Navigating the Evolution of the Housing Market with Ownify's CEO

Ever wonder what it takes to leap from predicting horse races with neural networks to revolutionizing the home ownership landscape? Frank Rohde, CEO of Onify, joins me, David McIlwain, in a riveting exploration of his unconventional path to innovation. Frank's story is not your average tale; it's a blend of academic rigour, marathon tenacity, and the kind of entrepreneurial spirit that turns ambitious ideas like fractional homeownership into reality. He opens up about the pivotal moments that led him from Germany to the forefront of the U.S. property market, and the relentless drive needed to outpace the 'golden handcuffs' of high-stakes enterprise sales.

In our conversation, we dissect the concept of buying a home 'brick by brick,' a model that could bring the dream of homeownership into reach for many. Imagine living in your house with full usage rights, but without the burden of a daunting mortgage hanging over you. This is the potential of fractional homeownership, and Frank walks us through the mechanics. He paints a vivid picture of how first-time buyers can climb the property ladder incrementally, and how investors can diversify their portfolios through OwnerFi, fostering community growth and aligning interests in a way traditional real estate investments rarely do.

But it's not all about the money; it's about the people and the communities, the 'missing middle' caught in the crosshairs of financial accessibility and market volatility. We examine the landscape of real estate investment, from FICO scores to tax benefits, and the innovative solutions providing a lifeline to first-time buyers. Frank shares insights into strategic growth in the Southeast's thriving markets and the role of persistence - a quality akin to his marathon running - in overcoming the challenges of innovation within the housing sector. For anyone navigating the complex world of real estate, be it from the investment side or the hunt for a place to call home, this episode is a stride towards financial freedom with Frank's visionary leadership as our pace setter.

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Transcript

Speaker 1: 0:02

Hey everybody, david McElwain, with another episode of Baker Golden Handcuffs Today, I'm really excited to have with me Frank Rowe. Frank is the CEO of Onify and you probably haven't heard of Onify, but we're gonna make sure that we change that today. Frank originally has from Germany. Early attempts had become the child prodigy violinist were unsuccessful, which forced his parents to abandon any hope or supervision, accordingly left to his own, frank quickly became famous for wrestling rattlesnakes in kayaking a kind of guy. His sister meanwhile became a child prodigy violinist and, looking for a brighter future, frank moved, of course, to California, where his first job was a choice between watering marijuana pints in the northern California mountains or building a neural network based prediction engine for horse racing results. Ever focused on doing the right thing, he of course built the neural network for horse racing. Several other lucky turns led him to stay in the US and eventually graduated from the Wharton School at the University of Pennsylvania with a BS in economics. Since then, he's been a consultant.

Speaker 1: 1:03

Oliver Wyman started an online insurance company, spent four years at FICO and grew no miss from less than 2 million to over 25 million in annual revenue before selling it. His most recent challenge is building Onify, a new path to ownership for the approximately 2 million first time home buyers. Each year, and ever since watching Forrest Gump, frank's been running. He's completed marathons in North Pole and in Antarctica, on the Inca Trail to Machu Picchu, along the Himalayan Ridge between India and Nepal and around the Cape of Good Hope. His goal is to complete a marathon on every continent. For his other passion, currywurst and colch, makes that impossible. Did I say colch right?

Speaker 2: 1:43

Pretty close, colch Yep it's that you can go out on the oil. But close enough, if you order that you'll get one in Germany.

Speaker 1: 1:51

Okay, well, I'm close enough redneck to where I don't try to speak any good German. So, frank, welcome to the show. Quite the bio. I love it when I saw that.

Speaker 2: 2:00

Well, thank you. I've never had anyone read it to me, so you know that was a bit embarrassing, but I'm glad you liked it. Thanks for having me you bet.

Speaker 1: 2:08

So my daughter just sailed around the Cape of Good Hope and she just finished a semester at sea. How was the marathon?

Speaker 2: 2:19

It was long and I didn't realize. It's actually an ultra marathon 56km so it's 14km longer than the traditional 42km right, so that's an extra 9 miles or so.

Speaker 1: 2:32

And the next 9 miles hurt a great deal.

Speaker 2: 2:35

It hurts at the end, exactly. But you start at night and it's fascinating because it's all in Cape Town itself and you start from one end, which is the Atlantic Ocean, and you run to the Indian Ocean around the Cape of Good Hope and it's just. The views are phenomenal, the support along the way is great. It's called the Two Oceans Marathon. So, yeah, I really enjoyed that and there's a couple of others, and generally what I've done is, you know, I'm a pretty big guy and I'm not very fast, so I try to find those marathons where you can have fun, you can go slowly, you enjoy the views, you enjoy the crowds, right, and that one was one of those and it was really hard and someone along the way tapped me on the shoulder and said you gotta keep running, otherwise we have to put you in the bus. I looked behind me and it's the bus that picks up the stragglers so that could make me go again.

