Hello again. This is Josh Carr at The Real Angle, and today I'm speaking with Frank Road, CEO and founder of Onify, and we're going to talk about an interesting business model today. Frank, how are you doing today? I'm good. Thanks for having me. Good. Thank you for joining me. Always, always, you know, the whole reason I started this podcast was I wanted to talk about things that were not just simply let's buy some garden apartments and rent them out, you know. So, I've really sought out more interesting structures. So, let's get into it. What is Onify? Onify is a new on-ramp for first-time home buyers, and the best way to think about Onify is it's an alternative to the mortgage for first-time home buyers looking to buy properties homes in the U.S. Okay. Okay. So, structurally, like, what's the, I guess, let's start with the basics of mechanically what it is, because I mean, I've seen rent-owned structures before, but I want to understand kind of what your secret sauce is, if you will. Cool. So, the big challenge for first-time buyers and buyers generally is really, there are three things you need to be able to buy a home, right? One is income, the second one is decent credit, and the third one is usually savings for down payment. Okay. And where Onify helps buyers today is with the down payment. So, we, you know, we're targeting buyers who have decent income and decent credit, but haven't been able to save, and that proportion of buyers actually getting larger and larger because home prices keep going up, the down payment keeps going up, right? Inflation, that is weighing on people's ability to save. Housing affordability is a disaster right now. It's really hard, right? And I think it's not going to get any better anytime soon. We have a structural issue in the U.S. with supply, and, you know, we have mortgage rates who've reverted to the long-run mean, I think, in the fives and sixes, right? And I think the two's and three's. And so, I think that that just general environment, right, creates a structural issue around housing affordability, and that's really what we've been looking to solve. And the reason I got to this in the first place was I ran a software company for 15 years focused on mortgage pricing. We talked to a lot of the large lenders globally in the U.S. and Canada, the UK, Australia, New Zealand, that was doing basically figuring out the math on how to price a mortgage for consumers. Based on credit quality and all kinds of other things. Credit quality, income, capital markets, you know, conditions. And part of that started seeing in the data this problem that first-time buyers are getting squeezed out of the market. Even those who can qualify for a mortgage, a lot of times can win deals because of financing contingencies or appraisal contingencies, right? And they're competing against corporate buyers who make all cash offers. And so, what we did with Onafide is, you know, we sat down, and said, "How do we rethink this on-ramp? And how do we rethink what it means to own in the U.S.? And basically, when I say it's an alternative to the mortgage, what we figured out is how to allow people to buy a home, build equity in the home while living in the home without incurring the debt that's usually associated with buying a home. Okay. And the way we do that is that we fractionalize homes into 10,000 bricks, as we call them. And a brick is really a membership interest in an LLC that holds title to the home, right? And you're going to understand this. Yeah, so you put the asset into an LLC, I assume you start with it being 100% owned by the landlord, and then over time, the tenant sort of buys in, if you will. Yes, we start with $2.98 or $200 bricks that the customer, we call them the only contributes, right? So that's the down payment, effectively 2%. And the fund or onify as the pool of investors contributes $9,800 of the bricks or membership interest, 10,000 bricks in every home. Got it. And over a five-year program, two things happen. The customer pays rent on the bricks that they haven't bought. And every month they buy incremental bricks. And the way the math is dialed in is they work their way from 200 bricks on day one to 1,000 bricks at the end of five years. 