Do You Want to Own Just 2.5% of Your Home in 2022?

Aron Solomon

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Willy Barton / Shutterstock

You want to buy a condo. It costs $540,000 and you really don’t have much money on hand because of this thing called life.

So a startup appears and says “Hey, friend! We have a solution!”:

Just pay $13,500 now and you (YES! YOU!) can own 2.5% of the condo.

Cool! So I can live there for free, yes?

Nope. You’ll also pay $2088.56 per month, every month.

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Realtor.com

These are the exact terms of a deal being offered by a startup called Key. While Key launched in Canada, this is obviously a model for the massive U.S. market that is essentially being beta tested in the small Canadian one. No matter the geography, the math here is brutal:

Key requires not only that you’ve saved up the $13,500, but also around $7,000 in closing costs.

Yet if someone saved up that $20,500 plus another $13,500, they’d have enough for a downpayment on the same home and would own not 2.5% of the property, but 100%. They would assume the full risk of the value or their home going down, and reap the full benefit of property increases.

For those entirely unfamiliar with Toronto, it’s no different from a real estate perspective than any hot US housing market. There are people who earn hundreds of thousands of dollars per year buying and selling homes with quick flips. It’s where someone could buy a home around a year ago for $1,000,000 and sell it today for $1,300,000 or more.

If you want to dismiss this as “just a Canadian thing - you know, like apologizing,“ sorry, but you’re wrong. Canada may be the canary but for this startup and others who will enter the market, the massive coal mine is the US market. While this business model might work for the startup, the problem is that while it operates under the guise of being a venture to help people actually own a home and benefit from its rising value, Key is instead preying upon the most vulnerable people in the housing market.

John Pasalis, who owns a data-driven real estate brokerage in Toronto, points out that Key is exactly what it appears to be:

“Key allows poor people who have lower paying jobs and not a lot of savings to get on the property ladder by allowing them to buy a ‘fractional ownership’ into a home.”

Pasalis adds that the end game here is simple:

“The people who feel the only way to buy a home is to partner with a big corporation and end up owning just a small sliver of a home while their corporate partner benefits (almost entirely) from the future appreciation in the home's value. Not a vision I'd put my name behind”

In November, Key made the kind of startup misstep that often proves to be fatal. The CEO of Key reached out to Pasalis to startup-splain to him that he had it all wrong. They are the good guys and he simply didn’t understand their business model (note: John is actually working towards his doctorate, analyzing micro-trends in real estate) so that’s that. After the CEO said they have glowing recommendations, John asked him to provide only one thing:

“Glowing testimonials from people who don’t understand real estate is not important to me. Contracts don’t lie and I was interested to see how their contracts are set up from a consumer perspective. What hidden costs/fees are associated with their business…”

Of course, the CEO refused, so it’s no surprise that Pasalis isn’t alone in raising both eyebrows and red flags about Key’s business model. Other critics of Key and their business model rapidly emerged once the details of what they were offering hit a larger audience.

In reflecting back on this exchange, Pasalis remarked:

“Key’s owner-residents are not registered on title which mean’s their $15K investment is technically just a 6-7 month rent deposit.”

It would be more honest and transparent for Key to market their service as a rent-to-own model rather than a co-ownership model.

Meaghan Daly, a former capital markets analyst and now a startup founder herself, commented:

“Risk is always in the ratios. There is no way I see an investment of this type of scheme bringing anyone closer to home ownership. It’s just about investing. If you want to have enough to buy a home, you need to invest in an asset class that outpaces home values.”

What draws people into Key’s proposition is the fiction within the fractional - the notion that fractional ownership of anything is actually ownership. When you own 2.5% of a home, is it really ownership or are you simply allowing yourself to buy into a pitch deck delusion? Can one imagine that investors into a scheme such as this were thinking that this is a great way to make people homeowners, or a great way for a startup to de-risk their ownership in many properties? Is Key simply stepping into part of the void left by Zillow not wanting to play in this arguably unclean sandbox?

Michael Epstein, a New Jersey lawyer, gives us a reality check, warning that things are indeed as they appear to be:

“This is a really non-traditional way in which to buy a home. The average person won’t understand all of the mechanics and legal aspects of a deal like this, including what happens if the startup that is organizing this deal shuts down, as well over 95% of startups do. My counsel would simply be buyer beware.”

Fundamentally and ironically this can probably best be characterized as the dystopian future of renting in places such as Toronto and all major US cities where the demand for housing is intense.

Given that landlords in Toronto are currently losing their collective minds, asking prospective renters to not only show a solid credit history but how much money they have in the bank and an introduction to their boss, what Key really may be offering is a way for people to rent without having to deal with the ever-increasing bar set by landlords.

Ultimately, we may be looking at yet another cautionary startup tale of founders and investors not realizing that they are slouching towards Bethlehem. With the Theranos trial all over traditional and social media each day, it’s possible that with each failed revolutionary startup, we collectively learn absolutely nothing. We make the same fundamental mistakes over and over again, failing to apply a critical analysis to that which is obviously too good to be true - whether it’s a technology that transforms how we draw blood and analyze diseases, or a scheme to transform people who can’t afford to own homes into equity-bearing homeowners.

Following Key’s lead, San Francisco startup, Fractional, entered the market with a splash and a $5.5 million seed round. Fractional spins Key’s business model to pair up prospective real estate investors to co-own homes.

As Pasalis reminds us:

“The world of real estate has always been attractive to those looking to get rich quick or ride off the misery of others looking to do so. As with anything in the real estate world that gets quickly overhyped, you need to ask around and do your research or you might get burned.”

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Aron Solomon, JD, is the Chief Legal Analyst for Esquire Digital, who has taught entrepreneurship at McGill University and the University of Pennsylvania, and was elected to Fastcase 50, recognizing the top 50 legal innovators in the world.

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