Home Ownership, Entrepreneurship, & The American Dream
An Interview with Adena Hefets - CEO & Founder of Divvy Homes
No long intro today for this one. We’re just rolling right into. I’m excited to share my interview with Adena Hefets the CEO of Divvy Homes. Divvy Homes is a $2B real estate startup helping consumers who have traditionally been renters, become home owners. Divvy is using technoology to enable Main Street, compete with Wall Street, whe further breaking down institutional barriers to home access. There are some absolute gems in this conversation, so I hope you all enjoy.
Note: This interview has been lightly edited for clarity, and is part of a broader project I am working on with my man Theo Williams. More to come!!
Adena – I am so excited to do this interview. Your reputation precedes you, So, as I understand it – you grew up in Long Island, went to Cornell (Go Big Red). You have worked across Fintech and financial services for the entirety of your career, Goldman, Square, BAML, I believe DFJ and TPG as well. Now, you're the CEO and leader of Divvy homes, doing some amazing things on making homeownership more affordable for people like me, and people writ large throughout the country, which I love. So, with that context out of the way - I would love to kind of just start the interview and get a little bit more context on yourself and how you came to start Divvy.
Sure. Well, first of all, Dez, I don't know that you’re our core customer base. You live in New York City, worked in sales and trading, and went to an Ivy League school, it's probably a little different. We serve pretty much the average American. Most of our customers live in tier two markets. Most are making on average, somewhere around, $75,000 to $125,000 a year, and generally ages 25 to 45 years old. So, I'll give you a little bit of background on how we were founded and started and then can dive into any specific questions.
So, I founded Divvy about four and a half years ago and the idea behind it was really to make homeownership more accessible. What I saw was that basically pre-global financial crisis, mortgages were given out pretty readily, and the result of that widespread extension of leverage, led to the global financial crisis. The pendulum swung really hard in the other direction at that point where mortgage underwriting seriously tightened, and it just meant that people who previously would have been able to buy a starter home, send their kids to a good school district, etc were no longer able to do so. And so what happened was those consumers felt like they just woke up one morning and were like, “It turns out I don't want to actually ever be a homeowner. I think that that's just the natural progression in life.” So, I started thinking, is there a way to actually create a product where we provide them with the utility of owning a home and then help them actually access it over time? So, I founded Divvy to do that. And then I can go into the way we work if that's helpful.
Yeah, of course – keep going, that would be amazing.
Awesome. Okay. So, folks come to our website, there's a little yellow button on the top right that says “Sign Up”. We put you through a really quick free application. We run a soft credit check so there's no impact on your credit score or anything like that, and we basically, from there, quickly assess you and give you a budget to go home shopping. So, we'll say, “Dez, you're approved for home shopping for a $450,000 home in Dallas, Texas”, and then you go out shopping with your realtor, you find the home you want, we put down an all cash, quick close offer for you. I think this is a really important nuanced point, which is that today we give the individual consumer the ability to compete with institutional buyers, which is a scenario where Divvy is representing you, we are partnering with you, we are making you as competitive as any other cash offer that's out there. We put the offer down on the home for you, you sign a lease with the option to purchase, commit anywhere from 1% to 2% of the home value and savings. That's your money, 1% to 2%, it is not a fee, it is your savings, you get it back if you leave the house. And then ultimately, you build up equity in the property. It’s part rent, part equity is the payment. And then that builds up to anywhere from 5% to 10% over the course of three years. At any point in time, you can roll all that savings, including that down payment onto a mortgage. You can also cash out and leave if you want to, and we just take a small relisting fee.
So, one point I do want to expand on that you talked about is how you're helping the regular American compete with institutional buyers, specifically within single family homes. There's a ton of interest given real estate investor’s continued search for yield as we emerge from this post-pandemic world. Where, depending on the area, multifamily, is at all time occupancies. Office has been affected by the shift to remote work. Hospitality, there's probably been a flight to quality. So, could you expand on all that so people have a better understanding of what it means when you're competing with an institutional buyer?
