Better.com IPO: What You Need To Know

Michael AdamsLead Editor, Investing

Michael Adams is lead editor, investing at Forbes Advisor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publications, including Kiplinger, U.S. News and World Report, The Motley Fool and more. Michael holds a master’s degree in philosophy from The New School for Social Research and an additional master's degree in Asian classics from St. John’s College.

Michael Adams

Michael AdamsLead Editor, Investing

Lead Editor, Investing

Paul KatzeffDeputy Editor, Investing

Paul Katzeff is an award-winning journalist who has written four books about how to grow your 401(k) retirement nest egg and one about internet investing. Before becoming an investing deputy editor with Forbes Advisor, he was a senior reporter/writer at Investor's Business Daily, a correspondent for Money magazine, managing editor of the Boston Business Journal and staff writer for the Boston Herald American Sunday magazine. His work has been featured in The New York Times and The Wall Street Journal.

Reviewed

Paul Katzeff

Paul KatzeffDeputy Editor, Investing

Deputy Editor, Investing

Reviewed

Updated: Jan 26, 2024, 11:59am

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

Getty

Mortgage rates are at their highest levels in more than 20 years, housing demand is cratering and millions of Americans are abandoning the dream of remote work. And this is when Better.com chooses to go public?

Officially known as Better Home & Finance, the company followed through with its long-delayed SPAC tie-up with Aurora Acquisition Corp. on Thursday morning. It debuted on the Nasdaq stock market under the ticker symbol BETR, and proceeded to lose more than 90% of its $17.44 deal price at the opening bell.

This six-year-old online mortgage startup enjoyed tremendous growth during the Covid-19 pandemic, driven by surging demand and ultra-low rates, plus its canny ability to streamline the famously laborious and expensive home buying process.

Better.com managed pushed fees and commissions nearly to zero, which has helped it do billions of dollars in mortgage originations, refinancings and title and property insurance sales.

Yet the forces that drove the start-up’s peak valuation of around $6 billion are all gone now, leaving a great deal of uncertainty about Better.com’s business. The company decided to go through with the SPAC deal, yet only a fraction of BETR’s shares were available for trading after a vast majority of investors opted sell out before the public offering took place.

The Case For Better.com’s IPO

As with any hot new company, there’s an impressive growth story with Better.com that investors hope they can build upon.

In May 2021, the Softbanked-backed Better.com disclosed that it had entered a deal to go public via a merger with special purpose acquisition company Aurora Acquisition.

Better.com reported that its loan value had climbed to more than $24 billion in 2020, an increase of 490% year over year, while its title insurance business had grown by 855% year over year in 2020, its homeowners insurance was up 300% and real estate transactions were up 471%.

This impressive growth, according to the company, was a product of a labor force that costs about half that of its competitors, and that it completes more than twice as many loans per month than competitors. Better.com also has the backing of major financial institutions, like SoftBank and Ally.

Clearly, Better.com’s plan to incentivize more regular folks to take out a mortgage online was working. Getting a mortgage is famously difficult, replete with a seemingly never-ending array of fees.

Better.com’s website, on the other hand, is easy to use, its brokers don’t charge commissions or loan origination fees, and prospective buyers can get pre-approved in a matter of minutes.

This kind of home buying experience is sure to connect with younger, digital native Americans between the ages of 22 and 40. This is the biggest of cohort of home buyers, making up 37% of the market, according to the National Association of Realtors.

The Case Against the Better.com IPO

As anyone who lived through the housing market meltdown of 2005 to 2007 can attest, real estate ain’t always so rosy.

While Better.com has been able to make its bones in a low-rate environment, what happens now that mortgage prices have return to historical norms? How will that impact its refi business, for instance?

That process may have already begun. A 30-year fixed rate mortgage now clocks in at well above 7%, up from 3.11% to start 2022. Higher inflation and concerns about Federal Reserve interest rate hikes has pushed rates higher.

Meanwhile, the current housing market has issues. A shortage of construction workers combined with supply chain woes delayed new home construction. For a while, that drove up demand for existing housing, but now high housing prices have combined with high mortgage prices to make it too burdensome for families to bear, with an adverse impact on demand.

Then there’s the curious case of Rocket Mortgage (RKT). This Detroit-based online mortgage company is the nation’s leading originator by volume, and Rocket is well known as a digital disruptor. After the company’s initial public offering in 2020, insatiable demand for its shares never appeared. RKT is down more than 50% since its debut.

Even still, analysts appear bullish on Rocket’s long-term advantages.

“While Rocket’s revenue and earnings will likely remain volatile, a symptom of the cyclical nature of the mortgage industry, the company’s strong competitive position and trends in consumer behavior will provide it with long-term secular growth,” noted Morningstar equity analyst Michael Miller.

Should You Invest in Better.com?

The mortgage industry is incredibly competitive, which means Better.com is facing many entrenched stalwarts with their own powerful technologies to increase efficiency and reduce costs.

Meanwhile, it doesn’t have the lead-generating capabilities of a Wells Fargo or JPMorgan Chase, who can convince millions of existing customers to get a mortgage through them.

What Better.com has is a powerful growth story and a vision of an easier mortgage application process for the future. Its executives also bring controversy that could upend that narrative. In 2020, Forbes detailed how Better’s chief executive Vishal Garg created a reportedly unhealthy work environment and drew lawsuits from former business partners, some of which allege fraud.

The more recent brouhaha over Garg’s mass layoffs adds further fuel to the narrative that Better.com simply isn’t governed effective.

Garg recently returned to the office after a month away to “reflect on his leadership,” according to Better.com’s board. Aurora Acquisition Corp. said in a regulatory filing following Garg’s temporary departure that it “remains confident in Better and the proposed transaction.”

Given Rocket Mortgage’s dismal performance, the uncertainty in the housing market and the inherently risky proposition of buying shares of any individual company, you should consider waiting until the dust settles before planing to buy shares of Better.com.