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Is the new home you are thinking of buying overpriced? Ask Proportunity.
Part fintech part property tech, London startup Proportunity is representing buyers for a change.
Startup of the Week ⭐🇺🇸🇬🇧🇪🇺🏆
As mentioned, I am experimenting with splitting out the Startup of the Week segment. Primarily because these posts were getting longer and longer as I dug deeper into the interesting startups and founders that I meet. It also makes me more accountable to doing deeper analysis, which is probably a good thing.
🚨FATP is now taking submissions for future Startups of the Week here.🚨
Proportunity is bringing the concept of a “buyers agent” to the UK with its home equity loan and proprietary AI-powered real-estate analytics, catering to prospective homeowners who are deposit constrained or want to reach that next tier of properties that is currently out of reach.
Proportunity was founded in 2016 by Stefan Boronea and Vadim Toader. The pair met during the 2016-2017 Entrepreneur First program. The business idea had originally struck Vadim when he was looking to buy his first home with his wife and struggled with the usual pain points and the lack of representation for buyers in the process. Estate Agents only have the seller’s interests in mind, unlike buyers agents in the US who are legally bound to help buyers.
Proportunity’s main product is their home equity loan. They provide an interest-only equity loan with a maximum value £90,000 or 25% of the value of your property. This loan can be added to a borrower’s own deposit, giving them a lower loan-to-value (LTV) when applying for a mortgage, giving them more choice and cheaper interest rates.
As a quick example using Moneyfacts.co.uk, a 5 year fixed mortgage with a LTV of 95% is available at a rate of 3.05% with the total repayable over five years £108,764, based on a £400,000 property value. If however a borrower combines their 5% deposit with a £90,000 equity loan from Proportunity, they are eligible for a mortgage at 1.68% and save ~£36,000 over five years. When considering the average cost of Proportunity’s interest only loan over five years, a borrower is still over £10,000 better off and can afford a better home.
The magic of Proportunity lies under the hood with its proprietary machine learning technology developed as part of Google’s Machine Learning Incubator. It ingests over 150 factors impacting property prices to provide a more accurate valuation which it uses to determine which homes it will lend against, typically lending to homes it finds are undervalued. It provides its aggregated insights free to borrowers, with the image above showing colour coding of homes Proportunity believes are overvalued and undervalued and provides far more detail than any estate agent would ever give you!
Although not exclusively, Proportunity is targeting first time buyers who are struggling to get their first step on the housing ladder due to the increasingly large deposits required and the high house prices, meaning borrowers couldn’t afford the properties they would like.
In 2019 there were £276bn worth of residential mortgages issued in the UK and the average house price was ~£230,000, over 7.5x the median income. Around 20% of the mortgages went to first time buyers who spent on average £231,500 on their first property at an average age of 34.
In London the average first time buyer paid £453,000 in London, a figure that has doubled since 2009. This is over 12x the average salary in London. The average deposit was £46,200, which would take 20 months of saving the entire post-tax earnings for the average Londoner. Who needs food though!
With an equity loan from Proportunity, borrowers can access a wider variety of mortgages. Whilst there are some 95% mortgages available, there are far fewer than before Covid due to lenders lower appetite for risk and lenders mostly pulled their 90% and 95% during the peak of the pandemic. Money Supermarket provided the above warning when searching for 95% mortgages. As demonstrated earlier, even if you can get a 95% mortgage, these are vastly more expensive.
The UK Government has tried to help first time buyers with stamp duty holidays, savings schemes, shared ownership programs and most recently the Help to Buy scheme, but it has only exacerbated the increase in house prices and lack of affordability without “the bank of mum and dad”. The Help to Buy (H2B) scheme, through which the government provides an interest free equity loan for between 20%-40% of the purchase price provided the inspiration for the Proportunity Equity Loan. Unlike the H2B loan, which is only available on new properties, the Proportunity loan is available on any property purchase.
Proportunity is currently pursuing a B2C model and makes most of its revenue through a liquidity event of the properties it has an equity interest in.
When a borrower comes to sell or remortgage, the undervalued property should have increased in value and allow the borrower to remortgage and buy Proportunity out of its equity stake. Proportunity therefore has also benefited from the appreciation in property price, which is why getting their valuation estimates accurate is crucial to the business model.
Although primarily B2C, Proportunity partners with mortgage brokers as a distribution channel and has built a bespoke platform catering to their needs of tracking potential borrowers. Mortgage brokers can identify quickly borrowers who may be interested in a Proportunity loan and can refer them to the website to see undervalued properties that would be eligible for a home equity loan. This channel should be very lucrative for the company over the long term as first time buyers and buyers who are more financially restricted are more likely to use the services of a mortgage broker.
Proportunity has raised over £5m to date from investors such as Anthemis, Global Founders Capital and Concrete VC as well as £7.5m of debt from Conister Bank.
My Vision for the future for Proportunity
It would be easy to see a world in which Proportunity sold a premium version of its analytic insights as an SaaS service to residential property investors and possibly to commercial property investors looking for investment opportunities.
Additionally, as Proportunity scales, its cost of capital will come down which can be an opportunity for further monetisation or lowering the interest-only loan cost to borrowers. It could do a combination of the two.
Furthermore, Proportunity owns a securitised asset and could create its own market for securitised loans by pooling its equity stakes and creating customised securities for investors. An institutional investor looking to gain exposure to North East London property market could easily gain exposure without having to physically buy up properties itself. It can provide institutional investors access to a different pool of risk, rather than to rental properties, it can provide them access to owner occupied property, which will trade and be priced differently than buy-to-let.
To date the company has helped finance £25m worth of property sales and has a target of making 1,000 equity loans in 2021.