1,000 of the 10,000 bricks is 10% of the value of the home, which is then enough to use that as a down payment for traditional mortgage. And they have the purchase option to then buy the home from the LLC at future market value. So really what we're looking to do is buy the home fractionally as equity rather than through debt. To get from that 2% down to 10% down, basically. Exactly. And then once they're at the 10% down, so now let's say, okay, so I got it. So we agree, you know, the house is worth, you know, 500 grand. I'm putting in 2%. You're putting in 98%. We have an LLC goes on. I understand that there's a rent and the rent is tied to how many bricks we have left. So now let's say we're five years down the road. And as you said, I've got 10% of the bricks. You've got 90% of the bricks. I now go to finance this thing. We've got to we've got to purchase contracts. So we don't want to buying it for. But I'm not really showing up. Sorry. Yep. You don't. I think one of the so one of the interesting things you said, we have a purchase contract. So you know what I'm buying it for. The whole thing is equity. So the value of the home is variable throughout the entire five years. Okay, right. So five years down the road, we agree. I buy it for some future value and the future values determined by appraisal. Yeah. Okay. We don't do that. We do AVMs. And the way you build from two to 10%. So the 800 breaks you're buying along the way. Those are also transacted at whatever current market value in every given month. So every month, we revalue every home in the in the portfolio. And we sell to the customer the number of bricks at the then current market value, which has an interesting your financial modeling guru. So you'll appreciate this. Yeah, which has an interesting dynamic. It basically means that the customer buys slightly more bricks on the dip of real estate values and slightly fewer bricks. Stuller cost averaging just like with automatic stock plan. Now, now one thing that interests me about this, like I understand what an appraisal is and I get that. But when you talk about that there's some sort of automatic value calculation type thing, how is that being calculated? Because imagine if I were a prospective buyer, my great question would be, well, that's fine. I'm buying bricks based on the value at that month. How is that value at the month determined? Yeah. So the value on day one is the purchase price. Easy. Plus whatever, you know, if there's improvements, those go into the purchase. So let's say it's 400,000 on day one. Okay. One month in, we pull three different AVMs or automated valuation models from three different independent providers. So this is got it. Okay. Whatever the fox guarding the henhouse, but it's not you coming up at the price. There's not us coming up with the price. It's three different providers. We take the average of the three. We add in, you know, there's a declining calculation around the improvements we've made. But we strike the price in that month and say, okay, so in month one, we bought it for 400. Let's say it's now worth 402, for argument's sake. Sure. A month later, it might be worth 401 or 399 or what have you. So the price fluctuates every month. And we divide it by 10,000. That's the price of the brick. And so in that first month, let's say at 401, each brick is worth $40 and 10 cents. That's your price at which you purchase some number of bricks. You make a fixed payment, which means the number of breaks is variable, hence the dollar cost averaging, just like you're buying. She doesn't do mutual fund, right? Or your 401k got that. So now let's say we're now five years down the road. And now the time comes that I want to buy the house and just own it just like a normal person. I show up to the bank and I say, I have a purchase contract because now now I am buying it. I'm buying it for X amount of dollars. And I'm contributing my 10% ownership stake is my equity, essentially. Correct. Do you, I mean, how old of an entity are you, I guess? Have you got into that five-year window of any of these people? We haven't gotten to the exit. We're two years in, right? Or two years old. And we started buying homes last year. So we don't have any exits yet. So we haven't happened yet. Because my real question would be, I imagine if a bank, you came to a bank with this at the five year. I mean, it's definitely not something they've seen it. They've seen it but they haven't seen it. It's not as straightforward as just a normal, you're buying a house and what have you. So that would be my only real question would be the market acceptance of this from a lender standpoint. Yeah. So we've worked through this with a couple of lenders to make sure we have folks on deck who can deal with this. And the way the lender views it is very similar to, let's say you put 500 bucks a month into your e-trade account. And at the end of five years, you have, you know, X number of dollars in that e-trade account. And you bought it over time. What the lender really wants to see is, here's your dollar value that you're contributing, right? Here's the provenance of those dollars. And I need to show you that I have them in this account, whatever you trade. It was real money that I put in that I saved. But instead of it being a savings account, it's like you were maintaining a savings account. You put money into an LLC. The LLC happened to have title to the home that you lived in. And you were also a tenant of that LLC, right? But for the lender at the end of the day, it's really about what's the provenance of that down payment. It's not a gift. It's not borrowed. That's the main thing they care about, right? Sure. It