A deeper dig into a new pitch from 'Key'.
A Canadian startup called Key is promising to “fundamentally change the way real estate works for the better.”
Their tagline says it all: “Own real estate. Not a mortgage.”
Rather than saving up years for a 5% down payment to buy your first home, you can become a “co-owner” in a condo by investing as little as $15,000 or 2.5% of a typical condo unit’s value. Under such a structure, you own 2.5% of the condo while a corporate investor owns 97.5% of the condo.
This initial investment forms part of your equity in the condo and as an “owner-resident” of that unit, you would still need to pay rent each month, but $50 of that rent goes towards your equity in the unit.
The idea here is that you’re not only building equity in your home, but your initial investment is also appreciating as the value of the condo you’re living in appreciates.
But when things sound too good to be true (i.e., “own real estate without a mortgage”), they usually are.
There are quite a few things consumers should be mindful of before considering investing their money with Key.
You’re Not Really an Owner with Key
The first and most important is that Key is selling the dream of homeownership with as little as a $15,000 commitment, but Key’s “owner-residents” are not actually owners.
There is only one real test for who actually owns a home — who is registered on title.
Key’s owner-residents are never registered on title which means they’re not really owners. They’re just renters who have effectively loaned $15,000 to their landlord.
Key’s owner-residents may have an option to buy the unit they are living in under certain conditions — but a contractual option to buy a property does not make you a homeowner.
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.
So why don’t they?
For a number of reasons.
Key’s target buyer is, in their VP of Market Development Mark McLean’s words, “people who normally would not qualify for a mortgage but want to get into real estate.”
Owning a home is something many people aspire to, and appealing to those who may be from households that have long rented, it’s a pitch that is very emotionally appealing.
It also has the benefit of skipping over many of the questions you might have to answer if you made a rent-to-own investment: Are you sure this is a good investment? Is your money secure? Are you sure the owners aren’t taking advantage of you?
The dream of becoming a homeowner can also lead people to overlook doing the proper research and due diligence to make sure they’re making a smart investment. The consumers that Key is particularly targeting are less likely to hire a lawyer to review Key’s contract before signing it.
I am very concerned that Key’s business model appears to be predatory and it’s this concern that led me to write a short thread on Twitter about Key.
Key’s CEO called me shortly after to reassure me that what they’re doing is great and that I have simply misunderstood their business model, and offered to share more information about their company.
I gave it some thought and asked them for just one thing — the contract that owner-residents sign with Key. I wasn’t interested in receiving more marketing materials. Contracts don’t lie and it would be easy to assess this potential investment from a consumer’s perspective by looking at one.
It turned out that this contract is information that Key isn’t willing to share with me due to concerns over “intellectual property,” even though they are comfortable sharing it with anyone interested in buying into their premise.
This led me to make an offer to my Twitter followers, which I’m extending to readers of this report — if you are considering investing in a condo with Key, but don’t have the financial resources to hire a lawyer to review Key’s contract, please contact me and I will happily pay for a legal review from a lawyer I trust, provided I can share the details of such a review online so that other consumers can benefit.
I’ll wrap up with one final reason why I believe Key is telling people they’re homeowners when they are not — when someone believes they’re a homeowner, they are more likely to invest their own money to improve and renovate their condo units.
It’s worth noting that any improvements are not paid 97.5% by the investor and 2.5% by the owner-resident in line with their proportional share in the property according to my conversation with their CEO as all improvements are paid for entirely by the owner-resident.
When a homeowner spends $10,000 renovating their home, their property rarely appreciates by the same amount. Depending on the type and quality of renovations, the owner might see a 50 to 75% return on their investment, the latter most often for kitchen and bathroom renovations.
This means that if an owner-resident spends $10,000 doing small improvements to the condo they live in, they would be lucky to see the value of their unit appreciate by $5,000. Continuing with our above example, the owner-resident may be reimbursed $5,000 for renovations that are deemed to have increased the value of the property, but the extra $5,000 in renovation expenses that did not add to the value of the property are paid for by the owner-resident.
So while Key promises that owner-residents will get the full value of the appreciation from the upgrades they made, this once again is a misleading promise.
The main beneficiary of these improvements is the investor who owns the unit and is getting it renovated at a fraction of what it would cost, not the owner-resident paying for the renovations.
Key’s primary clients, the investors that retain ownership of these units, are large institutional investors — big companies that are raising millions of dollars to buy blocks of condos from builders. Central Condominium REIT is one such company (and a Key client) that owns 60 condo units in two downtown condo buildings.
And this leads to an even bigger problem when we think about Key’s big institutional investor-clients.
Given how unaffordable Toronto’s housing market is, do we want big companies buying up single family condos and homes? While first-time buyers have to save their down payment through their earnings and have to qualify for a mortgage based on their income, Key’s clients can easily raise millions of dollars from wealthy investors and use their buying power to outcompete any first-time buyers.
Key and their backers seem to believe this is “changing the way real estate works for the better”, but I strongly disagree.
To me, changing real estate for the better would mean ensuring that more homes are bought by Torontonians who intend to live in those homes, not by big corporate investors who are using homes as just another financial asset.
John Pasalis is President of Realosophy Realty, a Toronto real estate brokerage which uses data analysis to advise residential real estate buyers, sellers and investors.
A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).