Better.com's Strategy: A Deep Dive into Their Plans

Better.com's Alternative Path to Public Markets

Executives at the online mortgage lender, Better.com, opted for an unconventional route to become a publicly traded company earlier this year.

Rather than pursuing a traditional IPO or direct listing, Better.com will merge with Aurora Acquisition Corp, a SPAC (special purpose acquisition company).

This deal values the company at $7.7 billion.

SPACs and the Appeal for Better.com

Despite the uncertain stock performance of companies that have gone public via SPAC mergers this year, Better.com’s leadership felt this approach offered a more favorable outcome.

They believed the combination with Aurora, alongside additional investment from SoftBank, would be more advantageous than a conventional IPO roadshow targeting bankers and institutional investors.

According to Better CEO Vishal Garg, a traditional investment bank cannot guarantee a stock price or successful execution.

Concerns About Traditional IPOs

Garg expressed a lack of confidence in investment banks’ ability to successfully navigate the public offering process.

This skepticism stems from recent experiences of other online mortgage lenders.

Both Rocket Companies and loanDepot, which completed traditional IPOs in the past year, saw their initial pricing fall below expectations due to weak demand from institutional investors.

Similarly, real estate brokerage Compass reduced its target range on its IPO day and has experienced a continued decline in its stock price since going public.

Beyond Categorization

Garg suggests that a traditional public offering is best suited for companies easily understood and categorized by investment bankers.

If a company can be readily classified as an enterprise SaaS company or a payments company, a public offering becomes a logical choice.

However, Better.com envisions a broader scope than simply being perceived as a mortgage lender.

Expanding Services and Future Growth

While mortgage lending remains central to its operations, Better.com has diversified its offerings.

The company now includes realtors, title insurance, and homeowners insurance among its services.

In the latter part of the year, Better.com intends to introduce home services and improvement loans.

Long-term plans involve expanding into other financial and insurance products, such as personal, auto, and student loans, as well as life and disability insurance.

“We aren’t so easily categorized,” Garg stated, emphasizing the company’s ambitious and multifaceted vision.

Streamlining Mortgages: A Faster, Simpler, and More Affordable Approach

Similar to many innovative companies aiming to transform traditional sectors, Better emerged from a personal need. Around 2012, Vishal Garg, a founding partner at One Zero Capital and the creator of the online student loan platform MyRichUncle, encountered difficulties while attempting to secure a mortgage for his desired property.

He ultimately lost the opportunity to another buyer who could finalize the deal more quickly. This experience highlighted a gap in the market.

As the story goes, options for applying for and obtaining a mortgage online, or even receiving a pre-approval letter, were limited at the time. Consequently, Garg initiated the development of a solution.

“The initial goal was to simplify the transition from renting to homeownership, making it more affordable, faster, and easier,” Garg explained. “We created a platform that allows users to obtain a pre-approval letter online within five minutes, a significant improvement over the typical five days or five weeks.”

Sarah Pierce, an early employee who now oversees all sales and operations, notes that Better achieved faster mortgage approvals through its technology-driven risk assessment of borrowers.

“Customers can complete the entire process without needing to speak with a representative. Many, especially those refinancing, apply, secure their rate, and finalize everything without any personal interaction. This allows for completely automated processing,” Pierce stated.

However, Better may have been somewhat ahead of its time, particularly in its initial stages. When making a significant financial decision like purchasing a home, many individuals appreciate personalized guidance.

Even today, despite increasing comfort with online financial services, only approximately 10% of Better’s customers are considered “auto customers” – those who don’t interact with a broker. This figure decreases to 2% or 3% when excluding refinances and focusing solely on first-time homebuyers.

“Our typical customer entrusts us with roughly 87% of their accumulated savings as a down payment on their home,” Garg said. “Our priority is to ensure they feel confident and secure throughout this major financial undertaking.”

This is where Better’s team of salaried, non-commissioned brokers plays a crucial role.

In contrast to traditional mortgage lenders who compensate brokers based on loan volume, Better employs a salaried workforce dedicated to client service. This model reduces costs and, according to Pierce, aligns the broker’s interests with those of the borrower.

“It seemed counterintuitive that professionals advising clients on affordable homeownership would be incentivized by commissions that encourage larger loan amounts,” she observed. “Their earnings are directly tied to increasing the loan size, potentially conflicting with the customer’s best interests.”

