you as a landlord, as a rental property investor, you may be getting 10%, 12 % return. until the tenant moves out and there's repairs and it wipes all that away. So to have something like this where you don't have the turnover and then the exits five years down the road, mean, the upside on that could be huge, right? Yeah. So that's exactly right. And the exit, right, if you think about it as an investor, as a seller, that exit is pretty efficient because the way the purchase option works is it's at market. Right? So you're, and we run this AVM process, take three different independent AVMs, you know, that's been pretty accurate so far. so you have a purchase price, but you don't have brokerage costs, right? You're not paying a broker to list the home. You don't have a, you know, a vacancy or staging or repair. got to pretty up the house before you sell it. now as an investor, so you get all those benefits. The, the one downside is that you as an investor, don't get to control the timing of the exit. because the customer has the option to say, hey Keith, know, I want it now I'm ready. I built up enough equity, I got a bonus, I'm ready to go. I want to buy the house. Yeah. After a year. Theoretically after a year, right? Practically. You know, there's no like free payment penalty or anything like that, right? There isn't a pre-payment penalty. What there is, there's a floor on that purchase option. So I said earlier, it's at market. but it's at market with a minimum 5 % bump from the entry price. So even if someone were to come in and say, I'm using Onify for some short-term bridge financing until I get my act together. then six months later, that customer calls and says, now I'm ready, right? Yes, you can buy the home, but it's at 5 % above what we paid. And that's in place to protect the investors, right? But if they make it to the five-year mark, is that still in play? It's still in place. But the only time that would really apply in that case is if home prices are lower than they are today five years from now. And that is extremely unlikely. mean, that didn't even happen in the 2010. Yeah, yeah, yeah. So let's say on average the home increases in value three to five percent. And so at the five year mark, they would just need to pay the price based on the value. of that day, not an additional 5 % on top of that. Correct. Okay. Got it. Got it. Well, that's, that's pretty incredible. Now let's go back and I do want to talk a little bit more on the investor side, but let's go back to the purchaser. What are the requirements and how do they differ other than the fact that you don't need this, you know, 20 % down payment or 10 % down payment. you can get in with as little as 2%, 2%, right? What is the qualification like as far as credit and everything else? it the same as a regular loan or? No, I mean, look for a good, really the perfect customer persona for us. if you look at the folks in the portfolio, they have good credit. So the average in the portfolio right now is a 740 FICO. We do auto approval down to 680 and we look at folks all the way down to 600, but we're clearly in the prime space. So good credit. That's the focus. And they have good income. And a lot of times, what ends up being kind of the perfect customer for us is younger people, they have solid incomes, right? They have student debt, so they can stack a mortgage on top of that. And because they have student debt, they haven't saved for the down payment. So you look at them and you say, have good credit, you have good income. Guess what? You can't qualify for a low down payment program or a down payment assistance or, because the government program- make too much money. You make too much money. And that percentage of the population in markets like Raleigh and Nashville and Atlanta and a bunch of other places, there's a lot of folks like that who need help. And they're lucky their parents will give them 50 grand and you're off to the races. But guess what? Not everyone has that luxury. And so that's the perfect kind of persona. And so to answer your question, you need good income, right, or decent income. And we do go down to, you you can buy a house with $60,000 if you have clean credit and no debt, and you're looking to buy a $250,000 starter home somewhere. So you can be at that level. But the sweet spot is really that, you know, kind of a bit above that solid good credit just hasn't saved the down payment. Yeah, that makes sense. Okay, I like it. back to the investor side of things. The investors, they're not investing in a fund. They're actually investing in the LLC that's buying a particular home, correct? We do both. You do both, okay. There's a vehicle called the Onify Home Fund, and that's the easiest and simplest way, and starting with $25,000, and a credit investor can put money in. that investment is a five-year investment, 15 % a year, and it's diversified across all the homes, right? Okay. So the benefit of that is that you have instant diversification, right? If one of the homes for some reason doesn't perform, you know, it's a small impact and it gets supported by the rest of the homes in the portfolio. We also have the option, we have had investors come in and say, I really want to buy or invest in this home, right? Because it's in my neighborhood. I love the neighborhood. Or I want to feel that more visceral thing. I want to own the Hemingway, All of the homes are named after authors. you pick your favorite author maybe. And so you put money directly into those as well. Well, I mean, also if one area is going to appreciate more than another at the exit, instead of being spread out, you would get the benefit of that individual one. All right. Well, I like it a lot. Sorry to butt in, but if you're an investor, come to the website and we'll We're about to list another four homes, right? When you're going live with this. We're going to drop this on Tuesday. So I'm going to get this out here and I'll supply links and everything else. people, cause I have a lot of real estate investors that listen to the show and this is definitely a great option, especially if you want something completely hands off. But what I wanted to ask is what markets are you in right now? So we launched in Raleigh Durham, the research triangle. We just launched Nashville. We're launching Atlanta and we're going to be in Tampa and Orlando next year. And there's a whole host of