Global fintech and funding innovation ecosystem

Clay Financial Closes $1.7 Million Pre-Seed to Offer Home Equity Sharing AltFi Product in Canada

Alternative Finance | Sep 12, 2023

Unsplash Francesca Tosolini Real estate - Clay Financial Closes $1.7 Million Pre-Seed to Offer Home Equity Sharing AltFi Product in Canada

Image: Unsplash/Francesca Tosolini

Clay Financial secures $1.7M for its innovative HESA product in Canada, offering homeowners a flexible, debt-free way to tap into home equity. Launching soon in Toronto.

$1.7 Million Pre-Seed Funding Secured to Offer HESA

  • Toronto-based fintech, Clay Financial Inc., has successfully closed its pre-seed funding round, raising a substantial $1.7 million. This funding will be instrumental in completing the development of its innovative product and platform, expanding its team, and driving the company's strategic growth initiatives.
  • Clay's HESA (Home Equity Sharing Agreement) is a pioneering solution in Canada, designed to allow homeowners to convert a portion of their home equity into cash. This is achieved by exchanging it for a share of their home's future appreciation. Unlike traditional debt products such as home equity lines of credit and reverse mortgages, HESA offers flexibility with no monthly payments and ensures homeowners' existing equity remains intact. Clay is gearing up to launch its HESA in the Greater Toronto Area by the end of 2023.
  • With the introduction of HESA, Clay is venturing into creating an alternative asset class. This provides institutional investors with a unique opportunity to tap into Canada's $6 trillion owner-occupied residential real estate market. HESAs are designed to diversify investor portfolios, mitigate volatility, and offer a hedge against inflation, all without the conventional costs associated with residential real estate investments.

What is HESA and How Does It Work?

  • The main problem that HESA solves is providing homeowners with a way to access the equity in their homes without incurring additional debt. Traditional methods, like home equity loans or reverse mortgages, allow homeowners to tap into their equity but come with the burden of monthly repayments, interest rates, and the potential risk of foreclosure if they cannot meet the repayment terms.

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  • Instead of a loan, homeowners agree to share a predetermined percentage of their home's future appreciation (or depreciation) with the HESA provider. This provides immediate liquidity to homeowners, allowing them to use the funds as needed, while also ensuring they remain invested in the property's future growth or decline. It's a flexible, debt-free alternative for homeowners to leverage their property's value.

Initial Application and Valuation

  • A homeowner, interested in tapping into their home's equity, approaches a HESA provider like Clay Financial Inc.
  • They fill out an application detailing their property.
  • The provider then gets the property independently appraised to determine its current market value.
  • Based on this valuation, they calculate how much of the home's equity the homeowner can access.

Receiving Cash and Setting Terms

  • Once the value is determined, the homeowner and the HESA provider agree on how much equity will be converted into cash. The homeowner then receives this amount as a lump sum.
  • The unique aspect of HESA is that the homeowner doesn't need to make any monthly payments back. Instead, they're agreeing to share a part of their home's future value increase with the provider.

Settling the Agreement

  • The HESA agreement has a set duration, like 10 to 30 years. When this period ends, or if the homeowner sells their house before that, it's time to settle the agreement.
  • At this point, the homeowner gives back the initial cash they received to the provider. Additionally, they'll also share a previously agreed-upon percentage of any increase in the property's value.

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  • If the property's value went down, the provider might also share in that loss, depending on what was agreed upon initially.
  • After settling, the homeowner retains any remaining equity and continues owning their home without any HESA-related obligations.

What's The Catch?

  • The main risk or challenge with HESA (Home Equity Sharing Agreement) for homeowners is the potential loss of a significant portion of their home's future appreciation. Since the homeowner agrees to share a predetermined percentage of the future increase in their property's value with the HESA provider, if the property appreciates considerably over the term of the agreement, the homeowner could end up giving away a substantial amount of the value they would have otherwise fully retained.
    • For example, if a property's value skyrockets over the years due to market trends, neighborhood developments, or other factors, the homeowner will still have to share the agreed-upon percentage of that appreciation with the HESA provider. This could mean parting with a large sum of money that they would have kept had they chosen a different equity-access method.
  • Additionally, while the homeowner doesn't take on traditional debt with HESA, they do enter into a long-term financial commitment that might limit their flexibility in future financial loans or property-related decisions.

Frequently Asked Questions

1. Is the Home Equity Sharing Agreement (HESA) model unique to Canada, or is it being adopted in the U.S. and other global real estate markets?

The concept of Home Equity Sharing Agreements, while pioneered by companies like Clay Financial Inc. in Canada, is not exclusive to the country. Similar models are emerging in the U.S. and other global markets. In the U.S., for instance, several fintech startups have introduced equity-sharing products that allow homeowners to access cash without taking on debt. These models are gaining traction as they offer a flexible alternative to traditional mortgages and home equity loans, catering to the evolving needs of modern homeowners.

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2. How does the HESA model compare in terms of success and adoption to other alternative financial solutions in the real estate sector?

The HESA model is relatively new, but its adoption rate has been promising, especially among homeowners looking for non-debt solutions to access their home equity. In regions where it has been introduced, it's seen as a viable alternative to traditional home equity lines of credit and reverse mortgages. Its success can be attributed to its flexibility, lack of monthly payments, and the opportunity for homeowners to benefit from future property appreciation. While it's still early days, the positive reception suggests a bright future for HESA and similar models in the real estate sector.

3. Given the innovative nature of HESA, are there any regulatory challenges or concerns in implementing such a model in different countries?

Yes, like any new financial product, the HESA model can face regulatory challenges, especially in countries with stringent real estate and financial regulations. Each country has its own set of rules governing property ownership, equity distribution, and financial agreements. Therefore, fintechs and companies looking to introduce HESA or similar models in new markets must work closely with local regulatory bodies to ensure compliance. It's crucial to address any legal ambiguities and ensure that homeowners' rights are protected throughout the equity-sharing process.

Conclusion

The fintech landscape is ripe with innovation, and Clay Financial's recent capital raise and the introduction of HESA is a testament to that. As alternative financial solutions continue to emerge, they offer consumers more choices, reshaping the future of finance. However, as with all financial products, it's crucial for consumers to understand the implications fully and make informed decisions.


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