Sure. So today, I think in the markets we operate, I think close to 30% of all offers that get accepted on homes aren't from what's called an institution. Now, it's hard to pin down who's an actual institution. But the way that the government records it is anyone who is not living at the address of which they purchased the home, so that's the quick heuristics that they tend to use. What's different is typically these institutional buyers, they do something called paying all cash, which means that they don't have an appraisal contingency, there's no financing, they will just pay the cash at the time of closing.
Now, why do sellers like this so much? Well, because when you have a mortgage in the closing process, some sort of financing FHA, Fannie Mae, VA, whatever type of loan you're getting, it introduces a third party, which introduces risk. Meaning, now, not only do you and the seller have to agree on the price, you have to run an appraisal, and the mortgage provider needs to agree on the price that you guys just settled on. So, that adds complication and risk to the transaction. In order to remove that risk, the seller often just goes with all cash offers. What we're seeing in most markets today is that it is extremely hard to win if you don't have an all cash offer. So, for the average person, unless they've saved up big and have cash equal to the value of the home, it's very challenging to actually be able to win a bid.
Right. So, switching tracks a little bit, I wanted to explore this changing concept of the American dream. It’s something I’ve written about before, and historically for me, thinking about the American dream, a lot of it did have to do with homeownership, quite frankly, homeownership in the suburbs. Having access to great schools, great parks, et cetera, and being able to, frankly, give your children a life that is most likely better than the one you were able to grow up and pursue. I really just want to quickly read a quote and then I'll ask a question in terms of what the American dream means to you, and how has it changed over time, but this is my perspective.
“So, the American dream, as it was described to me always felt like it was about progress, pursuit and achieving a degree of freedom in one's life that allowed them to live comfortably with respect and dignity. To me, today, the American dream is unequivocally about ownership. It is about owning productive assets that allow you to live your life on your terms, on your time, as you see fit.’’
Clearly, there is an aspect where you are on that latter definition of the American dream, because you're running a series C backed company, you are a founder, you are building ownership and a productive asset. At the same time, you're equipping what I'll call again, the average American with a bazooka to compete with institutional buyers that are not only viewing this dream home for someone where you're going to wrap it in emotions, memories, et cetera, but they're viewing it as a productive asset. So, I know I wrapped the bunch in there, but I say the question that I have for you is succinctly, what does the American dream mean to you and how has it changed over time?
Yeah. So, I'd say, me, personally, a lot of the foundation for building Divvy came from my own experience. My parents, they got married, they were pregnant, they were living in a little studio apartment, and they went out to try to buy a house. The first house so that they can have their kid in a good school district, all of that stuff, and they could not get approved for mortgage. They found ultimately, a lovely woman who's willing to give them seller financing, and that is how they purchased a home where they then had my sister, three more kids of which I was the third, three out of four, and then they were able to eventually get a mortgage and put a mortgage against that house, and take out cash from the property. Every time one of us went to college, they refinanced that property and took more cash out, and paid for education.
My dad didn't go to college. My family had never gotten to an Ivy League school, nothing, and this to them was the American dream. The American Dream was having me and using the money from that home to be able to send me to go get an education, to better my life for myself, and also help support my broader family. I think that so much of the American dream is getting swept away and it’s a lot of what I see in building Divvy. If you have worked a nine to five job over the last decade, you haven't seen your wages grow almost at all. You've seen inflation take off and you've seen the basic things that you want in life start to escape your grasp. Groceries, buying a home, the cost of a car, all of these things are now way out of reach and the only way you could possibly afford them is if you had invested in an asset.
If you had built up equity in a house, if you invest in the stock market, if you had put your money into bitcoin, something, asset inflation has taken off, income inflation has not, and this has created a massive divide in our country. So, the goal of Divvy, and really, what I think the American dream is, is you want to build up a nest egg for your family. You want them to go to a good school, you want them to get a good education, you want them to provide a better life for their children than you are able to provide for them. A lot of this, the foundation of this, starts with building up a nest egg which comes from building it up in an asset. For better or for worse, I think that most folks who are middle class, middle income - investing in something like the S&P 500 seems pretty far out of reach.
Whereas investing in a house, one, it’s a tangible asset. Two, it's hard to take money out and it compounds over time. Three, it has dual utility. You can live in it. It compounds while you live in it. You can't live in the S&P 500, right?