Speaker 2: 3:24

You didn't idea how fast I was, you know, and from that point on when I ran a little better, but um, yeah, it was a good time.

Speaker 1: 3:31

That's awesome. I have a fantasy of retiring to Cape Town and, uh, my wife is on on page so I need to, you know, get her to run the marathon at Two Oceans. And see, I can't get her on page for that. So welcome to the show. I'm curious have you ever had golden handcuffs?

Speaker 2: 3:49

I have and I thought about it. Obviously you know coming on to onto your pod. I started my career in consulting and then went into FICO, which was product management, credit risk, you know consulting. And then I joined this company, nomis, which is the company prior to this to Onify, and I joined that company as head of sales and marketing and so that's a glorified way of saying I was the salesperson and you know what that's like. Right, you're constantly on the treadmill. You're running after prospects and clients and deals and renewals, and this is this is enterprise software selling to big banks, and so we build at. Nomis is the pricing engine for a lot of the large mortgage lenders, unsecured lenders you know big banks. So you're selling into these big, huge sales cycles take forever, but when you win them.

Speaker 2: 4:40

Large enterprise sales.

Speaker 1: 4:42

Large enterprise sales no immediacy, no media gratification. Yeah, I'm very familiar with them.

Speaker 2: 4:48

Yes, and but when you win them, these deals can be very large and they can be very rewarding. So I had, you know, that kind of golden handcuff situation where I would work on these deals for, you know, a year or sometimes two years at a time, and maybe longer, and then you get a big commission check at the end and that's your reward. But and the way the structure works is that some portion of that always stays as a, you know, second and third and maybe fourth year recurring commission. So that's your golden handcuffs. But you realize that I'm working and I'm making a good amount of money, which is great, but I'm A still working for that A-jack right.

Speaker 2: 5:29

So it requires constant running on the treadmill, so to speak, not the marathon but the treadmill, and in order to keep, you know, more paychecks and more commission checks coming, you have to keep us. So that was, and you know I enjoyed that. And there's, you know, I think, nothing wrong with that until you realize it is a set of golden handcuffs and it prevents you from doing things maybe that you want to do that are that are maybe more aligned with where you want to take your career. And so, yes, I did have those golden handcuffs for a good amount of time, and then I became the CEO, and so I put the handcuffs on someone else, right?

Speaker 1: 6:05

I can tell you I really relate to that, having been a sales executive and a sales leader for a long time and a guy carrying it back as well. You get to that point. You get the macro accounts, can't leave them. Yeah, and you're. Part of what brought this pod to light was I wanted other people to viewpoint that when you are in this position of success, there's more out there than the negative that you can have. You have alternative choices, like making passive investments in realistic which is how about the genesis of going to spiky? Yeah, so that takes me obviously to onify that. That was also never heard of this. What is it?

Speaker 2: 6:44

so um. So there's a story here where you know I was working for this company in Thomas and, as I mentioned, selling pricing engine software to these big banks and lenders, including a lot of the Lord's mortgage lenders in the US and Canada and elsewhere, and and after I uh kind of graduated out of sales into being the CEO, you know, spent more time on the product and and the roadmap and all that. And one of the things that became apparent, especially in the last couple of years, was that the first time home buyer in the US is getting squeezed out more and more. It's getting harder and harder for young people to buy their starter home right, and we were seeing this in the data because we're running the software engine for these lenders. And when we dug into this, realized that the the way we buy homes in the US right through traditional mortgage, which is largely a government created and backed and sponsored product, is great if you can get to the down payment and afford that and afford the monthly payment, but it creates a number of challenges, in particular for first time buyers, and so I saw this kind of in my role there and then eventually decided to do something about it. I had sold onify so I had the ability to leave I'm sorry, I had sold onemis, so I had the ability to leave and the Golden Handcuffs kind of became a little looser right in the sense that that was now possible.

Speaker 2: 8:08

And so onify is really a combination of one the realization that there's a big problem that needs solving and that hasn't been solved. How do we create a better on-ramp for first time home buyers. Two, the realization for me personally that helping big banks make more money is great, but it's not the be all and end all and ultimate goal of my career. So I wanted to do something that actually helps people and pursue that passion. And three, I realized I have the wherewithal and the knowledge of the mortgage industry. I spent 15 years in the bowels of mortgage math to actually solve this problem and so I went out. She went back to the venture capital firm that funded my prior company, told them about the idea of Franco Lavi Capital. These guys have been fantastic supporters and so they seed funded onify about two years ago, and we've been working on this problem now for two years, which is how do we create this on-ramp?

