Since Islam forbids collecting interest, Sharia-compliant banks and lending institutions instead buy the asset (in this case, a house), and lease it out to the would-be borrower on an installment basis until a predetermined sum has been paid. At that point, ownership can either remain with the bank (but with zero installments) or transition to the would-be borrower.
About the only thing Arrived seems to be doing differently is allowing homeowners to change houses without affecting how much they're paying towards any house - in other words, you're really purchasing a subscription to a collection of homes.
I find this latter concept intriguing, but hard to reason about competitively. Wouldn't the subscription price point have to be higher than interest on a single home loan to offset the average cost of all of these houses?
Further, "home equity" is a weird term in this context. Home equity is a mark of ownership and makes clear sense in the cass of a single home - 100% home equity in a single house means you get 100% of all the profits after that house is sold. The total number of "shares" for a single house is fixed and never changes, meaning home equity never dilutes. For a collection of homes in this model, it's murkier because new renters and new houses would impact the number of "shares" available.
Does Arrived plan to distribute profits to renters after any home is sold to all of its renters? Does Arrived plan to sell houses in the first place? Does my "home equity" dilute as more people sign up to use the service?
I wish there was an FAQ page to really address these risks. As it stands, I would be interested since I like the idea of being able to move from any property to another property without negotiating a new lease or contract - it means I'm not locked to any particular economic region.
^ This is one aspect of housing we think is missing and that we're trying to support. More and more people are ready to build home ownership, but still want the flexibility to move homes or cities. So they get torn between renting or buying. By building the ownership position in a real estate fund, instead of a single home, that ownership position can move with you to new homes.
Re Rent: Monthly rent is set based on the value of the home a member moves into and local rental rates for the area. It should be in-line with what you'd expect to pay in rent for a similar home outside of Arrived and is transparent to members at the outset.
Re Profits: Members participate as LPs in our real estate fund and receive a percentage of rent and appreciation which adds to their investment over their lease term. We take a long-term buy and hold position in the homes so appreciation is based on re-appraisals of the homes over time to incorporate changes in value.
And thank you for the feedback on an FAQ, we're working on it!
If I understand correctly, I think they're thinking of it more like credit. When you make payments to them, you accrue "equity credit". You may exchange that equity credit for a given home, if it reaches whatever value threshold that home has. You can apply your equity credits to any home in their collection, however each home will require a different amount to purchase, and a different monthly payment to live in.
I think it's a really clever and really interesting idea, if i'm understanding it correctly.
In other words, if you use your "equity credit" to take a house for yourself, you could end up paying more than the house is actually worth.
I've never heard of what you described. I'm guessing it's a new model for most of the US.
(Thanks for describing it.)
Or similar to the distinction between calling a taxi vs using an smartphone app with live GPS, you’re still ‘calling’ a cab to a predefined location but the experience is new and different, via maps, picture of the driver/car, reviews, receipts, user selected destination without telling the driver, more car/ride options, etc.
Details are everything in business and product development.
If the would-be borrower misses a payment, do they get to keep a part of their total lease payments? When I take out a mortgage, the house is effectively owned by the bank and I also pay "installments until a predetermined sum has been paid". If I'm not able to pay the "installments" then I get kicked out.
However, I'm not an expert on Islamic finance - the expectations around leases could be different.
You wish to buy an asset, but don't have the funds to do it. At that point, your only options are to pay in installments towards eventual ownership. So you go to a for-profit lending institution, which agrees to let you pay it back in installments, and has you sign a contract for it.
There's nothing inherently greedy about this - it's just the way agents in an economy work. It would be greed/hoodwinking if customers were tricked into giving money away or didn't have terms explained to then upfront or that "interest" or "rates" beyond what is needed to recoup the asset despite depreciation - but I've not seen anything to suggest that is common practice in any home loan situation.
All that Islamic finance does is change who is nominally the owner of the asset under consideration until the asset is paid back. The standard American model - you're the owner, until the bank reposses it. The Islamic model - the bank is the owner until you buy it back.
I haven't analysed the effects of this home ownership structure, but the business investment approach means that the banks aren't lenders, but are part owners of the company. This gives a different incentive structure and changes the relationship - I think for the better.
This way the apartment company can keep good tenants and the tenants can move around as needed with less burden.
I don't belive this will work in the realy world because of greed and whatnot but it's a nice idea.
When a unit becomes available, existing members have the option to move into it before it will be offered to potential new members. Who gets it is decided by a formula based on need and seniority within the network. This might happen when, for instance, a family starts to need more space, or an elderly tenant would like to move to the ground floor.
It seems to work well, and makes me wish for more non-profit housing.
This is a little different. You lease and get equity in real estate fund that you are required to contribute to. At the end of the lease you can move or cash out of the fund of you wish. You don't get the home.
This is so you can participate in the upside of owning a home without actually owning. This isn't a way to buy a house. It is a way to lease and still get the appreciation of ownership.
I mean, that sounds like a huge difference.
A predetermined sum that happens to match what the amortization tables say?
It's 100% the same as with interest, but it's a religious thing so I don't think debating this will result in anything.
