When planning to buy a house, interested home buyers typically plan their budget in accordance to how much they can afford for the 20% they must put down immediately on the house. But, why is 20% the magic number in the home buying process? 20% is really the amount of cash you need to be able to obtain a reasonable interest rate on your mortgage.
So let us take a typical $400,000 home in the US. The amount of cash that you would want to be able to put down is about $80,000, and hopefully after you do that you have money in the bank for closing cost, repairs, insurance, taxes… and oh yeah your monthly mortgage payment! Needless to say, owning a home is not easy in the US. In fact, many Americans put off buying a home for many years because they cannot afford all of the upfront costs.
Yet home buying is one of the largest wealth drivers for most Americans!
One innovative firm is setting out to find a way to change this barrier to entry and make home buying accessible for normal, working class Americans. S.I.C was lucky to sit down with Jonathan Asmis, Co-Founder of Landed, to discuss how he thinks about changing the home buying game.
Check out our discussion below…
CL: Jonathan, thanks so much for taking the time to speak with S.I.C. today. I am excited to learn more about your career and founding of Landed. So let’s dive right in…
Before you founded Landed, you were in management consulting. Can you tell us a bit more about your journey from management consulting to your founding of Landed?
JA: My path has really been all over the place. But, I actually think it’s a good path for people to take. I was a biomedical engineer major in undergraduate and then worked in vaccine manufacturing for 14 months and decided that that wasn’t going to be my life.
So, I went back to school and earned my master’s degree which brought me into the world of management consulting and on the side I started working on local and urban policy such as helping with policy around immigrant settlement services, and impact bonds. I also started an organization to bring something like the High Line to Toronto, which was a whole bunch of fun.
I kept doing a lot of things that were interesting to me which gave me the confidence to continue to do and take on more.
CL: For those who don’t know can you define Landed as a business?
JA: What we do is pretty basic. We want to partner with people to help them buy their first home.
One of the unique things we do is offer to split down payments with people in exchange for some percentage of appreciation when they go to sell the property. One way to think about this is that it’s equity financing for your home.
This concept itself isn’t new but it has been a foreign concept to the residential market. As homes become more expensive for a number of macro reasons, we think this type of equity financing will play a larger part in the residential housing market.
CL: Can you tell us a bit more about the approach Landed is taking to create equity financing for the homebuyers market?
JA: First thing I need to do is provide some context. Right now, we are staying very focused on serving one customer segment, which really need help- educators. These are people working at your public school, community colleges and universities that make good household incomes, but work in cities such as San Francisco, Washington D.C., and New York City, where so much money gets sucked into rent. This typically hinders their opportunity to accumulate wealth and save for a down payment.
As part of that plan we raise community funds to support individual schools or groups of schools. Say we have the Los Altos School District which is here in the San Francisco Bay Area. People with an affinity for the district would invest in a community investment fund to help support their local educators to be able to access homeownership.
Subscribers to the fund will have their money invested in several homes of which distributions will come at different times. It works a lot like a venture capital (VC) fund where the fund invests in several companies, and receive distributions from different investments at different times during the life of the fund.
CL: The challenge I see with something like this is time of ownership. Do you have a sense of what the typical length of home ownership looks like in the US?
JA: The great thing about the residential market is that since it’s so big, there is crazy amounts of data available. You can find and identify what average appreciation has been all the way down to individual census regions. So, we do have good idea of what the typical length of ownership will look like. Because our buyers are using Landed funds as a bridge to full ownership, we expect it to hold each interest between four and seven years on average.
CL: This is a powerful investment tool, but what happens when the value of the housing market depreciates?
JA: Investing in equity looks a lot like appreciation rights or VC funds. You can lose your investment in the fund. Investment is not guaranteed to return principle. If the price goes down, investors are exposed to loss.
Our model is that we split the down payment fifty-fifty with homebuyers. Then for every dollar the price of the home goes up, they share twenty five cents with the fund. If the equity of the home declines, the fund loses too; however, investors can’t lose more than they put in. This is because the fund isn’t tied to the mortgage in any way making our position a little more resilient than a commercial equity interest.
CL: To date, what has the typical Landed investor looked like?
JA: There isn’t really a typical investor. What they all have in common is an affinity for the school district we are serving at the time. Investors have been former board members of the district, people who used to live in the neighborhood, and former students of the schools. What’s great about the funds are that they are hyperlocal.
CL: Can you speak about the challenge of bringing new investors on board?
JA: I think the great part about the model we have is that it’s really very much on the community to make community members aware that the fund exists. The community really comes through. We always have a fund champion, someone who is typically one of the first investors and who passionately spreads the word to the rest of community.
CL: How has the Landed message of providing down payment support through equity investment resonated with both investors and those looking for support in purchasing their first home?
JA: The message of “Hey, there are people out there that care about you and are willing to invest alongside you”, resonates overwhelmingly. We actually get overwhelming amounts of consumer interest and we have to manage that.
Buying a home is something that is very powerful. The reality today is it is almost impossible to make that transition yourself. Even a condo in the Bay Area is in the $800K to $1M range, which means you need save $150K to $200K just to reasonably access that product. People will work to find all kinds of ways to make it happen and many of these end up being largely illegal (e.g., loans from family and friends). In many ways, what we’re doing is not at all innovative. It’s just formalizing something that existed for a long time.
On the investor side there has also been a lot of interest. Despite being a new investing product and a new investing team without a long record as a responsible fiduciary, people are still willing to give us a part of their wealth to help essential people within the community. We are moving towards an institutional product geared towards long-term investors like pensions, insurance companies, endowments, foundations, or even sovereign wealth funds. These investors don’t necessarily mind the long capital lock-up.