Speaker 2: 9:07

How do we enable first time home buyers to buy a starter home in the US and as part of that, we actually and this is where it comes full circle a little bit we've created a value proposition for investors that generates passive income, capital appreciation in real estate, which is why this is, I think, a good fit to talk about here as well for the investor side. So what we've done is we've basically challenged this notion of how do you buy a house in the US and traditionally you do it with a mortgage and we said why do you have to? First, the question we asked is why do you have to buy 100% of the home and take on this mountain of debt to do it? Why couldn't you just buy a fraction of the home that you live in, a quarter, a tenth, maybe, 1%, maybe even less Right? Well, just to make it, understand.

Speaker 1: 10:01

The general answer is I want to use 100% of the home.

Speaker 2: 10:04

Correct. So having all those fractional homes in the past as a second home.

Speaker 1: 10:09

I can only use it every fourth week.

Speaker 2: 10:12

Right. So if you think about fractional ownership right, what does that mean in the US, for most people it means some version of time share or some version of I have to pick a time or get a window, or I get maybe I only get a couple of rooms in a bigger house, but it's a limited ability to use it. So what we had to figure out is how do you buy a fraction of the home while also being able to use the entire home? Right? And so it's really taking apart the notion of what ownership means. Ownership is one occupancy Right. It's to the economic rights Can you mortgage it, can you sell it, can you lease it out, et cetera.

Speaker 1: 10:49

The whole bundle of rights. It would talk about all five of them.

Speaker 2: 10:52

The bundle of rights, exactly, and the bundle of rights also includes use Right.

Speaker 1: 10:57

You know quiet enjoyment and there's a. We can go to the Wee Tier listeners. But the reality is what we're talking about is, when you buy land, you really buy a bundle of five rights. You're not actually buying the land, correct? And if you want to go into this, hit me with a comment offline and let's dive in.

Speaker 2: 11:16

Right.

Speaker 1: 11:17

Exactly.

Speaker 2: 11:18

So we took that bundle of rights apart, then put it back together in a different format. That is the legal structuring answer here, right? And so what we said was well, what if we could allow someone to pick a home, live in it and buy the home brick by brick? So imagine you could break a home into 10,000 bricks, right, even a home that's made out of sticks, you could theoretically break it into 10,000 pieces. So we call these pieces bricks. Each piece is one basis point or 100th of a percent, and so if you think about a $400,000 home, right, a brick, 10,000 bricks. One brick would be worth $40.

Speaker 2: 11:57

What if we could create a structure that allowed a customer to pick a home? We purchase it for them, they live in it and they buy bricks over time, right, so they accumulate their stack of bricks and grow it and, at the same time, investors hold the balance, the remaining bricks. And since I need to live in the home and need to have 100% of the usage rights, I would probably pay rent or have to pay rent for the use of those remaining bricks. Right, and so that's the structure we've built.

Speaker 2: 12:29

You started out with this question of could you fractalize the home purchase and structure it as an equity-based path. Right, where the customer buys equity or buys equity over time but doesn't have a mortgage balance, doesn't have the obligation to ever buy the entirety of the bricks right, you can keep going as long as you want, you could stop, you could potentially reverse it as well and sell bricks back to investors, and so if you want to build that and so we've worked on this for a year what we're effectively building is this notion of fractional ownership in bricks of single-family homes in the US. Right, and the way we use that is to create what is effectively an on-ramp for first-time home buyers, where we've built a program that says to the first-time buyer you can pick a home, so start our homes right. Three, four, five hundred thousand over homes.

Speaker 1: 13:20

Totally, you're trying to mark your place a little bit.

Speaker 2: 13:22

It's not a mark your place right, but yeah you're on the right gear.

Speaker 1: 13:25

Oh, all parked yeah.

Speaker 2: 13:27

So Denver, you know this gets tough, but there are some suburbs of Longwong and further out where you can do that right.

Speaker 1: 13:32

The mean home price in Denver. For those of you who don't know, I live in Denver it's $5.75 or so yeah right now.

Speaker 2: 13:39

So we've launched a starter home as $4.50.

Speaker 2: 13:43

Right, right, we've also enrolled in Durham the research triangle, right, and you can buy homes for $350, start a couple in the $310, $320, right, and these are two three-bedroom $1,400 square foot starter homes. So the on-run, the program we've created is basically says you know the customer qualifies, we credit underwriter, we income underwriter. We give them a budget, they go out with a realtor, they pick a home and then we buy the home on their behalf and the customer, on day one, puts in 2% of the equity, or 200 bricks that's their down payment, if you will and they commit to a five-year program during which they buy incremental bricks every month, roughly 13 bricks At the then current market value of those bricks. So each home gets revalued every month and the transaction of bricks being transferred just like you would buy shares in any other company or entity, it actually done at the current market value of those bricks.