I wish, haha
Right! So, I think that investing in a home, builds so much wealth for families over time, and really helps solidify that American dream,; I know it certainly did for my family.
So, how much do you view risk as a barrier to developing wealth? I’m of the mind that broadly, to build wealth you need to put your money to work, and you need to take highly concentrated risks. You need to have money flowing into an asset that is going to return money back to you at some point. But also, at the same time, being able to save up $50,000 for a home is a lot. I'm in the process of doing it right now and I’m like, “How am I going to do this?” But I am aware of the fact that given my age, given my demographic, given where I work, it's in my, quite frankly, in my benefit, at this time period to take on, in my opinion, as much risk that I can possibly bear without extending myself on credit/with leverage that I can't afford. But yeah, so succinctly how do you view risk as a factor in building wealth?
I want to push on this. How old are you, Dez?
I am 27, 28 in December.
And you are you married?
I am not.
Do you have children?
I do not.
Okay, you're not the average American. The average American at your age is married and started to have children and the risk profile of what they need to do is very different than the risk profile for you. So yes, if you have worked a job and have a ton of savings and want to take risk and invest in assets like Bitcoin, go for it. I would say for the average person who gets married, who has children, and by the way, go through that math in your head. The average salary in America is $60,000. $50,000 to $60,000. How much is the average children? $15,000 a kid per year. Two kids, that's $30,000. Post tax, you're living off of almost nothing. The math just doesn't work out super well.
So, when you start to talk about savings and taking risks, I think savings are super important for everyone, I don't care if you're the top 10 percentile, or you're the bottom 10 percentile, like figuring out a way to save is super important. The question is how much risk you take in those savings, and I would argue that for some folks, taking extreme risk and how they invest is probably not the right call, and maybe less risk in terms of asset class is probably the right call. That is the reason also why I think that one of the better investments to make is in a house. Risk adjusted returns for housing are the best out of any asset classes. Period. Going back a hundred years.
Would you say that, in your opinion, that the best asset still to achieve the American dream is owning a home in this country?
100%, I think. I mean, risk adjusted returns, home prices, or owning a home is the best asset class. You can't get this sort of leverage against anything. In general, look, we lived through ’09, and so, I think in our heads, we have the idea that homes depreciate over time. In general, you hold a home long enough, it appreciates, right? The beta in the asset class is tremendous. It moves, it's a less liquid market. It doesn't move as quickly as something like the stock market moves, right? I'm not discouraging people from investing in the stock market or in other asset classes. I think if you have that risk tolerance, if you don't have children, if you're still young, go for it. I think that that's the right thing to do. However, I think that the profile of the average American ages 25 to 45, who has $5,000 saved up, has two children and is living somewhat paycheck to paycheck, the place you want to save is in an asset that is extremely stable, which is housing.
So, let's zoom out for a second. And let's say we’re talking about Adena’s three tips or tips and tricks to creating the American dream. One, it seems like is being able to own a home in this country. What would be your opinion on the next two?
I think there's actually been studies that have been done on this, and they say the first thing is graduate high school. Graduate high school, and do not have a child until you are married. Why? Because dual income helps support the fixed costs of children. If you're paying for one kid and you’re a solo earner versus you're paying for one kid and you have two earners, the financial profile is different. Three, own a home. So, education, wait until you can afford to have children essentially, or figure out when that right time in your life, when you have stable income is, and then three own a home and invest in a home. And that would be, to me, the biggest three things you can do to pull yourself from being somewhere around, call it the 30th to 50th percentile in income to above the 50th percentile.
Isn't there an exacerbated challenge or structural problem there as well, where the quality of your education is also linked to the value of your home? It's something that I didn't fully appreciate and understand until I got older, where it's like, “Hey, the reason why I went to a nice school is because it was funded by tax dollars linked to the value of homes in my town”. So for me, I believe and frankly know, that there will still be people who are starting behind the beginning line, depending on where they live, because a function of the quality of their education is related to the cost of the homes in the area, and people are going to probably choose to live in the area that they can best afford.
