Consumer PropTech Landscape

PropTech industry (companies applying technology in the real estate space) has been gaining traction lately with new players and funding. Below is a product perspective on what’s going on and the types of innovation that we are seeing in the market today.

Let’s talk end users first

Before jumping into companies doing interesting things, I would like to start by establishing an understanding of the end users that are impacted by the home buying process.

Home Buyers

Ultimately, home buyers are interested in getting the right home (bed, bath, sq ft, among other features) at the right price for their desired lifestyle (neighborhood location).

Desired lifestyle is the easiest to solve. Buyers can walk around the neighborhood, understand the commute time, check out the schools, and do the research before they makes an offer.

However, right price and right home remains uncertain until the purchase contract is made to the seller. Buyers often include various contingencies in the purchase offer contract to protect themselves and enable them to back out. These common contingencies illustrate what buyers care about the most. (We will circle back to them when talking about companies disrupting the industry by eliminating the need for different contingencies.)

• Financing contingency — am I going to get the money to pay for the house?
• Appraisal contingency — is this home worth what I’m paying? is the lender going to underwrite this asset?
• Inspection contingency (some contracts also call out specific items such as lead paint, pest, roof, sewer, and mold) — is this home in the condition that it appears to be when I made the offer? did I account for all the cost? In some states, the industry and sellers are trying to mitigate the need for this contingency by giving the buyer the Seller Disclosures before someone makes an offer. Oftentimes, these disclosures include a pre-inspection to avoid surprises. As a result, many buyers in hot seller markets (such as San Francisco) are not including this contingency in their offers.
• Home sale contingency (only for buyers who are intending on selling a current home) —am I going to be financially stretched or under water if my current home doesn’t sell on time?

Home Sellers

Not only does there need to be a buyer offer for a home transaction, the seller needs to accept the offer. The seller often evaluate an offer on 3 dimensions.

• Price. Am I willing to sell at this price?
• Timing. How soon will I get the money in my bank? The longer a home sits on the market before closing, the more money the seller is paying for taxes and interest among other costs incurred during that time.
• Certainty. How likely is this offer to close? The primary reason a seller cares about this is because if the offer fall through, there is often a record on MLS and it will likely impact future offer price & timing negatively. The certainty is often increased when there are less contingencies in the contract.

Disruptors

In the past few years, start-ups and new product offerings have become available to help buyer and sellers address their primary needs. The main theme was to make the real estate purchases smoother, faster, and maybe even happen more often due to lower effort. Most of these companies fall under one of the categories below. (Aside: This list isn’t meant to be all inclusive. I would appreciate any note of any companies I missed.)

Remove need for home sales contingency

These companies are known as iBuyers in the industry. They buy homes directly from home sellers with instant offers (hence the “i” in iBuyer). Home sellers get immediate liquid funds to buy their new home.

Key players

• Opendoor. This segment has taken the industry by storm mainly driven by Opendoor reaching start-up unicorn status in less than 5 years with $1.5B total funding at $3.8B valuation.
• Zillow. Zillow Offers launched in April 2018 and now has plans to expand into 20 markets.
• Offerpad. Founded in 2015 with $975M in debt and equity funding in its pocket.
• Knock. Founded also in 2015 with $435M funding currently, it has a slightly different model than buying the home outright from the seller to let the seller buy their new home. Knock buys the new home that the seller chooses. The seller leases it in the meantime and buys it from Knock when their current home sells.
• Perch. Founded in 2017 with $250M in funding, it has both the iBuyer as well as Knock model.
• Homeward. Founded in 2018 with $25M in debt and equity funding currently in seed. Same model as Knock
• Many established players are also dipping their toes into this space (some FOMO going on?) — Redfin with Redfin Now. Realogy with cataLIST Cash Offer. Keller Williams with Keller Offers iBuyer Program

This segment is essentially institutionalizing house flipping, where investors buy a home for a lower price and make modifications (or just stage better) to sell for a higher price within a short turn around time. When the economy and real estate markets are doing well, this is great. The key is in data model predictions for valuation as well as foot on the ground operations to quickly buy and sell the inventory.

Although iBuyer model is only applicable to 1/3 of the user segment of sellers who also want to buy, it makes sense why disruption starts here. The historical 6% buyer/seller agent commission is paid by the seller. When a seller lists their property with an agent, they already agree to pay this cost. When sold, the seller agent share it 50/50 with the buyer agent. This fee structure is core to the traditional real estate industry. Without iBuyers, if sellers want to sell without following this traditional fee structure, they might run into difficulty when agents steer buyers away from these homes and therefore protecting the status quo.

Disruption potential comes in when iBuyers open an additional option up for sellers that avoids the traditional fee structure and challenges the traditional model strong hold. Control the inventory and you just might control the market.