Speaker 1: 14:45

So let me dive in here for a second, if I can.

Speaker 2: 14:46

Yeah.

Speaker 1: 14:47

So what you're saying is that you're revaluing the. I want to take the investor side. As an investor, we're basically buying in full the house in advance the tenant for lack of a better phrase, we call them home buyers the ony, because the ony okay, onify, ony owner ony the ony owns, you said, 20 bricks initially. You're buying 13 or 200. You're buying 13 per month, right, and is that an addition to or part of the rent they pay? It's an addition to, okay, so they. So You're evaluating this basically like a dollar cost average of the stock equity.

Speaker 2: 15:33

That's exactly right, and so what we're allowing the customer to do is dollar cost average the purchase of their home, or up to 10% that's the way the math is dialed in over five years. So really it's a walk. Where the customer starts at 2%, they walk up to 10% of the equity in the span of five years, over 16 months. Individual transactions. Now each transaction is done at the then current market value. So home prices bounce around. They go up, they go down. If they go down, your payment buys slightly more bricks. If they go, you know home prices go up, your payment buys slightly fewer bricks. Right, and so the net effect is that dollar cost averaging of the transactions to the point where the customer has 10%. Okay.

Speaker 1: 16:16

And at that point, what happens at 10%?

Speaker 2: 16:19

So at 10% you have enough equity to use that equity as a down payment for traditional mortgage. So the customer has a choice right. At any point along the way, and certainly at the end of five years, they can use that down payment, that 10% equity, as a down payment for mortgage and effectively buy the home from the investor pool. So they have a purchase right on the home at the future market value right, and so that's the risk.

Speaker 1: 16:47

That's 60s value. Whatever month, 60s value is Correct.

Speaker 2: 16:52

Exactly, and so there's a protection. You know we put a floor under that price to ensure that the investor is protected. So the golden path that this is really engineered for is customer builds equity for five years, has equity in the home now uses that equity as a down payment for mortgage, buys out the remaining equity the 90% effectively from the investor pool and owns it the traditional way. Right, and someone might have a 30 year fixed mortgage, they might have an FHA mortgage, whatever they can get. But the benefit to the customer is they have the purchase right in a non competitive transaction. So they don't need to come up with, you know, a cash offer. They're not in a competitive bid scenario.

Speaker 2: 17:32

So that's path one. Path two is they can continue and renew and say I want to build another 10% equity or want to renew for another five years, I stay in the same home, keep building equity in that way or at any point along the way. The customer can also leave and take their equity with them. Now, if they leave in the first five years, we charge them a relisting fee. So we buy back the equity and then relist the home and effectively sell it. So if they do it at the end of five years they can could bought out with their equity and effectively at that point we sell the home, return the capital to the investor pool. So it's a five year program right for every home, really optimized around this golden path where the customer, the homeowner, uses the equity as a down payment in a mortgage and buys out the rest, right.

Speaker 1: 18:24

So let's play the investor, let's pull in the investor hat, right, because that's who we're talking about. So is this a regulation 506C offering? I would assume, because it's probably not anything but that, because you're selling shares, in essence, and it's almost tell me how you guys have structured this.

Speaker 2: 18:45

Yeah, so there are three components to this. The first one is the sale to the only is a private sale, right? Okay, so that's under 4.2, private sale transactions, not market and et cetera. The funding comes from investors, and investors take two shades. There's the 506C accredited investor that puts money into the Onify home fund, so that's a V as well.

Speaker 1: 19:12

That's an accredited investor, so it must be a verified, better accredited investor, exactly so. It's a 506C with an A requirement on it, or is it A, or is it D, I can't remember. It's A 506CA.

Speaker 2: 19:27

It's the accredited you have to be an accredited investor and so, as an accredited investor and those are, we have folks in the triangle, we have folks elsewhere in the US right, you invest into a fund and the fund holds bricks across all the homes in our portfolio, so you get this instant diversification and while you're holding the bricks, they generate rental income and they generate home price appreciation. Obviously, that's not guaranteed right and there's risk in that, but it's a single family home and so, from an asset risk management perspective, is relatively well understood. There's a diversified risk pool. As a diversified risk pool exactly the other thing we're working on and this is still in the works and so the SEC hasn't qualified it is a REVI-A exemption which allows non-accredited retail investors to buy bricks either in the fund or directly in individual homes, and the reason we're doing that and again, that's not live yet. So this is not a solicitation, as is not of this in any way.

Speaker 1: 20:31

And I'm not an attorney and I'm lucky to be passed advice that I'm not a registered or best-in-arriser, and is there any other solution we need to put out there?

