Irvine-based Cove Financial Group Inc. hopes patience will be a virtue in the real estate market, too.
The company serves customers who do not qualify for traditional mortgages despite having sufficient funds for down payments and income for monthly payments. Cove will buy and hold a house for as long as six years if that’s how long it takes a would-be buyer to secure a loan.
The customer agrees to lease the property in the meantime.
“We buy homes for families who are currently shut out of the single-family residential market,” said Brent Martini, Cove’s cofounder. “It’s not a huge margin, but it’s good enough.”
The company last week raised $10.4 million through a sale of preferred stock led by an affiliate of New York-based investor Jacobs Asset Management LLC.
The capital infusion is a nod to a business model that aims to “put a consumer into a home and allow them to either cure their credit or wait until lending markets loosen up a bit, so that they can end up completing the purchase,” said Mike Sekits, director of private equity at the Los Angeles office of Jacobs Asset Management.
Martini established Cove and its service model after spending more than 25 years in various industries, including serving as president of Bergen Brunswig Drug Co., a subsidiary of Orange-based Bergen Brunswig Corp. The company eventually became part of AmerisourceBergen Corp. in a 2001 merger with AmeriSource Health Corp.
Martini then “had a chance to race seriously” for some time, he said, winning several sportscar championships. He later partnered with real estate industry experts—including former executives of Irvine-based New Century Financial Corp. and New York-based investment firm Cerberus Capital Management LP—to acquire distressed real estate properties, holding as much as 5,000 loans.
Cove has 22 employees and operates primarily through its mortgage-alternative program, or MAP.
2 Contracts
The program allows customers to “go out and choose the homes with whatever realtor they want to use,” Martini said. “Cove then purchases the homes, and at the same time, we get into two contracts with the customer: a purchase contract where we agree to sell [the house] to them in the next six years, and a lease contract where they take position as a tenant under a lease. They rent it from us until they can qualify for a mortgage.”
The maximum six-year period is essentially an escrow, he said.
The purchase price on the home is fixed, and the customer eventually assumes any depreciation or gains in home value if they go ahead with the purchase.
Customers pay a fee equivalent to 3% of the agreed-upon purchase price to withdraw from the deal anytime during the six years. The lease contract is canceled if a renter doesn’t secure a mortgage to make a purchase after the period ends.
Cove’s program takes into account a waiting period that’s required of an individual who has experienced a foreclosure or bankruptcy before becoming eligible for a new loan. That could be at least three years, depending on whether the original loan was backed by the Federal Housing Administration. A recent FHA rule change allows as little as 12 months for borrowers who meet certain criteria.
“Cove believes that there are many families who have lost their homes from a short sale or foreclosure,” Martini said. They are “recovering financially and would like to become homeowners again,” but unable to meet the home-lending standards that have tightened up since the recession.
More stringent requirements have included higher percentages of down payments and average credit scores, though recent indications have been mixed. Signs of softening standards were visible earlier this year, for instance, when the monthly index of mortgage credit availability published by the Mortgage Bankers Association reflected four straight months of increases.
The market tightened again in August and September, though, when the index resumed declines.
Cove aims to offer a consistent source of capital as the market fluctuates.
“Our goal is to bring more organized capital in the secondary market to this new way of putting these customers into more stable home ownership and get them back on the path,” said Patrick Flanagan, cofounder and chief executive of Cove. “If you look in the market place, there are a lot of small programs [like] rent-to-own or contract for deeds. But not a lot of people have taken the approach to make it a systematic program that’s consistent.”
Flanagan’s career includes a stint as managing director at Cerberus Capital and as president at New Century Mortgage Corp., where he spent nearly 10 years through 2005. Its parent, New Century Financial, filed for bankruptcy in 2007 in one of the early harbingers of the eventual mortgage meltdown.
Cove executives declined to say how many houses the firm owns. They said most are concentrated in the western U.S. and valued at slightly more than $300,000 on average.
They’re “middle-class, American suburban homes in areas around cities,” Flanagan said.
Proprietary Technology
Cove has a proprietary technology-based marketing tool that helps the firm identify “the exact consumer that fits the profile,” Sekits said.
“That’s the consumer who pays his bills on time, pays auto financing bills, credit card balances,” he said. “They’ve got a good job, they have a down payment and really want to be a homeowner again. They might have lost their jobs during the recession and had healthcare issues. And today, that person can really struggle to find any financing.”
Cove plans to use its banking relationships and other available equity capital, “like the ones we raised with Jacobs Asset Management,” according to Flanagan. “There’s certainly been a lot of capital flowing into residential housing over the past year in different forms.”
The recently raised funds will go toward supporting MAP and boosting Cove’s digital marketing efforts, according to the company.