CL: What is the strategy for Landed to scale the business moving forward?
JA: Our business can sometimes seem complicated, so it’s our number one job to make sure we try and keep the story very tight.
Our story is we are helping educators buy homes. People know how to engage with that story. They typically say, “Oh, I should talk to these guys.” We hope that that takes us through geographic expansion and helps us to create a base of investors in a number of different urban markets that we can expand on. There are a lot of people we want to reach, but we can’t get ahead of ourselves. We have to stay focused.
CL: How does Landed think about monetizing the Landed platform?
JA: What we always say is that we are creating “net new” homebuyers. These buyers wouldn’t have purchased without Landed. More homebuyers increases demand for real estate brokers and expands the pool of potential commissions. So, we partner with real estate brokers and earn a share of the new commissions.
Our goal is not to have any profit contributions from the fund. We’re creating an index product and index products compete on fees. We will just charge enough to cover auditing and basic management expenses. Right now this is one percent of invested capitals, but we are hoping to get that down to 30 basis points.
CL: Obviously there has been a lot of noise around platforms like Lending Club that have become transactional businesses that may value quantity over quality at times. How do you think about Landed as a business, is it a transactional player or a carried interest player?
JA: We don’t really view ourselves as a transactional party. There is an interesting thing about equity versus debt. When you give someone equity you view them as partner and they ride along on the same risk reward curve that you do. You look to them for advice, and it’s fundamentally a very different relationship that you have with the customer.
A16Z innovated the VC market by branding themselves as the most ‘entrepreneur-friendly’ capital partner. Equity partners can do that while debt partners are a fairly commoditized relationship. For example, we have had people who utilized Landed to buy their first home who called us up to tell us a tree was hanging over their roof. Buying a home is complicated and it brings on a series of new challenges for people. Yes, we give them money, but what the homebuyers are looking for is a real partner in this series of challenges.
CL: As you continue to build Landed as a business, are there other features you hope to build into your service offering?
JA: We want to more of the transactional services of buying a home like obtaining a title and insurance. All these transactional products are very well protected industries that are ripe for change. We want to think about engaging with these products to meaningfully improve the homeownership experience and build the relationship with customers once they are in their home.
CL: Well I can honestly say Landed captured my interest because as I think about wanting to buy a home in a few years I realize that the only thing holding me back is the down payment. In a city like Boston my rent is as much as 30 year a mortgage on a half a million dollar home, and right now I am just throwing money away!
JA: Great to hear it!
We are saying for 10% down you can have the same payments as if you put 20% down. You just have to share in some of the equity risk with another partner. This idea is super appealing to some, and completely unattractive to others.
It’s really interesting. The US has collectively decided that we want to incentivize people to be homeowners. We provide massive tax exclusions on capital gains and large ongoing deductions for having a mortgage (that’s already subsidized through government policy!).
The policies we have to promote home ownership end up transferring tons of money from non-homeowners to homeowners. So, as an equity issue, more people should be able to access ownership. It doesn’t seem fair that anyone who can’t get help from their parents is essentially locked out (in cities at least). This is what motivates us to build a company to move the needle just a little bit to reduce systemic drivers of wealth inequality.
The Minute Rundown with Jonathan Asmis
CL: If you could tell someone trying to start a business one piece of advice what would it be?
JA: Stick with it.
CL: How did attending Stanford for your MBA impact your road to entrepreneurship?
JA: I think that attending Stanford and utilizing an incubator like YC are similar in many ways. Both have started companies before and they have the skills and resources to help you along the way. Stanford is a source of additional champions for you as you build a company, and you’ll need as many as you can get.
CL: What other areas of Fintech get you excited?
JA: I get really excited with essentially finding pockets of mispriced risk because most financial transactions are handled by very large institutions. These large institutions don’t necessarily have incentives to price risk at the micro level. Fintech takes pockets of that risk and gives people the deal they deserve. When done right, everyone can truly win.
A lot of this kind of Fintech is about believing in a group of people so much that you are ready to risk prime career years to prove to world that with the right structure, this group deserves the trust of the financial markets (and the pricing that goes along with it). That’s what microfinance is about, that’s what immigrant lending is about, that’s what payday innovation is about. They are all about shifting the risk reward curve.
CL: As a fellow consultant, what do you miss most and least about your days in consulting?
JA: This shouldn’t be an answer, just a chuckle. I definitely miss resources, especially having teams across the world that can help you augment your capacity. As for things I miss the least… I just wasn’t built to be an advisor. I have always wanted to be a builder. The strategy work is intellectually interesting, but ultimately it’s not that hard to come up with the “right answer”. What’s hard is making the right answer work.
If you could pick one entrepreneur to emulate, who would it be and why?
I don’t like doing that. I read a lot; in fact, I like to get up at five thirty or six and do bit of reading before starting the day. I love to read biographies and try to take a little from a lot of people, instead of a lot from a little.
Landed is one of my favorite companies that I have highlighted to date. So many people in America with good jobs and income cannot necessarily afford home ownership because of soaring home prices and the need for meaningful equity to be able to purchase a home. Landed provides greater access to home buying for millions of Americans by providing an equity sharing model that works for investors and home buyers in an intuitive way.
As Landed moves forward my hope is we will see equity sharing become more commonplace in the home buying process. I see it as an answer to solving a major barrier to home ownership in the US.
Thank you Jonathan for promoting a discussion on an incredibly important topic and for building a company that wants to bring about meaningful change in terms of financial inclusion and increased homeownership here in the US.
We at S.I.C. are excited to see where Landed is headed!