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Post: : This startup is raising money to invest in home equity. Here’s how it works.

Boston-based startup Hometap Equity Partners LLC has raised a $245 million fund with capital commitments from Bain Capital and Group 1001’s Delaware Life Insurance Co. to acquire minority equity stakes in private homes, MarketWatch has learned.

The fund marks the latest and largest such vehicle for the company as it builds up its practice for institutional investors to gain access to trillions in equity while providing homeowners a debt-free way to raise capital, said Hometap CEO Jeffrey Glass.

“There are millions of Americans who are house rich and cash poor and who have a huge percentage of their wealth trapped in their home,” Glass said.  “If you want to access the capital, you either sell outright or further borrow against the home, which increases your monthly payments.”

Here’s how it works for the homeowner:

Hometap pays up front for a percentage of the future value of the home.  Homeowners can settle the investment at any time over the course of the 10-year term, when they sell or refinance the house, with no pre-payment penalties.

“They have complete control,” Glass said. “This is capital that allows them to deal with the opportunities and challenges of life whether it’s paying for a renovation, paying down debt, or for college or a health emergency.  This allows them to access a big pool of capital without the burden of debt and interest payments.”

Usually transactions are made for 10% to 15% of a home’s value, or it could be a smaller piece such as 5%. 

At the end of the term — or whenever the homeowner decides to settle the investment — the homeowner pays Hometap an agreed upon percentage of the final home value.

If the home goes down in value, Hometap takes a smaller percentage of what is now a lower value when the home is sold or when the investment is settled. But the company is building a portfolio of homes in various markets to reduce this risk to its investors in the fund.

“For some people, taking on additional debt is reasonable and affordable, and they feel comfortable with the required cash flow,” Glass said. “However, we feel good about the alternative for homeowners we provide whereby they have the option to access the equity in their home without taking out a loan or having to sell their home.”

The idea for Hometap came in 2016 after conversations about the challenges of homeownership, both in the ability to access capital for a down payment and the inability for homeowners to benefit from the equity they earn due to home price appreciation. 

In one case, a friend needed money for a relative’s medical bills and had to ultimately sell the house because the bank would not extend more credit to them even though they’d been paying the mortgage for 10 years and had equity in the house.

Glass and Hometap company co-founders Max Campion, Andrew Vassallo and Charlie Vrettos saw that companies typically sell a chunk of equity in their businesses to investors so they figured there must be a way to allow homeowners the same thing. 

At the same time, institutional investors are looking to invest in long-term assets.  Equity in homes tends to be a hedge to inflation and may also offer a counter-cyclical way to invest.

Hometap may expand the fund, but there’s no immediate word on speed of deployment. Down the road, the firm will likely expand the fund or raise another one.

HomeTap has 150 employees now, and plans to ramp up to about 200 in 2022.

In December, Hometap announced a $60 million round of financing in a round led by American Family Ventures, along with capital from Bain Capital, Iconiq Capital LLC, G20 Ventures, Pillar and General Catalyst. All told, the company has raised $95 million in financing.

Glass is a serial entrepreneur and venture capitalist dating back to the 1990s before he helped launch Hometap Equity Partners in 2017.

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