Home remodelers, meet the crowdfunding crowd.
Zeus Mortgage in Houston has rolled out an online real estate financing platform that seeks to match accredited investors with property holders who need funding for renovation jobs, construction projects and cash-out as well as other refinances.
The loans are initially made in the name of Zeus CrowdFunding, with Zeus prefunding the loan. Once the funding is secured through one or multiple investors on the platform, they become the official lenders.
Zeus makes its money off of the yield spread between what borrowers pay and what investors earn, which comes to around 2% per loan. The company also allows investors to request that it guarantee the loan, in which case Zeus will guarantee the principal and the interest.
Roughly 90% of the loans Zeus has funded through the platform were for residential properties, while 10% were for commercial properties, which can include multifamily, office and retail.
The platform naturally attracts borrowers looking to invest in a property for financial gain, according to Steven Kaufman, Zeus Mortgage’s president and founder.
A lot of buyers "are looking to buy and renovate, fix and flip, fix and hold," Kaufman said. "For a lot of baby boomers, their second career is real estate."
When looking to tap into this segment of the marketplace, Kaufman said he noticed several gaps just as crowdfunding was gaining in popularity. He said it reminded him of "when the U.S. Postal Service finally took notice of UPS and FedEx."
"There's definitely a big shift in marketplace," he said. "I want to be on the cutting edge of that."
Zeus has long had an offline crowdfunding program, which has funded $200 million in loans. Its default rate on the crowdfunded loans it has done offline was "1% of 1%," according to Kaufman. Zeus attributes its low default rate to its proprietary "Z score," an algorithm that rates the creditworthiness of every borrower, and to "defensive, multilayered underwriting," Kaufman said.
"We're not looking to approve the loan, we're looking not to approve," Kaufman said. "We underwrite to know in the case of default what our outcome is."
Instead of providing investors with the traditional loan-to-value ratio, the company provides a figure called the "after repair value," which measures the amount the property is expected to sell for after repairs or renovations. The ARV is set by a "subject-to" appraisal, and Zeus will lend up to 80% of the ARV.
"If you were taking a Mercedes or a Rolex, you would consider what it's worth fixed up," Kaufman said.
"In lending, there's some sort of myopia that happens where you don't do that," he said. "We lend off the improved value or retail value of the property once it's improved."
While the platform appeals to those looking to acquire funding for investment properties, it also can be used by would-be owner-occupants. One of the first deals on the platform, Kaufman said, was for a borrower who had a loan fall through with a large bank just three days before closing. Zeus was able to meet that tight deadline, he said.
"There's no delay, and there's no TRID, so we were able to close that loan in three days and save that deal," Kaufman said, referring to the Truth in Lending and Real Estate Settlement Procedures Act combined disclosures. "We're really a second-chance financing option."
In that vein, Kaufman sees this new business line as a complement to its traditional retail mortgage bank. As he puts it, "if a client calls and doesn't fit into one of the seven or eight boxes we can put them in, they'll need some sort of alternative financing."
Since rolling out the platform in the fourth quarter, Zeus has funded $10 million in loans. When the platform was still in beta mode, an investor attempted to put money toward one of the company's fake deals that was being used as a test, Kaufman said. Given the interest thus far, the company says it thinks this segment will expand quickly.
"We've done no real marketing," Kaufman said. "We expect some pretty good quantum leaps in growth over the next several years."