May 16 2024 16:02
Paul Schaefer, the founder of fast-growing PropTech and InsurTech startup, LeaseSurance, discusses how the group has been a trailblazing success, four years after it was founded to solve a problem which has irked hundreds and thousands of South Africans.
LeaseSurance partners directly with property management companies. It uses a Deposit Free Platform at the properties which they manage. LeaseSurance does not work directly with residents.
What drove you to make a play in the PropTech space?
I’ve always been entrepreneurial; always asking how can we do this better? I have this constant drive for innovation and improvement. I happened to start my property journey with Ithemba where I was the CEO. We developed affordable accommodation in areas such as Joburg and Pretoria CBD, Maboneng, Berea and Hillbrow, helping to house thousands of people and their families. It was in my role that I got to learn the ins and outs of multifamily property management. It was at Ithemba that I experienced the cash deposits problem first-hand, which inspired me to find a solution. That’s where LeaseSurance the company and the concept of lease insurance were “born”.
The LeaseSurance team: Back left to right: Heinrich Lange (CEO of Octaco), Pieter Zietsman (Octaco Technical Lead); Front left to right: Paul Schaefer (CEO of LeaseSurance), Elische Schaefer (Chief Revenue Officer of LeaseSurance), Albert van Urk (Chief Technology Officer of LeaseSurance)
How does lease insurance work?
A landlord provides us with historical tenant ledger data which we put through our proprietary underwriting algorithm. This provides us with customised premiums and cover options for each property!
We use a back-to-back program:
- We charge a landlord a premium in exchange for cover; in the form of an insurance policy.
- The landlord recovers these premiums from tenants in the form of waiver fees.
- Each waiver fee is added to the lease agreement and billed in addition to rent and other charges.
- The product therefore comes at no charge to the landlord, who enjoys an assortment of benefits:
- An increased and quicker leasing cycle
- Reduction of concessions
- Additional protection on the back-end of the lease
- No more move-out friction
- Simpler administration
How does lease insurance help tenants who are facing tremendous financial pressure?
There are numerous ways in which tenants can benefit.
The cost of deposits
We’ve analysed more than 30,000 vacating tenants in the multifamily rental market, and consistently, on average, a staggering 70% of deposits are NOT refunded.
If you extrapolate the non-refunded portion of the deposit over the average stay, the cost is almost the same as the waiver fee.
If one considers that many tenants have to borrow the deposit amount and pay exorbitant interest on these loans, the cost of the deposit increases more and beyond that of the waiver fee.
Opportunity cost
Many tenants simply prefer to spend the lump sum deposit amount on other urgent matters including education and debt. They are more comfortable paying a monthly fee instead of a large cash deposit in one go.
We are achieving adoption rates of 70%+ when tenants are offered the choice between a waiver fee or a cash deposit.
You talk about a: “Front-end vs back-end balancing act.” To what does this refer?
So many people want use to cash deposits as a financial tool because there is so much risk of non-payment in the market. But the problem with a cash deposit is that it is an outdated and meagre financial instrument when it comes to mitigating this risk.
If you try to drive occupancy by lowering the barriers to entry and offer lower or even no deposits, then you are certainly set to lose revenue on the back-end of the lease when the tenants move out. Less protection leads to bad debts.
Similarly, if you are lowering the barriers to entry in an effort to drive lead generation, by offering concessions such as a free month, then you create an unnecessary expense item and chances are high that you are still likely to lose revenue when people move out, because of limited deposit protection.
On the contrary, if you try to solve the back-end problem by increasing your cash deposit protection to lower bad debts, you make the barriers to entry so high that your occupancy levels drop.
Lease insurance solves both the front-end and back-end problems of the leasing cycle. Cash deposits are mutually exclusive whereas lease insurance is actually mutually inclusive, statistically speaking.
Have you seen any behavioural change in tenants after waiver fees were used with home rentals?
We haven’t seen any worsening of tenant move-out balances in the data. In fact, the data actually tells us the opposite; tenants with deposits have higher move-out balances than tenants with waiver fees do.
Tells us more about your technology platform
Our technology platform consists of three pillars:
Integration: We have recently become an MRI partner, which gives us access to APIs for their Property Central and PMX applications. These APIs are used to extract the landlord’s data into our database, where we clean and prepare them for the other functions. These include automation and algorithms.
Workflow automation: We have built an easy-to-use, automated online platform where our clients can perform all the necessary functions, the most important one being claims. Managing claims is simple:
You click on the tenant who has vacated and confirm that the outstanding move-out balance is correct and, by clicking on the submit button, we convert that amount into a claim, which we pay out within seven days. We also provide a dashboard and reports on all the key performance indicators of the properties.
Underwriting algorithm: Our underwriting algorithm engine has been developed and fine-tuned with numerous data points to provide customised risk profiling for properties. We’ve been forecasting claims for almost two years and our model is extremely accurate.
Who is your target market?
Our B2B (business-to-business) lease insurance product, in its current form, is specifically tailored for the multifamily market. Although we have had requests from other subsectors of property like commercial, retail and student housing, our focus remains on the multifamily market in SA in the near future.
How difficult has it been to operate in the multi-family market?
In all honesty, it’s not been smooth sailing. Our product is totally different from how landlords have been doing things for many years or decades, so understandably there is resistance to change. The property industry in general is lagging when it comes to adopting new technology and innovation, but there are some early adopters who are reaping the benefits.
Our product’s benefits far exceed any potential downside, as it costs the landlord nothing. What landlords do need is an open mindset and a willingness to improve.
We are extremely privileged to have two of the largest multifamily operators as our clients, and to see how our product is achieving its value-add promises. There are a few more landlords who are keen to come on board in the coming months.
Have you noticed an increase in competition in your space?
We haven’t noticed any direct competition as such. What we have seen is that some landlords “tinker” with cash deposits, for example paying over three or six months, but the fundamental and inherent problem of cash deposits remains, as I have explained.
Solving for market lease risk involves a total re-think, which we have done at LeaseSurance.
What makes LeaseSurance so different?
I believe that everything that I’ve mentioned here is what makes us different. Nevertheless, if I were to summarise our core USP, I would say:
We have a strong insurance carrier in Bryte and clients know that their policy is as good as cash.
We have a technology platform which is driven by workflow automation and, importantly, a strong risk engineering model.
We have achieved scalability and effective costing across our product.
We are also able to spread the risk across the entire market, rather than across only a few properties.
We also possess an in-depth knowledge of the multifamily market, as we are experienced ex-operators in the market.
I remember that you raised R3m in seed funding last year in a round led by FedGroup Private Capital. What other finance has been raised since?
We have recently partnered with Octoco as our development house. They like our model so much that they decided to acquire a stake in our business. Octoco is responsible for everything tech in our business, and they have been really great!
We are also fortunate to have the continued support of FedGroup.
Thanks so much for your time! LeaseSurance is driving innovation in residential property management and proptech.
LeaseSurance notably covers three major loss events:
- Damages:Damages to a unit above and beyond normal wear and tear.
- Evictions:We cover the costs associated with an eviction, such as missed rent, legal fees, etc.
- Skips:Rent loss when a resident has vacated the unit without paying rent.
This is a paid for article for LeaseSurance.
For more information, visit: https://www.leasesurance.co/
alistair@propertyflash.co.za
