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October 16, 2019  

Fund Targets 'House Rich, Cash Poor' Plays

A former Bain Capital executive is marketing a fund with an unusual strategy: buying minority equity stakes in single-family homes.

Hometap Equity, a Boston firm led by Jeffrey Glass, offers alternative financing to homeowners who are “house rich, cash poor.” Instead of lending money against their properties, Hometap seeks to purchase ownership interests equal to 9% of a home’s appraised value — in exchange for agreements by property owners to eventually buy back the stakes at a value equal to 15%, under most circumstances.

The strategy yields a day-one gain most asset managers could only dream of: “Each investment is worth 1.67 times at closing,” according to marketing materials circulated by placement agent Harken Capital of Boston.

Hometap’s debut fund, which invested a little more than $8 million of proprietary capital, generated a 19.7% gross internal rate of return via investments in 91 homes with an average appraised value of about $889,000.

For Hometap Fund 2, the manager is seeking to raise $225 million. The vehicle would have a three-year investment period and a total term of at least 10 years. Homeowners would be required to buy out Hometap’s stakes at the end of that period, either by selling or otherwise refinancing their properties.

“Hometap enables creditworthy homeowners to unlock wealth tied up in their home without taking on debt,” Harken managing director Donald Nelson wrote to prospective investors.

Hometap structures the deals so that its ownership stake in each property increases to 15% when home prices are rising and to 12.5% during periods of price depreciation — a rare occurrence in the U.S. housing market. “In depreciating environments, a Hometap house would have to lose more than 28% of value before Hometap would lose even a portion of [its] initial investment,” according to the pitchbook for Fund 2.

The vehicle targets a gross internal rate of return of 16.4% and a 2.2 times multiple on invested capital.

The pitchbook cites the example of an investment in a home with an appraised value of $1 million. The fund would write the homeowner a check for $90,000, while booking the position at $150,000. Assuming home prices rise by an average of 5% annually and the homeowner sells the property after 5.5 years, the value of Hometap’s stake would rise to $196,000 — for a cumulative gain of 118%.

Fund 2 could invest up to $200,000 per home. Fund 1’s investments are concentrated in wealthier markets in California, Florida, Massachusetts, New York, North Carolina and Virginia.

During the investment period, limited partners would pay a 1.8% management fee on committed capital — with the rate dropping to 1.25% during the harvest period. They also would pay a 20% performance fee after receiving an 8% preferred return.

The general partner plans to contribute up to 3% of the fund’s overall equity.

Glass, Hometap’s chief executive, oversees a 24-member team including investment professionals, data scientists, marketers and operations staffers. He worked in Bain’s venture-capital unit from 2007 to 2013, and since then has co-founded several startups including NRG eSports and StartingFive. Earlier in his career he worked as a management consultant at Bain & Co. and Boston Consulting.