The fully digitized mortgage application process allows Better to automate administrative tasks, enabling agents to concentrate on providing customer support. It also provides customers with a dedicated point of contact for all their inquiries.

Creating a Comprehensive Homeownership Experience

While mortgage lending and refinancing constitute Better’s primary business, the company is actively diversifying its offerings. Their objective, as stated by company leadership, is to evolve into a comprehensive resource for all home-related requirements – encompassing purchase, upkeep, and maintenance, effectively a centralized “home screen” for homeowners.

This expansion began in 2019 with the introduction of homeowners and title insurance policies integrated into the purchase process, sectors that have experienced substantial growth in the subsequent year. Better’s S-4 filing reveals that insurance coverage written rose from $1.1 billion in fiscal 2019 to $8.8 billion in fiscal 2020.

The company continues to broaden its operational reach, increasing the number of states where it holds licenses to provide these services. At the time of the S-4 filing, Better’s title services were authorized in 24 states, and its home insurance product was accessible in 37, compared to the 47 states where mortgage offerings are available.

Kevin Ryan, Better’s Chief Financial Officer, anticipates accelerated growth in these areas, stating, “We are inherently positioned to expand these businesses more rapidly.” He emphasizes a key differentiator: “We integrate everything directly into our streamlined process, something no competitor currently replicates.”

Many first-time homebuyers may be unaware of the necessity of title insurance; however, by incorporating it into the standard mortgage application, Better efficiently captures this business opportunity.

Similarly, for homeowner’s insurance, Better collaborates with online brokers like Hippo and Lemonade, earning fees for customer referrals. Ryan notes this represents “nearly cost-free revenue” due to the absence of customer acquisition expenses.

Beyond post-mortgage upselling, Better aims to engage customers earlier in the home-buying process by connecting them with real estate agents.

Initially, Better directed mortgage clients to an external network of agents. However, the company is increasingly internalizing this function, mirroring its approach with commission-free mortgage brokers – to simplify procedures and lower costs for consumers.

“We are striving to replicate our success in the mortgage sector within the real estate agent space, aiming to alleviate the financial burden on customers,” explains Pierce. “The typical real estate commission of 6% can represent a significant down payment for many.”

Having started with five non-commissioned agents in early 2021, Better now employs over 200 across 26 markets, with plans to reach 500 by year-end.

In the competitive current housing market, swift closing times offer a distinct advantage. The company’s founding was motivated by the CEO’s personal experience of losing a desired property due to financing delays.

Garg asserts, “The sole impediment to instant closing is the sluggishness of mortgage companies or banks.” He proposes, “If we can determine mortgage eligibility within minutes and offer rate locks in 15 minutes, we should effectively enable cash-like purchases for our clients.”

Better is realizing this vision with its Cash Offer product. For preapproved customers unable to make a cash offer, Better will extend the offer on their behalf, allowing time to secure financing and transfer ownership upon closing. Launched in mid-August, Cash Offers are currently available in eight states with in-house Better real estate agents to mitigate potential fraud.

These products and services are designed to facilitate home acquisition and financing, but what about the period following the purchase?

Pierce highlights that the average mortgage lifecycle is five to seven years, making customer re-engagement challenging. Although approximately 8% of borrowers have returned for repeat business in its relatively short history, Better recognizes the need to foster ongoing engagement post-purchase.

To achieve this, the company intends to introduce a suite of products designed to maintain its relevance to customers. This initiative begins with the launch of a home equity line of credit (HELOC) for existing mortgage holders.

The Better Home Line of Credit will be a closed-end, unsecured line of credit, offering up to $50,000 accessible via a debit card specifically for home-related expenses, and will provide up to 15% cash-back at select home goods and hardware retailers.

Furthermore, according to its investor presentation, Better plans to offer personal, auto, and student loans, credit cards, and life insurance as early as the first quarter of 2022.

“Many companies focus on specific aspects of this market, but we believe we are on track to become a fully integrated platform, with all services seamlessly embedded in a single process,” Ryan concludes.

A Surge During the Pandemic

The COVID-19 pandemic undeniably provided a significant boost to Better’s operations, as well as the broader online mortgage sector. Simultaneously, the closure of traditional bank branches due to public health concerns allowed borrowers to secure mortgages or refinance existing ones at historically low interest rates.

