The Logic Behind Leap
We started our lease-to-purchase pilot program to put more people on a path to homeownership. Here’s how the program serves customers — and our goals as a company.
By Nick Chim, Maria Khimulya, and Andrew Domont
Nabr was founded with a mission to accelerate the shift to sustainable, urban living. That’s why we are building high-quality urban homes for ownership — not rent. As we explained in a previous blog post, homeownership enables Americans to generate wealth in four key ways. Plus, it is a cornerstone of sustainable communities: homeowners are more likely to invest their money and time in their neighborhoods’s long-term vibrancy and prosperity.
For many, however, homeownership has shifted out of reach. Given the accelerating rate of home prices in many markets, saving for the 20% down payment needed for a conventional mortgage becomes harder each year — the target just keeps moving. It is for these consumers that we’ve created Leap, our lease-to-purchase pilot program.
What’s in it for customers?
As we explained in our introductory blog post, Leap unlocks access for people who want to own a Nabr Home, but can’t yet afford a down payment for a mortgage. The customer can select and customize their Nabr Home, then sign a lease agreement with an option, but not an obligation, to purchase the home later at a locked-in price.
Let’s imagine a Leap customer named Betty. A few years ago, Betty moved from China to the U.S. to get her masters degree from San Jose State University in Software Engineering. Straight out of school, she got a good job at a local tech company, where she earns $150K a year. She recently got out of debt. Betty hasn’t yet built much credit, nor accumulated much savings, but her earning potential is strong — she’s confident she’ll be making more money in the tech industry as her career progresses. Her goal? To stop renting (which she sees as throwing her money away) and own a home in San Jose (close to her work) in the next few years.
Leap is an interesting option for Betty. While the market has seen volatility in recent weeks, home prices in Santa Clara County have appreciated about 6% a year for the last 20 years. With Leap, Betty can lock-in her future purchase price at the time of pre-order, providing her certainty around the savings target she’s working towards and protection against escalating home prices.
Furthermore, unlike with renting, Betty can keep any appreciation her home earns over her lease period in excess of her locked-in price. So if Betty locks in a price of $800,000 for her Nabr home, and two years later the home is worth $900,000, that $100,000 difference is hers to keep — and can serve as her homeowner’s equity when she goes to apply for a traditional mortgage. Moreover, Betty has had a few years to build credit, contribute to her future home purchase (via her monthly Purchase Credits), and save up for her down payment — all while getting to live in the home (and neighborhood) she loves.
What’s in it for Nabr?
When describing Leap to someone for the first time, we are often met with the reaction: “This sounds too good to be true — what’s the catch?” The skepticism is understandable. Many rent-to-own companies have engaged in predatory practices, targeting consumers who may not be able to convert to homeownership, and offered older homes that are largely in disrepair, saddling consumers with hidden costs. Those customers are often forced to drop out — and lose their payments in the process.
What’s more, your typical developer isn’t interested in incorporating lease-to-purchase programs, and for good reason: they involve a lot of sales, legal, financing, and operational costs. Since most development projects are funded one project at a time, there is no opportunity to spread costs between projects. Most developers just don’t bother.
But at Nabr we treat housing as a product — not a project. We have structured our business model so we make money from building more and more buildings over time. This incentivizes us to invest in systems that work across our building portfolio and allows us to absorb Leap’s administrative costs across projects. To put it even more bluntly: we don’t profit directly from Leap, nor do we need to. We offer Leap to reach more customers, in alignment with our mission of helping more people become homeowners — not because it will be a money-maker for our company.
How is Nabr making Leap viable?
Developers of multi-family housing projects typically source capital from like-minded investors who fund the building as a whole. For (income-restricted) affordable projects, they seek bonds and corporate tax credits. For market-rate projects, profit-maximizing investors. Our urban form of income-segregated communities reflects this bifurcated capital structure.
Nabr, however, is funding our buildings on a home-by-home basis. Practically, this means we can diversify our “capital stack.” We can raise capital from traditional real estate private equity investors for the “for-sale” units. For the Leap units, we can raise funding from mission-aligned capital seeking a bond-like return, like investors at state pension funds or family offices with broader societal objectives. These mission-aligned investors will help influence the structure of the Leap program — and could even make Leap units more attainable to those lower on the AMI spectrum. Thanks in part to the rise of ESG as a force in investment capital, we’ve already seen marked interest from firms interested in sponsoring Leap units.
For our first development, SoFA One in downtown San Jose, 22 households (15% of the building) will be able to take advantage of the pilot Leap program. Once the pilot is launched, we plan to expand it with capital partners who, like us, believe in making homeownership more accessible — and who will support Leap’s expansion to more people in more places around the world.
If you are a capital partner who wants to invest in Leap units, contact us here. If you’re a consumer interested in Leap, use this form to get started.
