Trust May be the Answer to Many of Our Problems TodayBy Rodrigo Barrera Vivanco | Tue, 09/01/2020 - 13:50
"Desperate times call for desperate measures" or so we have heard ad nauseam, even more so now than ever. At a time when reality is blurred with a toxic brew of paranoia and hysteria that we slowly sip through our daily feeds, coming to terms with law initiatives that pretend to revisit the tenant-landlord balance of rights or discuss domain extinction acts perhaps may be too much to overcome. Still, when people reach out to us at HAMOC seeking advice on how to deal with home-rental-related risks, our answer in pre or COVID times has invariably boiled down to what we call the science of trust. Let me elaborate.
Perhaps you may recall a time in which jumping into a cab in Mexico required a thorough inspection of its driver's permit posted on the side window, and on top of that you would utter a silent prayer to your favorite saint or deity of choice to bargain a safe journey. Decades of Kafkaesque undertakings and corruption to obtain a cab permit came to its sudden end the moment Uber decided to do things differently: build a system based on trust. Closing the loop through transparency and immediate social evaluation on Uber proved to be far more effective than any other previous measures to make private transport safe.
Mexico's home rental market is highly fragmented into over 5 million properties, mainly owned by mom-and-pop landlords with no more than three properties each. However, unattended demand, mainly described by yuppies living unwillingly with their relatives, represents a full additional share of homes. So, if demand is there, how come supply is failing to meet it?
Allowing a perfect stranger to "get on board" your property, which may account for a fair share of your equity, may produce even greater chills than riding a taxi back in pre-Uber times, but incumbent policies that ask prospective tenants to present a third party with a property free of lien as backup for the lease contract are starting to feel stagnant and more unlikely to find compliance. Luckily, science and technology are helping again to overcome this situation.
HAMOC, a Mexican proptech/insurtech company, uses a combination of data science, machine learning algorithms and behavioral economics to liberate home rentals from worry by building trust. Different to Legal Assistance Insurance policy alternatives that solely take care of lawyer expenses in case of undergoing a legal process, HAMOC proprietary tech at first assesses any prospect-tenant willingness to pay and payment capacity to then offer to become their guarantor with no property collateral requirement. Landlords are covered and paid rent on time, always, and may even request rental arrays in advance. Everyone is happy but perhaps the greatest misunderstood tech implicit in HAMOC's solution derives from its behavioral economics aspect.
Lemonade, a B-corp renters insurance company founded in 2015, has recently raised roughly US$300 million in a Series D round. Its core philosophy relies heavily on behavioral economics applications driven by its founding CMO, and fully-belted expert on the matter, Prof. Dan Ariely. Lemonade positions itself as a customer-friendly insurer that gives away unclaimed policy proceedings to customer-appointed charities. Not long ago, this model would have been greatly criticized but so far, its understanding of how psychology and economics intertwine is yielding extremely positive results.
In managing and underwriting home rentals, there is more to thinking that tenants will react rationally and dispassionately to strong negative incentives. In his book Moral Economy, Prof. Samuel Bowles describes how a former Boston fire commissioner learned this lesson the hard way.
To deter a few sick leave absences happening at the firehouse, the commissioner structured a policy that placed a limit on the sick-day calls per year. By implicitly assuming every fireman had a motive to cheat, the commissioner's decision undermined perhaps the highest moral value of the firemen corps and resulted in a series of backlashes and retaliations.
The same may happen when tenants are treated by default as delinquent payers when evidence shows that 85% or more pay rent on time and, if adequately screened by aforementioned algorithms, odds could improve significantly. Rather than bringing a lawyer to a lease contract signing, holding a Damocles sword over them and throwing any sense of trust overboard, showing tenants respect and generating moral commitment all in all goes a long way in their payment behavior.
Tenants who pay HAMOC their rent on time are offered positive credit track-building and the opportunity to be financially included. We pride ourselves in bringing justice to the underrated and underserved. Overall, HAMOC's underwritten bad rent is less than 0.2% on hundreds of managed contracts.
When I began as an entrepreneur, I recall a time when my lawyer and accountant friends helped me pro bono to get on track. As I asked one of them to bill me her advisory fees, she told me, "I won't bill you today but do remember that." To date, I've been trying to repay her in any way I can or to anyone who allows me to do something for him when most needed. It is perhaps the most expensive bill I've owed but also the one that brings me the greatest joy.
This might be the perfect time to reach into ourselves not only as individuals but as members of a community with moral standards. This might be the perfect time to reap the benefits of trusting one another.