Speaker 2: 20:38

No, we could put the fine print in the back right, fine, but the reason we're doing the REVI-A, the work on the REVI-A exemption, is that we would like to activate the community and community capital right. This family, community, church folks that know the only and might be, you know, are not there to give a gift or, you know, donate money for the purpose of buying a home but might be willing to buy bricks in this very structured transaction where you get rental income and home-press appreciation and all that right Under the qualification of an SEC exemption, say, yes, I'm willing to buy bricks and date this home. I've known forever, I trust them. This is going to be an interesting investment, essentially a good investment for me. So we want to activate that retail investor right who may actually know the only as well as retail investors elsewhere. And so that's the REVI-A exemption, which is the second path of putting investor capital into this.

Speaker 1: 21:39

And that's not yet live as we talk about in that stuff the hierarchy core and that's the racial office. Point in time Correct.

Speaker 2: 21:45

So what is live? And this is kind of this is a really interesting case here, right, if you think about single-family home or generally, multi-family is the same problem If you think about the investment returns to happen. One of the things that we focused on with building the structure is to say, well, we're creating owners right hence the name owner-fi and we are attracting people who have an ownership mentality and they are legally shareholders in the entity that holds title to the home right, so this is done through an LLC and fractional ownership is done through shares in that LLC. So what does that mean if we can create this co-ownership? And it means a couple of things which ultimately all drive investor return. The first one means we can pick homes that generate attractive rental yield and attractive home price appreciation and we can charge market and close to top-of-market rental rates for this transaction, because the only sees the optionality and the value of being able to pick a home that is not for rent. Today I'd pick a home that is on the market for sale and build towards owning it, so one that drives higher yield rental yield relative to just buying the same home and renting it out to the tenant.

Speaker 2: 23:10

Two, what we found is we don't close on a transaction until we've gotten a committed, only because they get to pick the home. So there's no lease up period, there's no vacancy up front and because we've built this five-year program with equity ownership, we also don't expect vacancy throughout the term. So ultimately, that all returns back to the investor in the form of, where you look at it, lower operating expenses or better rental performance. Three, and this is really interesting over the last year we've seen that we see about 60% lower maintenance and repair costs in the portfolio because the ones are acting like co-owners, which is what you expect in what we hope for rent. So they're fixing little things, taking care of the properties, they're painting, they're changing light bulbs, et cetera, rather than calling their landlord every time something happens, which ultimately is cost for the investor.

Speaker 2: 24:04

So the net net is that, compared to industry average over the last year and again this is early, so a small sample and all that we've seen about 300 basis points higher operating return, about 11.3, 11.4% relative to 8.3 or so SFR average on an unlevered basis. This is before any debt or mortgage costs interest costs gets put into the transaction, and so the reason we're seeing that is because this co-ownership mentality, lack of, they can see better payment performance, et cetera ultimately all drives return for the investor and that's the basis on which we believe we have built a path here that is attractive to the first-time buyer because they get the lower down payment, they get an all cash offer, they don't have to worry about maintenance, repairs all that for the first five years, they get the on-rack and the investor gets the yield enhancement and the return enhancement by effectively partnering with someone who behaves in a better way than your average single-family rental tenant.

Speaker 1: 25:07

So the fascinating thing about this is that you're hedging part of the return portfolio, if I understand you correctly, on the premise that the owner has equity. Therefore, they will behave like a true owner and not like a tenant, and you've proven this out in the 300 basis point of Delta. So far in what the theory is, and thus, if I understand where you're going with this, the investor has a safer risk adjusted return because of this. That's correct, that seems like a good.

Speaker 1: 25:42

So the net is that onify if I'm jumping to the next natural assumption is onify believes that mankind is basically good and will treat their own possessions in a positive manner.

Speaker 2: 25:55

Yes, Dave, that Let me say yes, but I'll quote wrong rig and trust, but verify. So what does that mean?

Speaker 1: 26:07

Well, we're recording this the day that Mitch McConnell just announced he's stepping down as majority leader. So there's a tremendous amount of all kinds of political things going through my head.

Speaker 2: 26:17

So, look, I spent four years at Fightgov and I worked on credit scoring engines and all that, and my co-founder built a 5,000 home portfolio for another company, so he knows what happens when you have tenants that behave badly and what happens when there's evictions and all that.

Speaker 1: 26:34

So you're not going to reduce moral hazard here?

Speaker 2: 26:37

Well, so take that to the side, because there's a really interesting moral hazard question. But so, on the trust, yes, we generally believe people are good, but we verify. So right now we have an underwriting engine that looks at credit, looks at identity, looks at fraud, looks at cash income. We actually do bank account level cash flow analysis to create the budget for the customer and so far, the average FICO in the portfolio is 742. We've now had a single late payment, so the quality of the customer that we're sourcing and underwriting is pristine.

