Real Estate Startups – What the next few years hold

Introduction

The US housing market is a 10.1 trillion dollar market (1) and represents 25% of all US household wealth (2). Given it’s size and importance it’s not surprising we’re seeing a lot of startups try to tackle this market. Venture capital funding will be used as a leading indicator of what’s to come the reason I do this is – 1) for the data, because there’s much more information on fundraising and 2) I assume venture capitalists have a good eye towards the future and their investments are a good indicator of a future large company.

The Catalyst

A rebounding housing market, (3) along with strong showing of Zillow, with 219.6% gains since it’s IPO (4) and it’s 3.5 billion acquisition of Trulia (5) all have given the real estate startups validation and spurred on founders.  Zillow, Trulia and Redfin all were founded around the same time (2005, 2005 and 2004) and finally have emerged nearly a decade later as successful 4 billion, 3.5 billion and half a billion dollar companies. So what does the next decade hold?

Commercial Real Estate

What often is seen with technology is that the consumer market will innovate first and then startups will move more upstream to enterprise. I attribute this to the easier cost of acquisition of consumers and larger diversity including people more willing to be first adopters versus enterprise clients who are usually more conservative. So what Zillow and Trulia did for consumer’s who wanted to easily search for real estate, is happening in the commercial real estate market. In area long controlled by brokers, who haven’t really leveraged technology we’re starting to see innovation creep up in two different areas. The first is that commercial real estate search is being disrupted by companies such as 42Floors, a company that is acts just as Zillow did but for commercial real estate (mostly office spaces). 42Floors was funded by YCombinator, NEA and BVP backed company and raised 12.3MM in January 2013 (6) to disrupt this space. Commercial brokers too have found themselves being forced to leverage technology in their work with a mobile app called Hightower that functioned as mobile way to manage their sales process, recently raising 6.5MM.  (7)

Real Estate Investing

With the market jumping back on real estate, personal investors want to get in on investing in real estate. When the “JOBs act legalized crowding funding” back in 2012, we saw that it became easier to invest individually with an obvious area being real estate. Housing projects are easy to understand where their revenues come from – rentals and are asset backed. This area has quickly been funded by venture capital with Fundrise raised 31MM in May of this year (8), Realty Mogul and Real Crowd have also similarly raised million dollar rounds.

Brokers strike back

Brokers have become aware that if they don’t adapt to the use of technology, the large fees they generate will become a thing of the past. Responding to the threats they face, brokers have started using startups such as Realscout, a company that addresses the imbalance of “real estate agents getting the short end of the stick and are being left behind. Generally speaking, agents are still using outdated search and client management tools”(9) RealScout claims to “put realtors back in the driver’s seat — both by making the search process itself more collaborative and by offering them better tools to engage clients and find new business” (10)

Selling Real Estate

Selling real estate has remained complicated despite the increased options in searching for properties. Two separate startups have recently arisen to solve this problem by letting property owners sell directly online: Allre that was announced at TechCrunch Disrupt 2014 (11) and Keth Rabois of Square fame who recently launched OpenDoor (12) both of these new startups have emphsaized being able to sell online directly without any brokers at all. It makes sense that given the simplicity of information and the rise of ecommerce that more and more things can just be sold directly online.

Conclusion

As technology evolves it continues to changes spaces that were once considered un-modernizable. Real estate information was disrupted nearly a decade ago by easier ways to find information now other aspects of this industry are being innovated upon by a whole new range of startups.

References

  1. http://www.census.gov/people/wealth/files/Wealth%20Highlights%202011.pdf
  2. http://www.census.gov/people/wealth/files/Wealth%20Highlights%202011.pdf
  3. http://www.housingviews.com/wp-content/uploads/2014/02/CSHomePrice_Release_Dec2013-results.pdf
  4. http://finance.yahoo.com/q?s=Z
  5. http://dealbook.nytimes.com/2014/07/28/zillow-to-buy-trulia-for-3-5-billion/?_php=true&_type=blogs&_r=0
  6. http://pando.com/2013/01/31/finding-office-space-sucks-42floors-gets-12-3m-to-make-it-less-so/
  7. http://techcrunch.com/2014/08/21/hightower-raises-6-5m-series-a-for-its-commercial-real-estate-platform/
  8. http://dealbook.nytimes.com/2014/05/27/fundrise-raises-31-million-as-interest-in-crowdfunded-real-estate-grows/

