Auctioneera Welcomes Dwellr to the Irish Market
It is well documented that it is considerably less expensive to own a property in Ireland than to rent one. Of course, the reason that so many people rent is not because they can’t afford the mortgage repayments, but rather because they can't save a deposit while paying such high rents - a catch-22 of sorts. Dwellr seeks to address this problem by offering would-be property owners a rent to own option.
How Dwellr Works
Prospective homeowners apply to Dwellr in a similar manner that they would to a bank for a mortgage, except that the applicant has not as yet saved a sufficient deposit. The would-be home-owners must however have saved at least 3% of the purchase price in order to meet Dwellr’s criteria. Dwellr then provides the applicant with “approval in principle” so to speak. Successful applicants can start bidding on properties in the same way that mortgage-approved buyers do. If successful in bidding on a property, the Dwellr “approval in principle” is provided to the estate agent as proof of funds. Dwellr then completes the transaction and takes full ownership of the property. Dwellr in turn leases the property to their client at a market rent. The tenant is charged 1% of the purchase price as a fee to Dwellr. The tenant then is given an option to buy the property for the market rate within the next 36 months. If they fail to exercise this option, they can simply leave the property or secure a new 24 month option, which again costs 1% of the market value of the property at that time.
If a renter has identified a property that they would like to purchase, but doesn’t quite have a deposit saved, they can partner with Dwellr to lease it for a period with a view to buying it once they have managed to save the deposit and raise a mortgage. The tenant or lessor gets guidance from Dwellr that the property will not exceed the CSO RRP index as to the purchase price that will be applied if and when they proceed to buy the property. The downside is that this option to buy the property costs 1% of the purchase price of the property. The 1% is the only fee that Dwellr charges their clients.
How Does Dwellr Make Money
As mentioned, Dwellr charges the tenant a 1% fee when entering the lease agreement. If the tenant fails to exercise the option within 36 months, the cost to set up a new 24 month extension option is another 1%. Dwellr further charges its investors a small AUM (assets under management) fee as well as a percentage of the upside in the value of the property if the option is exercised. This management fee plus percentage of the capital appreciation on exit is a standard hedge fund / PE fund model, albeit without the possibility of outsized returns.
The investors’ returns are equal to the gross yield on the property minus Dwellr’s management fee plus the capital appreciation over the time they hold the property, again minus Dwellr’s fee. The obvious question is why wouldn’t an investor just buy Irish property directly or buy into a REIT. One benefit to Dwellr’s model is that because it is anticipated that the tenant will ultimately own the property, the lease is self repairing i.e. the tenant is responsible for the maintenance of the property. This differs from a REIT or owning property directly where the property owner, not the tenant, covers maintenance costs. This narrows the spread between gross and net yield, to the benefit of the investor. In terms of exiting the investment, the sitting tenant is an obvious buyer and as such estate agency fees are avoided, assuming the tenant exercises their option to purchase.
New Builds
One factor that potential Dwellrs would need to consider carefully is that should they use the Dwellr model to rent and subsequently own a new property, when they move to buy out Dwellr, they will be buying a second-hand property, not a new one. This will mean that the property will not currently be eligible for Help to Buy or the First Home Scheme as currently these schemes apply to new builds only. A first time buyer would need to think very seriously before foregoing the benefits of these extremely generous schemes. However, the Irish Independent recently speculated that second homes may qualify under new scheme terms to be announced as part of next month's budget. Let's see.
Conclusion
Currently, there is a yawning gap each month between mortgage approvals and drawdowns. It could be argued that the market can’t absorb the finance that is already out there and as such, the last thing the market needs is another demand side measure. Rather, more supply is needed.
That said, it will be interesting to see how this new offering plays out and should it become a feature in the Irish residential property market, we look forward to receiving proof of funds documentation from throngs of Dwellrs before long! Anything that helps more renters become owners has our vote!
Eddie O’Driscoll, Director, Auctioneera