Speaker 1: 27:11

So let's take a minute or second because for those of you that don't know what the average FICO is, alike. What's the average FICO in the US like Frank? 680? 680? Yeah, so 650 is considered in the real estate world writable, yes, so what you're saying in a perfect FICO score is 850, yes.

Speaker 1: 27:31

Mm-hmm. Okay, my wife always tells me how her FICO is better than mine and I just look at her and say she says no. And then I say we're fighting over truth, it doesn't matter. But a 740 FICO basically says this is a really honest, trustworthy bill payer. That's great. So as I hear this, my whole brain has been going through the idea that your own e-profile is going to be a less credit worthy person than a 740 indicates. But that's the interesting thing for me.

Speaker 2: 28:11

When you dig into the data, what's happening with first time buyers, right? So the first thing that's happening is house prices keep going up, so it's getting less and less affordable relative to incomes, and so everyone is subject to that. Second, you have a lot of people with student debt, right? You have more student debt weighing on first time buyers than ever before.

Speaker 1: 28:30

And one of the reasons for that is because student debt wasn't compounded into the equation until was it 2020? 2018?

Speaker 2: 28:38

Relatively recently, right. And so now mortgage vendors either have a point or a point grade of the standing balance and add them into the budget, that income calculation. If you have student debt as a second one, you have mortgage rates now reverting to their long run average. Right, they're high right now. They're going to go maybe back down to mid-fives.

Speaker 2: 28:56

They'll sell somewhere in the next 18 months in the fives, but they're not going to go back to the twos and threes, right? So you have that kind of affordability hurdle. You have, for first time buyers, the tax benefit of getting a mortgage. Basically get legislated away with the Tax Act in 2017.

Speaker 1: 29:14

So you can still get that. So the question comes does it go sunset? I think it's supposed to sunset at 25. Correct, potentially, right, potentially. What will government put us?

Speaker 2: 29:23

Yeah, so you have the interest, the intersection of the tax sector of mortgage interest. But the biggest issue that first time buyers have is that when they show up with an FHA mortgage, they've scraped together the down payment. They can make a monthly payment. They put in an offer. What happens? They get outbid by a cash buyer, and we see this time and time and time again right in the market that we launched, and so one of the big benefits that we're providing is this cash offer.

Speaker 2: 29:52

So why would someone with a good credit score engage in this rather than saying, well, I'm going to keep saving? There are basically three reasons why someone couldn't buy a home. The first one is they don't have sufficient income. We can't help with that, right. If you don't make enough money, you're not going to be able to buy a home. That's unfortunately the economic reality. Two, someone has poor credit, which means they've not been diligent enough to pay their bills on time. You know, maybe they don't care as much. Whatever, Everyone has their personal circumstances, but we don't fix that for people. But there's a third segment, and that's the segment that has gotten larger and larger for people. They have good incomes, but they have student debt. They've been diligent in paying their bills, so they have good credit, right. They just don't have the down payment. They haven't saved up enough to build a competitive offer in the market. And it's that piece, and we call them the missing middle right. They're teachers, the public sector workers, they're firefighters, they're policemen, they're nurses right, those are the folks in our portfolio.

Speaker 1: 30:56

We have software engineers and creative writers Kind of like the Henry's right their high income, not yet rich. That's exactly right.

Speaker 2: 31:04

And so they don't need help in the sense of a down payment assistance program right.

Speaker 1: 31:10

They don't qualify for it.

Speaker 2: 31:12

And they don't qualify for it. Because that's the other thing, right, this is. You'd go back and say, well, there are mortgages that help people with lower incomes. Yes, if you're below 80% of Gary immediate income, that's when you can qualify for those mortgages. But there's this middle piece. We call them the missing middle right. Who are people that you want to have in your community? They're great creditors, they're great people to invest in, and that's the program that we build and that's the core focus. That's how, ultimately, we've been able to build this portfolio with, from a credit perspective, very, very high quality customers who've been performing very well. And I think that's a long-winded answer to saying, yes, we believe in the good in the world, but we've built an engine that tries to underwrite and select those people very carefully as well.

Speaker 1: 32:01

No, just after I asked for the question.

Speaker 2: 32:02

it's going to be a five minute answer, so out of every hundred applications today, we accept maybe two. Right, that is fairly constrained still.

