Dec. 27, 2017
“Seattle housing prices are skyrocketing!” How many times did you hear this comment over the holidays? And how many friends or relatives added, “I just don’t see how anyone can afford a home in Seattle”? While prices are trending upward, we look this week at a creative financing solution for home buyers. Could it be a solution for you?
The company is Loftium, a new Seattle startup offering to help homeowners buy their first house or purchase a larger or closer-in “forever” family home. Homeowners receive help with the down payment at closing, and in exchange they must be willing to offer part of their new home to visitors on the short-term rental market. It’s kind of like getting help from a rich uncle and then letting him crash at your place now and then.
According to co-founder and CEO Yifan Zhang, the financing program was developed in 2017 out of what Zhang saw as a growing need in the housing market. Zhang herself purchased her first home in San Francisco without help from family or friends, and she found the process daunting. “People without access to friends and family support basically are not able to afford a home because of the down-payment hurdle,” Zhang writes. “Potential buyers often find it difficult to save a down payment as they are spending so much of their income on rent.” To address the problem, Zhang set out to provide down-payment assistance in exchange for short-term rental income that will return to Loftium for a limited time.
How It Works
Home buyers sign up with Loftium and agree to host guests through the Airbnb platform in a portion of the home they wish to purchase (typically a bedroom or an attached apartment). The program only works for single family homes due to typical homeowner association restrictions and bylaws. Loftium does not work with condo sales.
Loftium offers buyers up to $50,000, which goes directly towards the home’s down payment. The exact amount is determined by an algorithm Loftium runs, and the calculation depends on variables such as income, a buyer’s personal contribution to the down payment, the location of the property, and how long the buyer plans on staying in the payback program (typically 1 to 3 years). Buyers fill out a short Airbnb hosting survey to determine their personal hosting rules and style (such as the ability for guests to have pets).
Potential Loftium customers then meet with an Umpqua Bank lender (an exclusive partner for these transactions), and buyers get prequalified for the loans at Umpqua (see our resources page for specific lender information).
Finally, you start a house search! After you and your realtor have found a few options, you contact Loftium again for an estimate. Buy your home, move in, and start hosting the designated space with Airbnb. After your Loftium contract is up (1 to 3 years), you can either continue to welcome guests in your new Airbnb space (enjoying the rewards of hosting) or you can take back the living space.
Buyers who use this option for extending their down payment sign a services agreement with Loftium, which is not (technically) considered a loan. There is no interest rate, because there is no loan to pay off. Instead, the Airbnb income is shared with the homebuyer based on the agreement you make with Loftium. (For example, you can keep 20% to 40% of the rental income from Airbnb, depending on the contract you work out.) All agreements are slightly different, based on criteria such as the down payment amount (if any), the term of the agreement, and how you list your space with Airbnb for the duration of your contract. If the Loftium income prediction is incorrect and the Airbnb doesn’t perform as well financially as their algorithm predicts, Loftium will eat the loss, not the homeowner.
Here in our Kennedy Team offices, we signed up for the Loftium program and we were greeted with a very easy to use dashboard and an estimating tool. After entering a bit of information, we had the option of typing in an MLS number. This gave us a starting point and an estimate of what type of contract we might be offered. You can play around with the number of bedrooms, the number of months you wish to remain in the program (12-36) and the percentage of rental income you would like to share to fine tune your contract terms. Sign up for only what you are comfortable with. As an example of how the numbers might work, a family with yearly household income of $120,000 and a $60,000 down payment might qualify for a home priced at about $743,000. If the buyer takes an additional down payment amount of $50,000 from Loftium and runs an Airbnb for 3 years, the buyer may qualify for a home up to $831,000. If you have lived in your home for some time and built up considerable equity, the Loftium projection is even more impressive and just might be enough to bump you into a larger home. Try the site’s estimation tool for yourself.
A Few More Details
If you are a regular reader of our blog, you know one of our team members runs an Airbnb, and she has found it to be very rewarding and enjoyable (read here for more about running an Airbnb). More and more of our buyers are looking for homes with ADUs and DADUs that can be used as short-term rentals now, and units for aging parents or other family members in the future.
Loftium has partnered with a regional lender, Umpqua Bank, to serve as their mortgage lender, and the startup has received regulatory approval from Fannie Mae. We spoke with Matt Johnson, senior lender with Umpqua bank who sees this new vehicle as a real option for homebuyers. He recommends talking to the Loftium folks, going to their seminars to make sure the program is a good fit. (They host seminars in their Seattle office.) All of this does require a real commitment on the part of the buyer, but there are true benefits as well.
Matt Johnson is right. Being an Airbnb host does require commitment, and the terms may not be right for every homeowner. For instance, owners using Loftium are only allowed to “block” or make unavailable 8 nights per year; all other nights must be made available for guests, and owners must use a smart pricing algorithm on the Airbnb site to insure they are pricing the unit consistently with demand and other equivalent units in the area. Homeowners must also commit to being great hosts.
Loftium offers a welcome package to homebuyers that includes new bedding and an automated smart lock for guests. A separate cleaning fee is charged for each Airbnb guest, and owners retain this fee and can use the funds to hire a cleaner or do the work themselves.
If buyers want out of the contract early, there is a buyout clause which entails paying Loftium the remaining amount due plus 15 percent. This is important information for people who may need to sell the home before the term of the contract is over, for those who need to take back their Airbnb space for a family member (or for those who receive a financial windfall and simply want to cash out).
How does all the controversy whirling around the Seattle City Council play into this? Adam Stelle, one of the Loftium co-founders, sees the new requirements as a positive thing. The new licensing law (which will begin January 1st of 2019) will require Airbnb hosts to pay a $75 annual licensing fee plus $8 per night for a spare bedroom or $14 per night for an apartment. However, this brings Airbnb out of the gray area and allows homeowners to legitimize their units and follow local laws, ordinances, and regulations. It also allows the Airbnb platform to be used in the spirit in which it was intended; to allow homeowners to rent part of their home in the short-term market.
Our team finds this financial vehicle very intriguing and innovative as it allows buyers to purchase homes closer to work in neighborhoods of their choice. It also allows some homeowners to buy larger homes in a very competitive market, and allows young buyers who may not have financial assistance from family, to enter the housing market. If you are interested in investigating the Loftium platform and program, sign up then give us a call. Whether it is your first home or your forever home, we will help you every step of the way.