is, it is bona fide savings that you've built up over time. And one of the interesting things you mentioned in Brenton, right? My co-founder with CEO of a big rent-to-own company and he's bought 5,000 homes in that structure. And one of the big things that customers are missing and aren't getting with rent-to-own is true ownership. So the piece that we've worked on for a long time is how do we create true ownership, right? From day one, rather than I rent it and eventually I have the ability to buy in. Yeah, yeah, yeah, yeah. And so in the US, today at least we can't fractionalize a title. Or at least it's very hard, right? You run into trouble with every county courthouse and their heads explode. It's a mess. No, they're not equipped for it. They're not equipped for it. But you can put it into an LLC and you can, you know, distribute the membership and the ownership of that LLC in a creative way. And that's what we've done, right, through this model. It's interesting. It's interesting. So you guys have been around for, as you said, I mean, you've been operating for about a year and change. I imagine there was some startup period before this. How many houses do you have? Like roughly how many? We have seven houses in the portfolio, all in Raleigh, Durham. We've got 15 or so in the pipeline. We're looking to be at 30, 35 homes by the end of the year. Right. And Raleigh, Durham, you started with because you had a passion for Raleigh Durham? Like why Raleigh Durham? Yeah. So I'm from Germany and I live in San Francisco. My co-founder lives in Maine, right? Our team is all over the US. But we basically built a model for the 300 or so real estate markets in the US and looked at the core fundamentals. And Raleigh bubbled up to the top, right? OK. Rob creation, economic stability, house price appreciation, rental yields. It's just a really good market. And the market we're looking for, or broadly speaking, are markets that we can still buy starter homes in the three, four, $500,000 range, where you can generate enough of a rental yield on those homes to create an investor return. And where you have future home price appreciation, so that the investor return is partially rental yield and partially home price appreciation. Got it. Got it. And that's that's kind of the green that we apply to every other market as well. Now, obviously in a landlord tenant relationship, if I default, you know, you evict me, what have you here, you have a contract of them over five years. Like, how do you handle defaults? Because that's always the question I have with a situation like this. So so default, there's three agreements that run in parallel, one's a tenancy agreement, right? And the tenancy agreement governs your ability to live in the home occupancy rights, all that. It's at least a landlord tenant relationship. And under that agreement, if you default, you get evicted eventually, obviously, we try to work it out, et cetera. No, but that's landlord tenant. The second agreement is an equity share agreement that governs your ability to purchase shares in the LLC. That is also your landlord. So in a way, you are your, you're a shareholder of your landlord, which by the way, if you're, if you buy a co-op in New York, something similar happens, right? We only, we do it for each individual. There's a proprietary lease and you, yeah, with a co-op, you're an owner of a corporation, but then you have a proprietary lease that says you get some tenancy rights. Yeah, yeah, yeah. So it's not that to similar mechanic. So you have an equity share agreement. And to answer your question, Josh, when someone defaults, right, they can get evicted, et cetera, under the lease agreement, the equity share, basically what the equity share stipulates that if you end your lease in whatever way, shape, or form, because you default or because you ended by telling us, right, we will buy back your equity. And whatever number of breaks you've accumulated, at that point in time, we'll have a certain value. In fact, it's the value that we struck last month, right? We will buy back, we charge you a relisting fee that melts away through the five-year agreement. Sure. And which makes sense. Yeah. Right. The equity stake of the customer is protected and the interests of the investor are protected through this mouth away provision. Right. You're getting some fee for the aggravation and the hassle of having to deal with it, but mechanically, yeah, yeah, I get it. I get it. No, it's an interesting structure. I mean, the lack of down payment is obviously huge in the United States. I mean, I'm teaching class this summer at Columbia, the real estate market analysis class. And you pull the data on housing in the United States and you look at the Harvard journal on housing and everybody else, and it's like big screaming, blinking lights about housing affordability is bad. It's getting worse. And the issue is that as it gets worse, it starts to have larger societal