Furthermore, the shift to remote work and the transition to online education for students prompted many families to reassess their housing needs. This led to a migration towards less densely populated areas offering a reduced cost of living and an improved lifestyle.

Garg noted that the pandemic also encouraged many individuals who had previously considered homeownership to finally take the step towards purchasing a property. He stated that COVID expedited the future, advancing it by three to five years in terms of financial service adoption.

These factors collectively fueled Better’s rapid expansion and accelerated its path to profitability. The company’s total revenue increased sevenfold, reaching $876 million in 2020, and it reported a profit of $172 million for the year.

The year 2020 presented ideal conditions for the online mortgage industry. However, positive momentum continued into the first quarter of the following year. Better reported revenues of $426 million for the three months ending March 31, a substantial increase from $49.8 million in the same period of the previous year.

Profitability also improved significantly, reaching $82.3 million compared to a loss of $42.7 million a year earlier. Fannie Mae forecasts a decline in single-family mortgage originations, from $4.5 trillion in 2020 to $4.1 trillion in 2021 and $3 trillion in 2022.

Despite these projected market changes, Better anticipates continued growth through increased market share within the home mortgage business. Ryan emphasized that while susceptible to broader economic trends, the company benefits from a substantial total addressable market.

He explained that despite generating $876 million in revenue and holding only 0.4% market share, the potential market for homeownership in the U.S. remains immense. Better also aims to accelerate revenue growth from its Better Plus offerings, encompassing real estate, title, and homeowners insurance.

Currently, these ancillary product lines contribute approximately 5% of total revenue, but represent the fastest-growing segment of the business. The company is focused on expanding this portion of its revenue stream.

Better's Path to Public Markets

Rapid revenue expansion, a broadening portfolio of products, and substantial growth in personnel numbers collectively presented a compelling rationale for Better to pursue a public listing – and to do so promptly, as articulated by the company’s leadership.

However, strategic considerations, such as potential mergers and acquisitions, also factored into this decision. Better has already completed the acquisition of two companies based in the U.K. this year – Trussle, an online mortgage provider, and Property Partner, a startup focused on fractional homeownership. Utilizing publicly traded stock in future acquisitions is generally more advantageous than relying on private shares.

Public status will also facilitate easier capital raising should cash-based acquisitions become necessary. “Our ambitions are considerable, and achieving them will likely involve M&A activity over time,” explained Ryan. “Offering public stock in an acquisition simplifies valuation, as a target company faces the same uncertainty regarding stock worth as an employee does with their equity.”

Furthermore, Garg highlighted a philosophical reason for going public: his conviction in extending ownership opportunities to both small investors and the company’s customer base.

“I firmly believe that internet-based companies should operate as public entities,” Garg stated. “It’s important to allow customers to participate in the future they are actively shaping through their business interactions with us.” He expressed a desire for customers to have a stake in the company’s future success.

This leads back to the central question: why choose a SPAC (Special Purpose Acquisition Company) as the vehicle for going public?

According to the CFO, Ryan, Better considered a traditional IPO but ultimately decided against it due to two primary concerns. “Firstly, we were apprehensive about limited control over the identity of our shareholders. Secondly, the SPAC agreement we secured was exceptionally favorable, largely due to the involvement of SoftBank, who guaranteed the transaction.”

The decision to pursue a SPAC was partly influenced by the reassurance provided by a significant existing investor. As part of the agreement, SoftBank committed to investing $1.3 billion into the company through a PIPE (Private Investment in Public Equity), alongside an additional $200 million from the SPAC sponsor, Aurora. This investment supplements the $500 million that SoftBank had already contributed earlier in the year.

“The SPAC structure provided a guarantee from both SoftBank and the SPAC sponsor regarding the entire deal,” Garg clarified. “This assurance of price and execution is invaluable, as it eliminates wasted time and uncertainty.”

The time saved may be the most crucial benefit of bypassing the traditional IPO process. Garg emphasized, “When experiencing 300% annual growth, dedicating weeks to roadshows with potentially uninterested investors is an inefficient use of resources.”

“Throughout the summer, our focus remained on launching new products, rather than engaging in extensive investor presentations,” he added.