This sounds more letter vs spirit of the law
I am not a money lender I am a tap water buyer at 1k a cup, after a year you have to buy your water back at 1.2k a cup ;)
An example but not exactly similar
e.g. Write a contract such that equity is accrued over time, while I pay dividends on the "financed" portion of the home. This would also provide a hedge for home owners against their home price going down as the fund's assets would be spread across multiple markets.
As an individual I'd net out to the same investment position as if I sold the equity portion of my home to a REIT, then re-invested the money into the same REIT.
That's part of it, sure, but the biggest reason for me is permanence. I want a place I know that I'll be able to call home in 20 years. Homeownership achieves that.
To me it looks like a housing co-op scheme with more vendor lock-in, so to speak. But housing co-ops come in so many different shapes and form across the world so there might be some that have also some kind of lock-in disadvantage.
In any case it's refreshing to see that people want to question the home ownership model we rely on on an everyday basis.
Board (https://board.live) lets you make a cash offer instead of a
Zerodown (https://zerodown.com) and Unison (https://unison.com) I believe have a similar models to Arrived, with some different specifics.
Generally, they seem to be a response to how hard it is for millenials to buy homes . I did the numbers on ZeroDown, and it seems to be a good deal for someone early in their careers who is faced with high rent and student loans to pay off, given their other choice is waiting 15-20 years to save up a down-payment (during which time prices will have tripled again).
 AFAICT, this is due to the complete refusal of every city in the US to zone and build enough homes to keep up with demand, as well the student debt crisis, general wealth inequality, and similar stuff.
The biggest concern is what happens when the company folds? What if after liquidation they don't have enough value to pay out everyone's investments. Do seed investors get paid out first?
- would I buy homeowners insurance or renters insurance?
- Who has authority/responsibility for major work on the house?
I posted this above, but thought it might be helpful to repost here. Arrived the company and Arrived the fund (which owns the homes) are separate entities. Arrived the company is the manager of the fund, but the fund assets are protected in it's own entity. Members of the service invest as LPs in the fund and would have the option to exchange their shares based on the income and value of the homes. If all fund LPs wanted to exchange their shares, the fund may need to sell its ownership position in the portfolio of homes and each member would receive their share accordingly.
> would I buy homeowners insurance or renters insurance?
The Arrived fund carries homeowners insurance and our members carry renters insurance.
> Who has authority/responsibility for major work on the house?
Currently improvements on the house can be performed by the member with approval from Arrived. Members can submit an improvement project request and go from there. For major home maintenance items: New Roof, HVAC, Plumbing, Electrical, etc., these are the responsibility of Arrived.
Or, is the value-add that it is automatically done for renters?
One big difference is that we wanted to feel like an owner of the home we were living in. It carries some emotional appeal and as we got further into planning out the business found there are some tax and return benefits as well.
A few problems we ran into with REITs available to us:
- You pay a premium (lower yield) for access to public market liquidity
- Public REITs are quite large and not really a great hedge against single family home values (they're invested in multiple property types and residential REITs are often focused on multi-family)
- Market sentiment can change the value in an instant, and as a result, share price is not always based on the value of the properties. Not as big of an issue with long-term investing, but can be a problem during periods of time you may want to access the funds (like the end of a lease).
I suppose that some of the big benefits of home ownership (mortgage interest/local tax deduction, capital gains exemption) are not available with Arrived?
These benefits are not available with REITs, and REITs have to pay out most of their earnings as dividends.
Is Arrived classified as a REIT?
Would love to learn more about your level of funding, team etc. in case you're hiring software engineers.
- Does customer have to sign the contract and make initial investment before Arrived buys the house?
- Customer cannot buy the house in the end so how come does this platform makes customers feel like their own home? They're still paying monthly rent anyways
And last but not least, how does Arrived calculate the amount of appreciation for the initial investment of customers? like how many percents?
So many questions in my mind right now.
Both options are possible. We have a set of available homes and we continue to buy homes as we grow. Residents are part of the process for new homes we buy into the network.
> Does customer have to sign the contract and make initial investment before Arrived buys the house?
Our Residents go under contract once we've acquired the property, not before.
> Customer cannot buy the house in the end so how come does this platform makes customers feel like their own home? They're still paying monthly rent anyways
The model is a way to build investment exposure to real estate for individuals who want to own, but choose to rent for the flexibility to move over time. At the end of any lease term, Residents can decide to "cash out" their investment and buy a home if their lifestyle changes.
> And last but not least, how does Arrived calculate the amount of appreciation for the initial investment of customers? like how many percents?
We calculate appreciation through periodic third-party appraisals of our properties.
Question 2: What kind of stability can the residents expect? In particular, can the portfolio offer some stability in rents after moving into a property or do renters still have to worry about rents being jacked up x% a year ad infinity? Similarly, is there any risk of being not "renewed" on a lease (i.e. portfolio decided to liquidate the property)?
Re Q2: We include a fixed monthly rate for two years and a rental cap for future renewals in the lease agreement.
What happens to the house at the end if the period? The description wanst very clear on that.
The big one: what happens if the fund doesn't make enough and has to close up from another market downtown?