impacts. I mean, if you can't buy a house, how do you start a family? And if you don't start a family, then it has impacts with dot dot dot all the way down the line for pension plans and social security. No, it's a real issue. It's a real issue. And unfortunately, I think we'll go ahead. Sorry. And so one of the interesting things about the down payment, right? The way we've lived through it, you know, with with no miss as a as a participant is we, you know, people have low down payment or zero down payment mortgage issue with those zero down payment mortgages is that they create this moral hazard, right? Of someone puts nothing down. And then the home price falls by 10%. Now they have an active incentive to walk away, send the keys to the bank, right? And that's what happened in 2009, 2010. And with the structure we've built, we've said, okay, you can put down very little in your building equity, but because there's no leverage, there's no debt here, that equity will always be worth something, right? If you own 10% of a $300,000 home and the value goes to $250, your stake is still worth $25,000. You're still walking away from real money. Yeah, you would still walk away from your money. And so it takes away that moral hazard, right? This problem of people sending in the keys with a low down payment. And the mortgage math kind of falls apart at the zero percent down payment structure, right? Because you can't charge enough interest to compensate for that risk. No, in the moment, yeah, as you said, the moment the moment values drop, there's no incentive to continue paying. Well, it's just it doesn't make economic sense. And we've solved that problem through this equity structure, right? No, it's an interesting structure. So you're doing stuff in Raleigh. You're growing, you're adding more houses to the pipeline. Your investors are investing in these houses. And I guess down the line, as they get some, you know, they have some assets come to term, if you will, hopefully they reinvest in the rest of it. So are you out there actively raising money for investors? Like, where are you? What is the is the issue for you now that you need more investors? Or is the issue for you now you have more buyers for housing? Like, what's the what's the thing that's stopping you from becoming a zillion dollar entity, if you will? Well, we're going to become a zillion dollar entity, eventually. Sure. How fast can we get there? But right now, if I said to you, do you want you want investors? Or do you want houses, buy houses? What's the immediate issue? The immediate issue is more we need more investors. Okay. Right. But we we're the way to grow this business is to balance the two. Sure. No, you can't. I mean, you can't have more one and less of the other. It doesn't work. So we've launched Raleigh Durham, we're adding Charlotte, we're adding Nashville, adding the rest of Tennessee, and then we're going to add Denver and other cities. And so the growth on the consumer side is Metro by Metro, because we have a thesis on individual housing markets. And we want to leverage the agent network, but the realtor networks in those markets for low cost acquisition. Right, which makes sense. Because the other one's the point it's sales with the buyer and the buyer is saying, I need a way to buy this house. And then the agent assumedly says, well, you have you considered this product? Yeah, exactly. And they want a cash offer and all that. So, so we're doing that on the consumer side. And at the same time, we've raised the fund onify home fund that, you know, credit investors can put money into. And that promises or targets are 15% return. And so we're attracting capital there. And interesting. Where's the constraint? You know, today we're a little ahead on the fundraising side. Next month, we're going to close on three or four homes, right? And we're going to be. So, so it's them. Yeah. And as we get larger on both sides, the balancing gets easier. It's the, you know, when you start out small, that you're really looking to bounce those both sides of the business. No, you have an illiquidity problem, because you're not or not illiquidity. The mismatching, it's all there's a lot less mismatching problems when you're, you know, you got $500 million to play with. Interesting, interesting. No, it's definitely a fascinating model. It's definitely something that responds to the fact that right now down payments are crisis. And sadly, I don't see that going away anytime soon. Like this does not strike me as a problem that it will magically be solved in the next 18 months and the business thesis goes away, which is troubling. I mean, not for you, but for as a nation. It is a troubling problem. And whenever you have a big societal problem, there are opportunities, right? And we're structuring an opportunity around this to say, let's rethink what it means to own, let's create a different on ramp, right? For first time buyers that allows more