Normally, and in most circumstances, to buy a home you need a mortgage, not unless you are buying cash, which most people don’t.
Still, homebuying using a mortgage is one of the most emotionally complicated processes ever, and in reality, there are so many requirements that most homebuyers do not realize.
To purchase a decent affordable home, you need to have a good credit score and at least, your employment status must be impeccable with at least two years of solid employment with the same company.
The other factor you have to consider is your debt-to-income ratio which has to at least make sense to the lender before you can actually get pre-approved for the home loan. There are so many requirements that make many people intimidated by the process but what if you could purchase the home without a mortgage?
Is it possible? Well, Fleq, a Los Angeles-based start-up is claiming that it has the potential to get Americans into homes without requiring a mortgage. Instead of originating mortgages, the start-up plans to buy homes a homebuyer wants and sell it back to them, in shares. However, just like mortgage loans, homebuyers have a definite time to pay for the house.
According to the company’s website, the home buying process begins when a homebuyer finds his/her dream house. There are multiple ways to do this, one of them being using popular apps like Zillow, Trulia, Redfin. After finding your dream home, this home buying model teams you up in an alliance of representatives. They’ll work out their calculations and you will be given a quote of what you are supposed to pay on a monthly basis, your initial equity – “the starting ownership percentage for both parties and the current cost to acquire additional units of equity.”
The approval process comes next. Once approved, the company steps in to help with the closing process. This gives you the advantage of being an all-cash homebuyer.
After you have been approved, you can now move into your home, but here’s the catch, unlike the mortgage process, with Fleq, you pay whatever you want and whenever you want.
“We didn’t think that [mortgages] were the appropriate and fair approach to homeownership, and we didn’t think it resonated with Millennials and Gen Zers, who saw their parents wiped out by the financial crisis,” said founder and CEO Todd Sherer, whose background is in real estate finance.
How does Fleq work
Fleq makes money by charging rent. As the homebuyer increases his own share in the alliance, the rent is reduced. Fleq works with the idea that eventually, the homebuyer will own 100% of the property if they choose to, then Fleq will step out of the equation and hand over the title, removing the need for a mortgage down payment or make interest payments.
Another way Fleq is making this possible is by putting in place the option where a homebuyer could choose to just pay rent without having to own the home. This means that the deal has no expiration date and attracts no penalties if the homebuyer decides not to buy the home.
If the consumer decides to move out of the property while the deal is in effect, he can sell the house and split the money with Fleq based on how much ownership the customer has in the house at the time of the sale. Fleq will also help in the advertisement for the property.
“We often refer to mortgages as a tool, which can look like a backhoe or trowel. We think of our alliance as a Swiss Army knife. We can do everything a mortgage can and can provide benefits you can’t get with a mortgage,” said Sherer.
It doesn’t end at that, Fleq says that it intends to be the number one financing option by year 2021.
The Red flags
Sound as it may seem, there are some things salient to the home buying process that Fleq doesn’t answer, for instance, how much premiums will it charge for rent? If you look at the company’s FAQ page, it doesn’t address the issue about the payments by the homebuyers. Another thing to point out is that Fleq doesn’t outline the risk profile of its buyers. Which would mean that anyone is welcomed into the model. With the mortgage process, credit scores work perfectly in ensuring that people who are being loaned have a good standing. But with Fleq, none of that is addressed.
Will it Work?
It is too soon to tell, but going by the 2019 N.A.R statistics, a third of the homebuyers got help from their family members just to raise the down payment.
This means that a lot of young people now live with their parents while trying to save for the down payment. Since the invention of the mortgage system, down payment sizes have only been multiplying. The trend is, more millennials and Gen Zers are growing reluctant to take on more debts, considering the huge student loan debts.
Markets need to revolutionize the way they do things now, instead of encouraging people to take on more debt, they should offer a solution that doesn’t involve loans. This is why Sherer thinks Fleq will work.
“A mortgage, while mostly ubiquitous, is not the best way to buy a home any longer,” Sherer said.
But has the company overestimated the demand from millennials for an alternative mortgage solution? Let’s wait and see.