Speaker 1: 32:15

Yes. So then typically our keep this podcast a half an hour. We're already over that, so I apologize and listen and keep listening. We're going to get a little more meat in this potato stew. So tell me, frank, as an investor, you're basically buying into a fund of funds, in essence, or into a pooled fund of securities. The only makes the cash offer. That doesn't need to have an escalation cost in it for appraisal gaps, because it's a cash offer. Therefore, the shortfall and the competitiveness is overrun by that. I'm putting on a broker hat for something. I'm listing a house and I have three or four offers. I'm going to always recommend to my seller that they take the one that's the most assured to close, and what you're handling here is that assurance for that listing agent and that seller, and that's a core component of the 742 FICO user. It's a competitive advantage position Correct, yeah.

Speaker 1: 33:22

Is it competitive advantage as an investor. What happens if the market softens?

Speaker 2: 33:30

If the market softens, you own equity in a home that generates rental income Right.

Speaker 1: 33:38

And generally so it becomes a straight arbitrage play at that point right.

Speaker 2: 33:42

So the home may lose value, of course, right. And if the home loses value, two things happen. One, the only actually buys slightly more equity every month because the price of breaks goes down. They can buy with the same payment. They can buy more breaks, right. So they may end up at 11% or so. In an extreme scenario they might end up at 12% at the end of five years. So you might end up sending your equity as an investor over the pool Along the way, right.

Speaker 2: 34:10

And then the question is where do you believe house prices are five years from now, Right. If you believe that they're going to be lower than today, right, then you shouldn't be investing in real estate. I think that's a long Period, Right period.

Speaker 1: 34:24

So you're making the play here. Mathematically speaking, everybody the average house has raised in average per am by 2.5% to 3.5% nationwide since 1950. Right On any given year. So what you're saying here is there's a 15-point delta at minimum, Correct?

Speaker 2: 34:46

And there's a couple of other things going on right. One is we obviously try to pick markets that are better than the national average, which is why we started in Raleigh. So if you look at the how home prices behave by price bracket, starter homes generally tend to do better, right, because that's where household formation starts, right, and so there's a support system there. And then the third thing we did is we put in place a very simple protection for the investor. To say, the only cannot buy the home for less than 105% of the entry price, so the purchase option is at the higher of whatever future market value, or 5% above entry.

Speaker 1: 35:24

Now, 5% and 5% is not a great return that's 1% a year, so it's a terribly performing market.

Speaker 2: 35:30

But in a terribly performing market you have that floor right. Right, so that protects the investor and, at the end of the day, the thesis here is that you have investors who have more capacity from a balance sheet perspective and their individual financial situation. They have the capacity to ride out a home price drop in real estate. A first time buyer often doesn't, and I know we're over time so I'm just going to be super quick on this. You mentioned moral hazard, right? One of the interesting things about moral hazard is I used to sell these in the morning before I was doing.

Speaker 2: 36:04

You have someone buy a $400,000 home with 10% down right and then the home price falls to $320. So they put $40 down, home price falls. Now their equity is worth negative $40. Whatever they do, they mail the keys to the bank, right, and we call the jingle mail back in 2009, 2010, 2011. Because the way the mortgage works is there's no incentive for me to keep paying for something where my balance is higher than the value of the asset. What we've built with this equity-based structure is the customer builds from 2% to 10%. Let's say they want 10% with that $400,000 home and the value goes down to $320,000. Their 10% is still worth $32,000. And so we've removed the moral hazard of them saying I'm just going to walk away and stick the investors with the asset Right.

Speaker 1: 36:53

And that's a crucial element. That's part of why I'm a big fan of Michael Lewis and his writing, and that's part of why you see the domino effects he laid out from the 2009 mortgage crisis, and this is a fascinating concept for me. All three of my hats are going full. My brain's going in three different directions here. I love it. So as an investor. Just like curiosity right now for the accredited 506C offering, what kind of minimum are you looking for?

Speaker 2: 37:27

We're doing $25,000 minimum today into the fund. So if you want to Are you?

Speaker 1: 37:31

taking those retirement funds as well in self-reliance and solo form in case of all the so self-reliance.

Speaker 2: 37:37

we also have folks coming in with their donor advised funds because of the social mission construct here we're helping people with it. So we've had tax advantage 501C three money go into this. We've had self-directed IRAs and obviously cash go into this.

Speaker 1: 37:52

And if so, then talk to me for a quick second about your growth plans. What's the next market?

Speaker 2: 38:00

So Raleigh, durham today, charlotte is, next Nashville.

