The U.S. residential real estate market has been booming because of the pandemic. Although the rise in home prices has shut many people out of the market, it’s been highly lucrative for those who own property. The attractive returns in this sector have lured more investors into the market, but the processes associated with buying an investment property are still costly and fairly antiquated.
Vontive, an embedded mortgage platform for investment real estate that just came out of stealth, is trying to streamline some of those processes by helping mortgage lenders upgrade their tech. The startup, founded by a former Palantir engineer and a Freddie Mac exec, is taking a data-integration focused approach inspired by the data giant and applying it to the real estate capital markets, its co-founder and CEO Charles McKinney told TC.
McKinney first met Shreyas Vijaykumar, Vontive’s co-founder and CTO, when Palantir partnered with Freddie Mac to build technology for mortgage credit loss management during the U.S. housing crisis. The two decided to pair up to build a company that would help modernize the highly-fragmented investment real estate market.
So far, their approach seems to be working. Vontive has been profitable since last year, and has seen 900% year-over-year growth in its gross merchandise volume, according to McKinney.
The consumer and commercial mortgage spaces have more readily adopted technology than the investment mortgage space, McKinney said, citing the examples of Sallie Mae’s digital loan origination system and real estate fintech Blend’s mortgage application.
“When you look at the space we’re in, nobody’s really set a standard, and we think that’s largely a gap in technology. When you’re dealing with small loan amounts, you know, one-to-four unit residential properties, you really have to build in technology to take a loan application, underwrite it, generate the loan — in other words, standardize the contract — and distribute credit out to financial institutions or capital markets,” he said.
As a result, accessing capital can be a major hurdle for real estate investors, according to McKinney.
“The first problem that we’re solving is very inaccessible, very expensive debt, due to the market being fragmented. So imagine if you’re buying a house to fix it up and then turn it into a rental. As an example, imagine paying a credit card APR for a mortgage to do that, when you’re not going to default. It’s incredibly expensive,” McKinney said.
Vontive’s solution serves two different groups, McKinney explained. The first category is comprised of what the company calls “retail partners,” which includes entities such as banks, credit unions, property technology companies, or B2C brands. Vontive offers these groups a no-code, white-label solution that enables them to launch their own investment-property mortgage business in less than a week, he said.
McKinney shared the example of how affordable housing tech startup PadSplit used Vontive’s no-code solution to spin up its own investment mortgage offering in less than a week. PadSplit, like Vontive’s other retail partners, sought two outcomes in doing this — it wanted to increase its success rate in acquiring homes and add an additional revenue stream by offering mortgages to investors directly on its platform.
“Those retail partners can focus on customer acquisition, and we handle everything else to fulfill the mortgage,” McKinney said.
While the no-code solution helps companies reach real estate investors, the second prong of Vontive’s platform focuses on the other side of the marketplace — liquidity providers. These financial institutions have an entirely different set of needs and problems, according to McKinney. Vontive’s financial institution customers, or “capital partners,” include lenders such as Barclays and Colchis Capital, he added.
“Financial institutions historically have had very few options to allocate capital at scale, and earn yields that are positive after adjusting for inflation. Investment real estate is a trillion-dollar market, but there’s no solution for somebody like Colchis Capital or Barclays to deploy capital at scale and earn yield by financing the mortgages that we bring to real estate investors through our retail partners,” McKinney explained.
That’s where Vontive’s other core product could help, and it’s also where the company’s Palantir-inspired approach comes in. The company has built technology to automate and standardize the underwriting process by incorporating all the associated information — including contracts, ancillary documents, and risk characteristics — into a “highly structured data model” that makes lenders more efficient and saves them money.
“What that allows us to do is it allows us to supply credit-quality, favorable, yielding assets to our capital partners. And it also allows us to do that by eliminating manual intermediaries who typically manually re-underwrite every mortgage,” usually charging 2-3% of the loan amount to the lender, McKinney said.
Timing is key for real estate investors, he noted.
“When it’s a homeowner-to-homeowner transaction, everybody understands you’re getting a Fannie Mae or Freddie Mac mortgage, and it takes several weeks. But when an investor is buying a property, they’re competing with other investors, often who are going in and agreeing to pay cash, so [investors] need to be as frictionless and fast as closing with cash. So one of the things that is a huge differentiator about our technology is that we reduce the time that it takes to close a mortgage, with complete, full bank-quality underwriting from weeks to several days,” McKinney said.
Quick underwriting can raise red flags when one considers the context of the 2008 housing crisis, but McKinney allayed those concerns by citing the Vontive algorithm’s track record. The platform has closed over $600 million of mortgages to date using its algorithmic underwriting technique, and has seen a total of just three defaults, he added. That’s an impressively low rate, which McKinney attributes in part to the less-risky nature of borrowers looking to buy an investment property rather than a primary home.
Vontive has about 12 retail partners today, and plans to deploy its no-code embedded mortgage solution with another five “very soon,” according to McKinney.
The startup says it has raised $135 million — $25M of venture capital and $110M of debt — in a Series B round to scale its business. Zigg Capital led the round, and other investors include Founders Fund, Goldcrest, XYZ Venture Capital, 8VC, Nine Four Ventures, Village Global, Godfrey Capital, and the LeFrak organization, according to the company.
It has used some of its funding to double its headcount in the last three months to 78 employees today, McKinney said. Vontive plans to focus in the next few months on scaling up its go-to-market team and building out its partner network, he added.