Zillow – Is Fractional Home Ownership the Future?
In case you’ve been living under a rock, the global housing market is booming
Home ownership is one of the financial challenges for the millennial generation. Many studies have shown that this group is not purchasing homes at the same rate as their parents and grandparents – while the U.S. home overall home ownership rate is 65.8%, only 38.5% of people who are 35 or younger are homeowners. This week, home prices reached a new 15-year high, due mainly to a tight inventory supply
This challenging price environment is global. According to Devon Melanson, a Canadian mortgage agent, “The condos in Toronto are still going for the most part over $500,000. A lot of people are struggling. There’s people out there who are making six figures and they thought they were going to be able to afford an $800,000 home.”
Given these challenging dynamics, people are starting to turn to creative alternatives in order to realize their dreams of home ownership. Increasingly, fintech and proptech firms are stepping to the forefront of these solutions. Could fractional home ownership pave the way for the democratization of real estate, much like fractional shares are revolutionizing retail investing?
Pacaso, a one year-old startup led by ex-Zillow executives, is on a mission to determine just that. Last week, it received $75 mln in funding, making it the fastest-growing US startup to ever reach “unicorn” status. Its mission? To help democratize people’s ability to purchase second homes, by allowing people to own a portion of a house.
How does this work exactly?
Pacaso purchases a home and creates an LLC, before turning around and sells shares in the property. The minimum stake that a buyer is allowed to purchase is 1/8th. According to the company’s cofounder, Austin Allison, “the percentage size of ownership determines the length of time people get to stay at the property. Pacaso then acts as the agent on behalf of the group and handles maintenance, financing, legalities and more.”
Pacaso also takes care of nitty gritty things like property management and maintenance, so that owners can have a hassle-free experience. The concept sounds super close to timeshares, however the company maintains that it holds several key distinctions that make it the superior choice. First, Pacaso specializes in single family residences only. Second, usage is not limited to fixed weekly commitments, but rather is allowed on an ongoing basis. And lastly, when it comes time to sell, the pricing is set on market fundamentals.
“Pacaso is lightning in a bottle,” Allison maintains. “Our mission to democratize second home ownership has resonated with people looking for a refuge, a place where they can gather with friends and family. Pacaso’s innovative co-ownership model is helping many people now realize their dream of owning a second home.”
However, fractional home ownership comes with its own challenges
Owning ⅛ of a home comes with certain complications. A quick peek at the listings on the website show that some properties have starting values of $750k for a share of a home. For that price, you’d better hope that Christmas-week availability is guaranteed. Pacaso maintains that it has an equitable and fair scheduling system that allows owners to book up to two years in advance.
Given its robust valuation, the firm has demonstrated that it has successfully scratched an itch that is present in one portion of the real estate market. Since launching 6 months ago, more than half a million people have visited the site. From an investment theme perspective, it hits on two zeitgeist-y aspects: asset democratization via fractional ownership, and monetization of an otherwise underutilized (empty second home) asset.
However, second home ownership is still a distant dream for a large majority of the population. While Pacaso may have reached product market fit with one sliver of the population, what does the real estate market have in store for the rest of us mere mortals? Are we destined to rent forever?
Multigenerational home ownership may be a solution
Two interesting trends are starting to emerge.
The first is an increase in multi-generational home purchases. Per the Wall Street Journal, “Some 15% of people who bought homes between April and June of last year planned to have multiple generations living there … this is the highest level in survey data going back to mid-2012.” In some ways, one can think of multigenerational households as a simpler (and older) model for “fractional” home ownership.
As people continue to live longer, the question of caregiving becomes more and more complex. Multi-generational home ownership, therefore, provides two solutions. First, it enables individuals to stay with their families as they age. Second, it alleviates the financial burden of home ownership by distributing the cost across multiple members of a household.
Another trend that bodes well for future homeowners is that millennials are starting to close the wealth gap with their parents. In fact, their rate of home ownership is starting to match that of prior generations at the same age. Furthermore, it remains to be seen how the population redistribution brought on by the pandemic will affect long-term supply. Certainly a portion of individuals who relocated to lower cost of living areas will remain, but will this be enough to rebalance supply?
For now, the global housing market shows no signs of cooling off. Whether you’re purchasing 1/8th of a home or sharing the cost with your family, one thing is for sure – save for the down payment.