ZeroDown — Let’s talk about Money

I live in San Francisco. Yes, that city that’s called the epicenter of the tech revolution and has, arguably, one of the most unaffordable yet competitive real estate markets. The median price of a house in SF, as of early 2020, is a whopping $1,392,859. You can read more about what that means for wage-earners here and here.

If you were intending to buy a house in San Francisco, or most parts of the Bay Area, you would need a cool $300K as a downpayment. Even for a high paying tech worker, this would take a 3–4 years of savings to get to. And all the while you end up paying anywhere from $2,000 to $4500 a month for rent. Over 3 years that translates to $120,000 — $260,000 pre-tax money that you pay to the landlord. Let that sink in for a moment. Wouldn’t it be great to buy a house without needing to put down that downpayment or avoid hundreds of thousands of dollars as rent?

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Enter companies like ZeroDown and Divvy Homes that promise to buy you a house without needing a (significant) downpayment. The larger impact as claimed by these companies is increased accessibility to homeownership. It should be noted that ZeroDown, so far, operates in the expensive real estate markets while Divvy Homes operates in the relatively inexpensive real estate markets and hence probably target different demographics too.

Let’s take a closer look at how these Rent-To-Own companies make money in this post and if they create value for the home buyers if any in the next one. To get to the actual numbers, let’s focus on ZeroDown for a property at 322 6th St, SF, 94103 and create a simple yet realistic balance statement. Let’s also assume this buyer is in the ZeroDown program for 3 years and thereafter wants to either buy or walk out with the purchase credits. The annual estimated appreciation is 5.4% (as suggested by ZeroDown). This value directly affects how much buyers save in purchase credits. We will consider cases where the market overperforms and underperforms subsequently to understand how that affects ZeroDown’s profitability.

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At the end of year 3, if the buyer chooses to proceed with purchasing the house then the purchase credits worth $84,200 could be used by the buyer towards the downpayment. The new purchase price is the higher of the contractual buyer estimated price and an independent market appraisal of the property at the end of year 3. Alternatively, if the buyer walks out, then half of the purchase credits are given back to the buyer. Let’s walk through the many subcases that can pan out now.

1. The buyer proceeds with the Home purchase

In this case, ZeroDown could potentially avoid a buyers agent and hence save on sellers and buyers agent fees. It would be possible that ZeroDown gets 100% of the market list price.

Case 1a: Buyer estimated price = Market Price

In this case, the new house price is $935,553. ZeroDown would payback the buyer their purchase credits worth $84,200.

Profit = -$615,682 + $935,553 — $84,200 = $235,671
IRR = 8.99%

Case 1b: Market underperforms. Buyer estimated price > market price

Given ZeroDown effectively treats the new purchase price as the higher of the contractual buyer estimated price and the new market price, the new purchase price remains at $935,553. If the buyer ends up proceeding with the sale, the profit and IRR are the same as Case 1a.

Profit = -$615,682 + $935,553 — $84,200 = $235,671
IRR = 8.99%

Case 1c: Market overperforms. Buyer estimated price < market price

Let’s assume the market appreciates at 7.5% annually over the three years. The new purchase price becomes $992,595.

Profit = -$615,682 + $992,595 — $84,200 = $292,713
IRR = 10.96%

2. The buyer does not proceed with the Home purchase

The buyer gets half their purchase credits. So ZeroDown owes $42,100
In all the cases, ZeroDown has to own the responsibility of selling the house. Let’s assume a simpler straight-forward 7% of the list price for home selling logistics. This lets ZeroDown pocket 93% of the house’s market value.

Case 2a: Buyer estimated price = Market Price

New purchase price = $935,553

Profit = $935,553 * 93% — $615,682 — $42,100 = $212,282
IRR = 8.17%

Case 2b: Market underperforms. Buyer estimated price > Market Price

Let’s assume market annual appreciation rate to be 3.3%
New purchase price = $880,740

Profit = $880,740 * 93% — $615,682 — $42,100 = $161,306
IRR = 6.32%

Case 2c: Market overperforms. Buyer estimated price < Market Price

Let’s assume market annual appreciation rate to be 7.5%
New purchase price = $880,740

Profit = $992,595 * 93% — $615,682 — $42,100 = $265,331
IRR = 10.03%


We examined a few simple cases and all of them yield an IRR between 6.32% and 10.96%. Selling to market as we notice in Case 2, puts some pressure on ZeroDown’s profitability thanks to an expensive selling process. The IRR in a majority of the subcases is at least 8.99% which is slightly worse than annualized returns for REITs (~10.6%). To make things more complicated, ZeroDown could incur additional costs from Roof and HVAC repairs which fall under ZeroDown’s home maintenance costs. But on the brighter side, there are potential synergies with upselling home-loans, home-insurances and possibly even home-services that could generate ZeroDown more revenue.

As for the benefits to buyers choosing Rent-To-Own over traditional forms of renting or owning, we will talk about it in the next post.

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