of them to get into the real estate market, right? And build equity and build wealth quite frankly, through property maturity. Sure, sure. That's interesting. So from a team standpoint, how big of a team are you these days? We're seven. Okay, all over. And yeah, looking to, you know, again, balance VC investment for the Opco for onify Inc. And then we have the onify fund that is raising capital. Right, because yeah, and that's interesting. So yeah, so there's the operating business, which as you alluded to is VC backed, which is fine. And you grow and there's probably another round that you'll do because that's just the nature of VC world. And then you have sort of these and these funds that people are investing in, are they the investor side, are they doing like an evergreen fund? Or is it like they're just doing like a tranche of money, it's closed ends? How are you bringing them in? It's a five year closed end fund. Okay, fine. With four credit investors, there's 25k minimum. And if you do it again for profile, it's, you know, some folks come in with their cash, some folks come in with their retirement accounts, and some folks come in with their donor advised funds, given that there's a social impact component here. Right, we've been qualified as a as DAF eligible. So you can use donor advised fund capital to put in. And I'd say more than half of the investors are driven by the impact and the story and the desire to have, you know, a positive impact on their community or on young people generally. And the other half were driven by, okay, 15% return in a low risk asset class. You know, I'm excited about that. And off you go. Yeah. And off you go. Exactly. No, it's curious. It's curious. I mean, not to, you know, talk about competitors, really, but I don't really know of many other player. I mean, the other players I know over just rent to own guys. I don't know of anyone who's fractionalizing it the way you are, to be honest. And what I like about, sorry. I don't think so either. I think that you've seen, you've seen fractional ownership in the past, usually around timeshare and vacation properties, right? Yeah. You buy an eighth or a quarter or some number of weeks or, you know, and, and so the model has existed in that structure. It hasn't really existed in the for the benefit of first time buyers, right? And then when you look at the rent to own models, as I mentioned, my co-founder worked for one of them, the big piece that was missing was that true ownership piece. And so we tried to figure out how do we build that? And that's kind of how the two merge, right? And when we talked to first time buyers, a lot of them, we say, hey, it's it's factual ownership. They think, well, I don't need a rental. I don't need a vacation property. He's like, no, it's fractional ownership for the home that you live for the home, right? Or single family. Yeah. So it's more of an education issue at this point. I love the fact that we managed to go through this whole conversation. And at no point did you use the word blockchain. That makes me very happy because it seems that whenever, whenever anyone says, let's fractionalize it, the next sentence out of their mouth is something about blockchain, which I find concerning because like, you don't need that here. It's just simply, you don't really need it, right? Right. It's a spreadsheet. You just say, you stone this much. Now you own that much. I mean, it's not, we don't need to get fancy and techie for things like that. It's just, you could do it with pen and paper, frankly, it's just not that hard. Yeah, I mean, honestly, we've built a portal where the customer sees their equity and they see the value of the bricks and all that. And the investment in making that look attractive and appealing to the oni is much more important than the ability to then put that on the blockchain, right? So that they can use some third party wallet to look up the same thing. So we've not invested on the blockchain side. So here's my last question on this. And then I don't want to dig too deep, but here's my last question. So I understand the way the person buys in and it works for them. I guess the way the investors make money is through the setting of the rental price. Like that's how, because you said they're making certain rate of return on their money. That's what's driving that, right? Is whatever the rent is set to essentially? Yeah. So there's a couple of pieces there. The return is roughly evenly split between the rental income, right? And home price appreciation with a little bit of leverage at the fund level, we can increase the equity appreciation. So the source of return is rental income and home price appreciation. Where that is better or where we've innovated here is really around structurally, what we've seen is that the co-ownership relationship gets more of the onis engaged in maintenance. So we've seen 60% lower maintenance costs compared to standard single family