markets. There's about 150 target markets that we want to be in, you know, eventually. Really, mostly these are kind of the secondary and to some extent, maybe tertiary markets, right? So places where you can still buy single family homes. for 250, 350, 450, that's kind of the sweet spot range starter homes that are in good condition. They're not fixer uppers, right? So we don't buy, we don't do fix and flips or, yeah. So a little bit of make ready upfront. So there's a geographic targeting and really what we're looking for are markets that have strong fundamentals, young people who are educated moving in because there's great employment, right? They're growing markets. And a lot of them are quite frankly, supply constraints. So you have a long-term forecast around house price appreciation that's beneficial to the investors and also quite frankly, beneficial for the customer to get in a little earlier, right? Yeah, I'm definitely curious how this the next couple of years are going to play out with just the cost of building even looks like, you know, there may be an uptick there with some of these tariffs and who knows how all that's going to work out but I can only imagine what that's going to do with the supply, right? Should drive prices up. So I love for you to be out here in Colorado because I own a brokerage here and we focus on property management, but we also work with home buyers every single day. this would definitely be a great option. Any plans on getting here? We're working on the greater Denver Metro. So you're in Colorado Springs. I am, yes. Okay. So we'll look at that. And yeah, I think that's on the docket for next year, right? There's a couple of folks on the investor side in particular that have reached out and say, this is an interesting market. Obviously, I'm going to come out and ski a little bit and check it out while I'm out there. Yeah, you should definitely do that. We do have some of the best resorts here. So as far as realtors and working with agents, do you have anything? Yeah, so we do, we have an accreditation program where realtors can come in. any realtors, anyone on the pod, I encourage you to check it out. One of the things that we've built that's really unique and it's worked really well actually for our customers is we have a commission program after the NAR settlement, right? In August, everyone was like, what's gonna happen with the buyer commission? Is it gonna go away? So far, not a whole lot has happened. Just a bunch of creative ways to. Yes. Ignore it or work around it. call it But so the plan we've put out there is an interesting one in that we pay a base commission of 2 % or whatever the seller is offering, whichever is higher. And then on top of that, we pay a 10 % piece of whatever reduction in price you negotiate on behalf of us, on behalf of the buyer. So we call it the 2 plus 10. and we just, we haven't closed, we're in Eskirona home. Where the agents came in, it was listed at 295, it was valued roughly at that, we made a bunch of aggressive offers, we got it for 272. So that was a $23,000 reduction and the buyer goes, wow, this is great. And the reason we got that reduction partially was because we went in and said, hey, 14 day close, cash buyer, da da da. So the agent is getting, on that $23,000, they're getting 10 % of that price reduction. That's nice. Another incentive to drive the price down. And that was exactly the reason. like, in the past, the buyer's agent makes more if the buyer pays more, which doesn't make sense. It doesn't make sense at all. At all. No, I agree. to flip it and say, if you help us get a better deal for the buyer, you actually end up earning more as Yeah. I love it. I love it. I'm definitely gonna have to reach out to my folks in the Nashville area and let them know about this, because I have people out there and let them know about this program. Other agents that probably have no idea that you even exist. I would love that, yeah. I mean, we're young, we're early, right? And we're always looking for partners in local markets, right? Because we've built our business around the agent, right, as the lead flow. That's why... We want to pay an attractive commission structure. We've built this portal for agents, And accreditation, office marketing materials, all that. So because the first time buyer, it's daunting enough as it is the financing piece, right? The first time buyer needs help. They need hand holding, they need advice, right? So I don't think we'll ever see a world where there isn't a role for a strong agent in that transaction, right? The financing piece is the one where we can really help. Definitely. And so real quick, before we go, like a traditional lender, you guys go in there, send an appraiser through, right? We do an inspection. You do an inspection, okay. And we do an AVM and a CMA and sometimes a PTO. It's not an appraisal per se. Okay. So when you do the inspection, then I'm sure, because you mentioned something earlier, you don't do fixer-uppers. You want something that's like turnkey, ready to move in. So during the inspection, if you find items, you're gonna force the seller to fix those items before you'll fund it, right? I mean- We've done a lot of that, yep, to the extent that we can. And then we have something called Make Ready. It's an allowance, right? That is any investment we need to make upfront, right? So we had a home that needed new windows, we did that, right? The seller absolutely said, no way, no way, no way, fine, we did it, right? because at the end of the day, we want the customer to have a beautiful home that they're moving into, right? And so that make ready generally has been 5 % or less of purchase price, which means you really can't buy something that is a fixer upper, that needs significant work. But if there's some cosmetic stuff, flooring, windows, paint, et cetera, we do that. Awesome. Well, hey, I really enjoyed this conversation. It's an exciting program for both. buyers and investors and I think that a lot of my audience is going to get a lot of value out of this and you'll probably be getting people that listen to this show coming your way looking into how they can invest and if they live in one of these markets that you mentioned how they could buy so Frank thank you so much it was a pleasure having you on my show for everyone else that's out there God bless and I'll see you on the next episode.