Interesting idea, but more technical description would need useful for us finance geeks.
What happens to the home at the end of the period? - At the end of the initial lease term, residents have the option to renew their lease, move to a new Arrived home, or move out of the platform. At that point they can either continue contributing to their account or "cash out" and use the funds they've accrued. We haven't built in an option to buy the specific home outright although it's likely an option we'd support.
What happens if the fund doesn't make enough or there's another market downturn? - Good question and we think a lot about downside protection. Typically a fund "not making enough" is based on the fund not being able to pay it's debt service payments. To protect against this and a possible market downturn right now, our fund owns the title to the homes and we aren't taking on debt. So our fund should be resilient through market changes compared to a leveraged fund.
reference: uber driver pay over time
We've also had something similar with Islamic style insurance/takaful. Money is put into a pool and the takaful fund managers take a service fee for managing it. The people who joined early got awesome plans. The ones who joined later got mediocre ones.
Pretty interesting concept, although I don't know how it'll work long term, I'll be keeping an eye on this. Personally, I have my doubts that it'll really impact renters, but we shall see. Definitely should incentivize renters to be more careful to their homes, but for a few dollars back a month, I don't know if materially it'll impact poor renters.
The trick is this must be in an amount much higher than rental. While you may choose to leave the lease with some "equity", the truth is landlord borrowed money from the renter in the meantime and earn interest.
The only question is, what's the law and regulation around this model?
BUT, not sure if this is a good investment vehicle. how is this different than investing with a PE firm or hedge fund without diversification (real estate only)? What is the rate of return here; all subject to the real estate market condition. I
Edit: I suppose one reason would be if you want to rent, but you like a house that's not on the rental market. Any others?
So here’s a company that says “here rent with us and we will apply some amount toward a home purchase”
Also remember that a lot of people DONT consistently invest / save. So a service that invests 7% of their rent for them seems like a good deal, even if the rent is say 10%-20% higher than market
They filed with the SEC. But just a no-info Form D.
If this was legit, I'd expect it to be set up as a Real Estate Investment Trust. The REIT would own the properties, borrow at bulk rates, tenants buy shares in the REIT, and the company behind the web site is the fund manager. That way, if the management company goes bust, the tenants still have their equity.
It's also amazing to sort of tricks people do to force themselves to save money, having it part of a bill you have to pay seems to help. Heck, a 30 year mortgage mostly works this way, you mostly part interest every month, but still stock away a little principle
The only way Arrived can build a sustainable business is by doing what Opendoor is already doing - either buy low, or sell high.
It might be good to build equity... But you start with a big disadvantage, and statistically you are going to be worse than if you simply invested in other types of funds.
But it seems sort of like buying shares of an REIT or something.
On a home, the salt is capped. But if you are not directly paying salt, maybe it is different?
I first thought the system might be crazy and promise 7% monthly compound interest since 2000 * 1.07 ^ 36 = 22847.88, which squares pretty well with the number above. But doubling the time to 72 months only grows to a "profit" of 63000 dollars rather than 261000. So that's good, but then I don't understand how this is calculated.
Gotcha, thanks. It would be really good to have a bit of that information next to the calculator on the landing page.
Obviously the rental payments will be inflated to account for this.
annual_interest_percentage = 9.75
duration_of_stay = 36
rent_back_percentage = 7.
rent_monthly = 1500.
seed_investment = 3000.
invested_rent = round(rent_monthly * duration_of_stay)
monthly_investment = rent_monthly * (rent_back_percentage / 100.)
appreciate = seed_investment
for _ in range(duration_of_stay):
appreciate = appreciate + monthly_investment
appreciate = appreciate + (appreciate * annual_interest_percentage / 1200.)
roi = appreciated_investment - invested_rent
We can gain a few valuable insights from this:
1) Arrived will be investing some portion of the money you provide them (no surprise there).
2) They are assuming they can get 9.75% annual returns on their investment.
3) For the values plugged in above ($1500/month rent, living in same place for 3 years), the ROI is $-45,579.
4) With the values from item 3, if your "seed_investment" is $37,601 or higher, your ROI is positive.
5) For a place like SF ($4000/month rent, living in same place for 3 years), the ROI is $-121,545.
What pisses me off about Arrived is the snake oil. All the language on their site makes it seem like you're going to be having a stake in the ownership, but you never will. They use the term "home" not as something you own but as the place you live, yet the context makes it sound like ownership. Arrived will keep the home after you're done. Know what they don't say? If you're liable for repairs on the property. Because they're selling this as a way to "build home ownership," I'd wager the leaser will be responsible. If so, they're trying to be landlords who shirk responsibility.
They're a financial investment firm buying up property without the obligations of being a landlord.
At first, I thought this was an example of a land contract . However, this is almost more nefarious. At least with a land contract, the buyer is guaranteed the deed. (Unfortunately, land contract firms often target the poor. Contracts may have a clause where the buyer forfeits their right to the deed if they miss a monthly payment. These contracts will also often require the buyer to pay for upkeep on the property.) With so many large companies snapping up real estate and driving prices higher and higher, it seems likely there's a bubble that could pop.
IMHO, these are things that don't mix.