Speaker 2: 38:03

We're looking at a couple of other markets, so the Southeast generally. We're looking for markets that have strong economic fundamentals, job creation, folks moving into these markets and places where home prices are still reasonable but continue to appreciate, which creates the demand from the consumer side and also the opportunity for the investor side. And this is, at the end of the day, a very regional thing, right? A lot of the early investors in the first fund really are focused on the Raleigh-Durham area, like the area, know the area, right, local investors. It's home, it's home and they know and they like the idea of I'm generating real estate returns right. But I'm also helping my local community and, quite frankly, I'm not, you know, it's not blacks, don't buy these homes, it's, you know, people in my community who should be living here, and so that's, that's part of the thesis which leaves our rollout and our growth plans ultimately wide, nationwide, are really focused around these metro markets where the fundamentals work and where first time buyers want to live right and where they're struggling today to be competitive in the market Fascinating.

Speaker 1: 39:15

So they usually ask homeless at questions. I'm going to fire them at you. Tell me, knowing what you know now, having been in the mortgage, what did you call it? The mortgage math, the bowels of mortgage, the bowels of the mortgage math, and FICO and selling SaaS solutions in the financial, in tech world. What's one thing you know now that you wish you had known a decade ago?

Speaker 2: 39:47

The, how structurally slow our system is, and you know how innovation and solutions that that ultimately help people are often born outside of. You know the big banks, the big government agencies, right, the institutions that are largely built and run by people who have depended on the status goal, and this is not something new, but it's just so visceral to me. Every time I talk to a local attorney or a real estate investor or someone is like, well, how can you do this? And I was like can you? I was like, well, I was talking to this guy.

Speaker 1: 40:24

I interviewed a guy yesterday who's coming out in the episode before you, or two episodes before you, and it's for a company called Rintapp. Yeah, and he is lancing against title insurance. Yeah, there's no need for title insurance in essence. And he's right Now. All my title insurance folks are going to be freaking out and calling me. You know what I mean. We can have that discussion offline, but what you're really saying is, if I put on a libertarian point of view, is that the systems function really slowly to break the systems.

Speaker 2: 40:56

Because there's no incentive built in right, no one will reverse it, it's eating your own arm. Exactly, and so there's so, and everyone kind of knows that intuitively. But you know, what I know now that maybe I wish I would have known 10 years ago is just how constrained and how strong those constraints are right and how hard you have to work to get through them and how potentially great the rewards can be if you do it right.

Speaker 1: 41:23

Yes, which is one of the reasons why all of us that are in this alternative real estate investing world are so passionate about Get out of just one element. Get out of just buy it when the broker says you have to buy. Get out of just following the rule that says you must do A, b and C to be successful. Love that. So the Congress of that is. This is a decent advice you follow that you wish you ignore that.

Speaker 2: 41:47

I wish I would have ignored and didn't ignore.

Speaker 1: 41:51

Well, you can answer that up here. I'm not going to put that.

Speaker 2: 41:55

No, you know, nothing comes to mind.

Speaker 1: 41:56

That's a good question. You know, especially like some of my friends, some of my guests, obviously I wish I'd ignored going to college, I hadn't gone because I spent so much money doing this, or I wish I had done this, and you never know what you're going to hear from people, so I love asking them. Yeah, two final questions. Is there a thought or a quote that moves you day in and day out? If you want to share, if that was theirs?

Speaker 2: 42:18

I mean, it's not a quote, but this notion of building companies is a marathon, right. And you've kind of talked about the marathon in the intro right, and I think that's one of the things I learned. Maybe the hard way it's, it does take a long time, right. Persistence, staying power, grit, not running out of cat All those things are so important, right. And so for the folks who are maybe more on the arm of the normal side listening to this and it's just that persistence and not giving up that is so important right. And if you do it right, you can achieve what in marathon world is called the negative split, right, your second half is faster than your first half. That's the holy grail, right. All the really good marathon runners not me, but the really good ones do it that way. So you finish stronger than you start, right, but you recognize it's a long run and it's a marathon rather than a sprint.

Speaker 1: 43:06

I love that I actually wrote that I'm down. I'm a road stylist, so I'll do long roads as well, and it's the same thing. I'll do a hundred mile ride and if you can get the last 10 miles faster than a first 10 miles, please do die. Let it be on the hill. And then, lastly, frank, if someone's really enjoyed this conversation and wants to learn more, how do we get in touch with you? What do we do to learn more?

Speaker 2: 43:30

So come to onifycom. O-w-n-i-f-y. We make owners onify. I'm at Frank at onifycom, so email me and if you show phone numbers, they would happy to end up with phone number as well, but that's the easiest way to get in touch with you. This goes out. Sure, yeah, call me at 415-549-1939. And I'm happy to walk you through what we're doing right. If you're interested in investing, happy to talk you through that as well. And obviously all of that content and information is on our website as well.

Speaker 1: 44:03

Wonderful. Thank you so much for joining us, Frank. This has been a true pleasure, and you've been listening to another episode of Bicker Golden Handcuffs.

Speaker 2: 44:10

Thank you, eric, thank you.