Remove need for financing contingency

One model is to give buyers the ability to make all-cash offers that enable quick closing. How this works is the company would pre-underwrite the buyer based on their qualifications. Afterwards, the company would buy the home that the buyer chooses with an all-cash offer and have a fast closing process with the seller within 3–7 days. When the buyer secures financing in approximately 30 days, the company would then transfer the title to the buyer. Key players are:

• Ribbon. Founded in 2017 with $225M total funding currently in Series A
• Flyhome. Founded in 2015 with $19M total funding currently in Series A
• Board.live. Founded in 2016 with $150k total funding current in Seed
• Established private companies: Realogy OfferBOOST, Home Partners of America (seems to also offer rent-to-own option)
• OpenListings (acquired by OpenDoor). Launched this model in the past few months when buyers work with OpenDoor lenders
• HomeLight Fully Funded (main business is focused on sellers finding the right agent). Founded in 2012 with $56M total funding currently in Series B
• Knock, Perch, and Homeward covered in the iBuyer category also makes all cash offers on behave of their client and hold the property between the time their client buy and sells his/her current home.

Another model is rent-to-own. In this case, the company would buy the home the buyer chooses and close on it (similar to cash-offer model). But instead of transferring the title shortly afterwards, the “buyer” would lease back the home for longer periods of time before they buy it back. This model opens up a larger pool of home buyers to drive demand in the market since it targets people who want to own but can’t afford the down payment. Key players are:

• Divvy Homes. Founded in 2017 with $37M total funding currently in Series A
• ZeroDown. Founded in 2018 with unknown funding amount at around $70 million valuation

Remove need for appraisal contingency

Fannie and Freddie buy the majority of loans that empower buyers to purchase their home. In order for Fannie or Freddie to buy these loans, they require an independent appraiser to do an appraisal on the property to avoid unwise underwriting of assets that are worth less than the loan.

Due to the availability of data, there are many home valuation models out there to reduce the likelihood of appraisal falling through. Some of the all cash offer model start-ups have the ability to remove this contingency if they have high confidence in their own appraisal model and bet that another appraiser would arrive at equal or higher value. Nevertheless, no one currently advertise this.

Increase affordability

One of the big reasons people can’t buy a property today is because they do not have the money for down payment even if they can afford the monthly cost. Although this model doesn’t speed up the closing process in a transaction, it does enable more people to buy and boost demand.

How this model works is that the company would help the buyer pay a portion of their down payment so the buyer can qualify for a mortgage at a lower monthly cost. In return, the company gets equity in the home with their co-investment. The buyer can buy the equity back or share a portion of the earnings upon selling the home.

Key players:

• Unison. Founded in 2004 with $40M total funding at Series B stage
• Point. Founded in 2015 with $30M total funding at Series B stage
• Haus. Founded in 2015 with $7M total funding at Seed stage

Cost savers

This model doesn’t increase the certainty of the transaction by removing contingencies. The players in this category aim to reduce the cost in the home transaction by offering the buyer or seller cash back refund.

Key players

• Redfin. Public company founded in 2004 with $197.8M revenue last quarter. Redfin Direct also recently launched as a new offering that allows unrepresented homebuyers to make offers and buy Redfin-listed homes.
• Amazon TurnKey program. Work with Amazon Realogy partner agents and get $1,000 to $5,000 worth of product upon move in.
• Reali. Flat-fee brokerage founded in 2016 with $39M total funding. They are also looking to lower the cost of mortgage origination.
• REX. Founded in 2014 with $70M total funding at Series C stage. It’s model is to not list their properties on MLS in order to save sellers cost. In theory, this should also enable buyers to pay less.

Efficiency Gains

I won’t dive super deep into this category since in my opinion, players in here are making local optimizations on top of a broken system. Hence, the industry disruption potential is limited here. Whereas the above categories are opening up new territories with a larger global optimization areana.

Digitization model connects different systems in the transaction online so people can complete the steps easier and hopefully faster. Roostify & Blend are such examples. There are also a plethera of CRMs and transaction management software companies in this space.

Automation model are automating parts of the process to make efficiency improvements. Equifax with its verification of employment service, FormFree AccountChek, Ojo Labs with agent chatbot.

Compass is worth pointing out all on its own. Founded in 2012 with a total funding of a whopping $1.6 billion. It’s a real estate brokerage with modern branding targeting luxury properties. It’s recent growth is spurred by an aggressive acquisition spree as it buys brokerages across the US to expand beyond New York City. It offers a beautiful looking website, collaboration tools, as well as free staging and minor home improvements with Compass Conceirge for sellers to sell the home faster while still maintaining a fat 5–6% commission. Not sure if it’s really a tech startup causing disruption, nevertheless it has tech valuations. Maybe the spin here is to collect a big agent footprint in order to be bought by or acquired by someone who has a disruptive model and needing to scale.

Conclusion

There are definitely a lot of interesting companies and things happening in the PropTech space right now. I’ve only touched upon a small segment directly interacting with the consumer (buyer & seller). There is also real estate investment, property management, commercial, and auxiliary services (title, insurance, moving, etc.) that I didn’t touch on here.

Hope it was helpful. Feel free to comment, share, and point out anything I have missed.