And by the way, Dez, the majority of folks who can't get a mortgage end up renting. The majority of rental properties are in lower quality school district areas. So, I think what I was so focused on in building Divvy, which it goes back to is, we approve someone for a budget, they pick out any home they want. It is a for sale home, and you get it in the school district that you need or as close to your job as you need or in the right location that you need. This was so important to me because I went and I looked at rental inventory. It's not great, right? So much much of this is not only putting someone into a Divvy home to save, but letting them pick out the home they want, the school district they want, in the area that they want their kids to grow up in, and we just enable them to build savings in a way that ultimately has this ripple and compound effect of allowing their kids to access the education that they want and allowing them to be in a community that supports them.
That's a lot of the foundation for it. But I agree it's a complete flywheel, right? Which is you can't get the house you need, or you can't afford a mortgage so you end up renting, you end up renting, you tend to send your kids to a different school district or a lower grade school district, which then ends up putting them on a flywheel and cycle and part of it is how you break this cycle. I'm not saying Divvy is perfect and doing so. In fact, I think we have a lot to do. But I think we're attempting to help break it.
So, one, love that. In the last part of this interview I want to transition into getting your perspective on advice for other founders. I talk to founders every day, every week. So, the first question that I have for you is, what would you – I always tell founders, what I respect most is that you all are on the field and you're taking a massive swing. So, talking to other founders out there today, what do you think would be the best advice for them when they're stepping up to the plate and getting ready to hit a home run, grand slam, whatever you want to call it?
Yeah, so a couple of things. One, find yourself an amazing co-founder. This is a long, hard journey and my co-founder Nick, he's our CTO, has made this journey so much more enjoyable and has been my rock through it all. We support each other and it's awesome. So, find yourself an awesome co-founder. I'd say two, find yourself really good backers and investors early, people who will stand by you. When you start a company, no one knows who Adena Hefets is. I had no name brand or reputation. So, I aligned myself with someone who did have a name and a brand and reputation. So, we incubated Divvy, with Max Levchin’s Startup Studio. Max Levchin was one of the co-founders of PayPal and he was able to help us make sure that we closed our first couple of rounds of capital.
So, find that person who you can help – that can help you, actually, get to those first initial steps and building the company. Third, realize it's not as much risk as you think it is. There's a very large difference between personal risk, and company risk. Companies may fail, that does not mean that it's not going to be an amazing experience for you, or that you can’t leverage that experience to go further in life. I would just say it's hard, it's tough, but realize that it might not be as risky as you think it is, in terms of your own personal career. I think people respect others who have taken shots. It might mean that the company doesn't survive. But it does mean that I think you'll have more respect in terms of your skill set and abilities for the next job that you look for, and if it doesn't work, that’s okay. At the end of the day, it’s just really hard to build a massive company.
I really love that last point in terms of, it's not as much risk as you think, which I think should be trumpeted from the rooftops.
But another question, last question, and I play a role in this, could you help early stage founders better understand what it is truly like to raise venture capital? Because I think, and I was victim to this, I don't want to say victim, but I was someone who fell into the camp of I did not realize how much of a process it is to raise institutional capital, until I was on the other side of it and being one of the people who is assessing and meeting and chatting with these founders all day. I know it's not easy. I know it can be emotional and challenging. So, I’d really love your candor and context on what the process is like, from your vantage point, so people understand when they're ready to take a swing, how to be best prepared for that specific process.
Yeah, so I think that you kind of hit the nail on the head, which is it is a process. Like anything else in life, there's a formula, there's a way to do it, and there are founders before you who have figured it out. So, I would say when you're getting ready to raise venture funds, go talk to a founder who has done it and has done it successfully. I wouldn't walk into like a basketball game and like pick up the basketball and start playing it for the first time without like, having spoken to someone, or practiced, or gone and talked to someone who was actually quite good, right? Do not step up to the plate, or your front race, without having spoken to someone who could be your coach and help you through it, or have done practice rounds. It's like anything in life. It takes a little bit of just working hard at it, and then you get good at it, and it's not an impossible task. It's just there's a way to do it, and a way to do it well. So, figure out what that is, speak to people who've been successful. I think that that's the best advice I have for capital raising.
Adena, this was a fantastic time. Thank you for all of the context, the advice, the candor, the wisdom. We really do appreciate it.
Thanks, Dez. Take care.