rental. Right. Because now that I own it, I care about fixing the hot water heater fixing a leak. Exactly. We're not going to go into disrepair. We have zero vacancy because we don't buy a home until we have a customer signed up in the agreement. So they pay rent from day one. We haven't seen any turnover right now. Eventually we'll see turnover at scale, but you know, there's significantly lower turnover because you have these five-year agreements, right? And you have the customer coming in with the with the purpose of buying the home. So they're not going to default. And because look for the average FICO has been 740. So really, really high credit quality in the portfolio. We've not had any late payments. So it's great credit. It's just they don't have the down payment. Right. So from the investor perspective, all of those things kind of bump up the return right to that 15% IRR. So here's one more question I have because now I just thought of it as we're talking from a maintenance standpoint. So let's say now I do need to spend, you know, 20 grand to fix the roof. I own 5% of the house and you own 95% of the house. Are we splitting the cost to fixing the roof 95.5? Like who pays to fix the roof? The LLC pays to fix the roof. Got it, which means essentially we are paying 95.5. Okay. So largely the cost for repairs, especially major repairs, comes out of the investor's pocket. And less so out of the the customers or the only's pocket. The interesting thing is on the other flip on the flip side, if the only says I want to make an improvement to the home, right, I'm going to renovate the kitchen and put new kitchen counters. New cabinets, whatever. New cabinets, they can do that. And because the way the AVMs work and the way the valuation models work is we don't we ignore that improvement. So they continue buying bricks at the value pre improvement and they continue to have the right to buy the home at the value pre improvement, which means as they make improvements, they actually create an incentive for them to buy the home from the LLC. Right, because the price is kept down. And that also avoids the fact that just because you spend 20 grand to fix the house doesn't mean you necessarily have 20 grand. I mean, you know, it's it's unfortunately, most renovations and improvements to houses do not return the value that is put in, which I speak personally as a person who owns my own house. If you know the industry, it's an occupational hazard because you just realize that any money you spend on your house, you're never going to get it back anyway. So, you know, it becomes a run to failure conversation. It's like, well, why would we fix it if we're not going to get it back? No, I get it. I get it. I get a whole conversation in the first place. Interesting. Interesting. You know, it's cool because you've actually thought through the structure. And this is why I wanted to get you on because it is an interesting structure. And frankly, it's not something I've seen before. I mean, I've dealt with timeshare stuff. I've dealt with fractional ownership stuff. I've seen tenant commons or Delaware statutory trusts for like commercial real estate. But this is like another flavor of fractionalization. Interesting. Interesting. I wish I could poke holes in it. Honestly, I'm having trouble coming up with, I'm having trouble trouble coming up with negatives. I get the structure. It actually, it's a cool idea. You know, the on the surface, the idea is very simple. Once you get into the nitty-gritty of executing it, you realize how hard it is and how much you have to build in terms of infrastructure. And we spent two years building the legal structure in the math and poking all the holes, right? And then going back to the drawing board and saying, okay, here are all the holes. So, if we were to talk two years ago, you would have been able to poke a whole lot more holes. Right? But that was part of the startup cost. And I think that's where we feel good about where we are, right? And the customers feel great about where we are. And so now it's a question of, you know, can we scale both sides of the business while keeping them in balance? You know, hey, you know, stuff starts out. I mean, all these ideas start out as just a concept and, you know, a small accredited investor group. And then it blows open to, you know, before you know it, it's a publicly traded entity. Yeah, it's fascinating. It's fascinating. Cool. Well, look, this has been very constructive. If people want to check out your website, the address is just onify.com, right? O-W-N-I-F-Y dot com. Always good. I have covered what I wanted to cover honestly, and I knew it would take about this long. So I'm going to simply say, Frank, this has been very positive. I'm glad we got to go through this. And for anyone who wants to check out their website, you can go to onify.com. Thanks again, Frank. I appreciate it. Thanks, Josh. Really appreciate you having me. Great.
