Here’s how to use Fleq to buy a home without a mortgage

Startup explains its new approach to homeownership

You asked, and we answered. A Pittsburgh startup company is introducing a new way to look at homeownership, and it’s creating quite a stir.

Fleq launched saying it could get Americans into a home without requiring a mortgage.

“We didn’t think that [mortgages] were the appropriate and fair approach to homeownership, and we didn’t think it resonated with Millennials and Gen Zers, who saw their parents wiped out by the financial crisis,” said founder and CEO Todd Sherer, whose background is in real estate finance.

So the company started its own homeownership model. Check out the first round of Q&A here. But even after this, many questions went unanswered. So HousingWire sat down for a second time with Sherer to learn more about his concept and vision for his company, and for homeownership across the U.S.

Here is the next round of questions and answers with Sherer:

HousingWire: Would buyers own equity in the home as they make payments on it?

Todd Sherer: The quickest way to answer your question is to say: Fleq Members can absolutely acquire more equity in their house. However, we should take a minute to talk about how that actually works. One of the hardest things about launching a product as revolutionary as Fleq is that we have to basically reset an established vocabulary.

For instance, the idea of “making payments on a property” does not exist with Fleq. That concept applies to a situation like a mortgage where a bank places a lien on your property and some portion of your monthly payment goes to interest and some amount goes to principal. Or in a contract for deed or rent to own scenario, where someone else owns the property and your monthly payment is in excess of market rent and that excess portion builds equity or preserves your option to buy the home. Fleq operates very differently. Fleq completely separates your obligations as an owner of the property and those obligations that come from living in the property.

Let’s go through a fictional scenario to provide some more clarity.

Buy a house with Jane:

Jane finds her dream house and it costs $200,000. She creates a partnership with Fleq called an alliance, and the partnership purchases the home.

The amount of Jane’s initial equity contribution to the partnership, or how much of the home she will own at the time it is purchased, is based on a review of Jane’s credit history. Fleq expects that someone’s initial equity contribution will be between 3% and 8%. For the purposes of this example, let’s say that Jane makes a 5% initial equity contribution or $10,000. Fleq might set up the partnership with 20,000 equity units, which would be valued at $10 per share based on the $200,000 purchase price.  Jane would own initially own 1,000 units in the partnership.

What does this mean for Jane?

It means that Jane owns 5% of her home and she will be responsible for paying her ownership share of the costs of owning the home. This means Jane will have to pay 5% of the taxes, homeowner’s insurance and repairs, while Fleq will pay 95% of the same. It’s important to note that Jane owns 5% of the house’s equity vs. $10,000 of the house. If the value of the home goes up, so does the value of her 5% ownership. If the value of the home goes down, so does the value of her 5% ownership.

Jane’s primary residence

Jane’s 5% ownership of the partnership that owns her dream home does not automatically give Jane the right to inhabit the property. Jane signs a lease with the partnership to inhabit the home. At this point, another benefit of the Fleq model emerges – Jane does not have to pay herself rent as part owner, she only has to rent the portion of the home she does not own.

In our example, if market rent for the home was $1,000 per month, Jane’s monthly rental payment would be $950 because she is only renting the portion of the home that is owned by Fleq – in this situation, 95%. 

Also, this is not a standard lease. Jane, as part owner, gets the right to paint and decorate and have 10 cats if she wants. Simply put, Jane is a renter without all the restrictions that are normally placed upon renters and maybe best of all since she is a part owner, she does not have to pay a security deposit to the landlord.

Jane wants to own more

Now, let’s say Jane decides she wants to have a bigger equity stake in the home. During the first year of ownership, Jane can buy as many equity units in the partnership as she wants for $10 per share. At the end of each year, the partnership will get a new value for the property. If the property value goes up, the value of her ownership stake goes up as does the price at which she can buy more equity.  Conversely, if the price of the home goes down, her equity may lose value, but she can purchase more equity at the lower price.

Additionally, if Jane purchases more equity, the next month the amount of rent she pays decreases and the percentage of ownership costs increases.

So again, the short answer is: Yes, absolutely there is a road to owning more equity, but the road looks very different than with a traditional home buying product.

HousingWire: What are the basic steps of a home purchase with Fleq?

TS: It’s quite simple really.

Step one: Find your dream home

Go find your dream home – however you want to find it. Find your home on Zillow, Redfin or have a licensed real agent or Realtor find it with you. Fleq recommends that you use a licensed real estate agent or Realtor to assist you in finding the home of your dreams, but the choice is yours. Once you have found a property, you’ll be teamed up with an alliance representative to walk you through the approval and closing processes.

Step two: Get approved

There are two types of approvals necessary to form an alliance.

  • Credit approval: Fleq will run a credit and background check on every person over 18 who would be living in the home, even if their credit is not being used to qualify for an alliance. Based on these credit and background checks, Fleq may approve you for an alliance. If approved, Fleq will provide you a quote for your estimated monthly payment (rent, ownership costs and fees) as well as your initial equity contribution to the alliance.
  • Home approval: If you are credit approved and want to move forward based on the structure provided to you, Fleq will order an appraisal on the home to determine whether the list price (or your accepted bid) is supported. If the value is supported, Fleq will send out a home inspector to confirm that the home is in move-in condition. If the value is supported and the home is in move-in condition, congratulations you are ready to form an alliance.

Step three: Form an Alliance

Once you and your dream home have been approved, you will form a legal joint venture with Fleq.  Based on the purchase price of the home and your initial equity contribution, Fleq will provide to you the projected starting ownership percentage for both parties and the expected cost to acquire additional equity in the joint venture. Once the agreements are signed it’s time to close!

Step four: Buy the house!

You’ll make your initial equity contribution, pay a membership fee and your share of the closing costs and Fleq will direct the partnership to purchase the home. Additionally, Fleq can help with the closing process, working with your licensed real estate agent or Realtor to coordinate title, homeowner’s insurance and escrow procedures — giving you ample time to focus on your big move. Best of all, with Fleq, you are an all-cash buyer, which can make all the difference when buying your dream home and you only have to pay your ownership share of the title, settlement and escrow fees.

Step five: Move in

Move in and make our house your home. Paint and decorate and you see fit, no standard rental restrictions on painting the walls, changing the carpet or having four cats.

HousingWire: What kind of home purchase makes sense for the model (price point, apartment versus townhouse versus home, city versus suburb versus exurb)?

TS: Any home that is in move-in condition is fine with us. Fleq is not for fix and flip buyers or homes needing a rehab. For us, move-in condition means that we do not anticipate an immediate need for a major repair. We can’t know when the HVAC system will fail, but we want to try to avoid major repair needs. In addition to property condition concerns, because Fleq is reliant on third parties to provide property management services, we might not be able to offer an alliance in remote or rural areas, where our property managers might not be able to provide satisfactory services to our members. 

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