4 Comments

  1. Prashanth Bungale

    Interesting to read about the various forces together spurring innovation in the real estate market. One thing that is frustrating about the structure of traditional real estate transactions in the U.S. is the incentive misalignment of the buyer's broker (The broker is paid his/her commissions as a percentage of the sale price, which incentivizes them to encourage you to proceed even with a bad deal, and keep the home price as high as possible). Redfin seems to have fixed this misalignment issue by changing the commission structure to be based on customer satisfaction. But, with all the innovations in the incentive model, the process of discovery, and the fee structure (only 1.5% instead of he typical 2.5-3%), I wonder why it hasn't gained more than a couple percent market share even after 10 years of existence. I suspect it is because the Redfin agent quality remains low due to the relatively low commission you would earn as a Redfin agent vs. a traditional broker. (Would a highly qualified successful realtor become a Redfin agent? Probably not). Further, if consumer adoption of a technology & agent hybrid model itself was hard in the case of Redfin, I wonder if an extreme model like opendoor ("Receive an instant offer online and close in 3 days") can ever take off in the broader market, outside of the eager early adopter market. While it may be tempting to simply get rid of the middleman through technology, like in so many other industries, real estate brokers actually add enormous value by filtering listings, offering advice, helping with negotiations, taking care of inspections, etc. While some of their tasks such as coordinating appointments for visits can be automated away, and some others such as staging and listing design can be outsourced to fixed-cost service providers, I would argue there's a long way to go before we will be able to automate the critical tasks of advice, negotiation and positioning. This is what makes me skeptical of outright disruption in this market.

  2. Clarisse Siu

    Michael, great post. Prashanth, nice comment. I agree that "outright disruption" (if defined, as Prashanth had, as displacing the broker) is unlikely in the residential real estate market. I do think, however, that disruption of the real estate information market is very possible and in fact has already happened (shameless plug for my post about online real estate advertising on October 9th!). Where I think disruption is limited or a long, long time coming is in the real estate transaction market (in particular, in the residential market).

    Why? Well, broadly speaking, there are two types of real estate customers: people who buy to own and people who buy to invest. The residential real estate space is dominated by people who buy to own while the commercial real estate space is much more varied. On the residential side, most homebuyers are first time buyers. Sure, they care about price, but they also care deeply about many other variables, such as location, number of garages, safety of the neighborhood, proximity of home to high quality schools, etc. They also want help navigating the unknowns of the transaction process, which, as Prashanth mentioned, include things like legal docs, escrow, closing, etc. Because of the inexperience of the first-time home buyer and the significance of a home purchase, home buyers are more likely to invest in a great agent to help them navigate the process. Note that the agent is still an integral part of the transaction flow here. Trulia and Zillow have been successful because they work WITH agents to help them better promote their own listings. (In fact, that is how Trulia sells its products to agents.) If Trulia and Zillow were to disintermediate the agent, they would not be around today.

    On the commercial side, I disagree that innovation in the residential market is leading innovation in the commercial market. For one, LoopNet and CoStar, both commercial real estate information marketplaces, have been around for decades. So, the commercial real estate information marketplace has already experienced “innovation”. For another, the commercial real estate transaction is far less emotional than the residential real estate transaction. Whereas the role of the residential real estate agent is to softly guide the home buyer through the process, the role of a commercial real estate agent/broker is to find/place properties at optimal prices. Price is pretty much the only variable that matters in commercial real estate transactions, especially when the buyer is actually an investor. So, a company’s value proposition of helping an agent better promote his listings is valued by BOTH agents and consumers in the residential market. But in the commercial market, investors care less about the broker and more about price realization. For this reason, disruption in the residential market does not bleed over into the commercial market. (An interesting case study here is Auction.com, a company that conducts online and offline auctions of residential and commercial properties. Their commercial real estate business has been far more successful than their non-distress residential real estate business – for, I believe, the reason that agents are not as important in commercial real estate transactions as they are in residential real estate transactions.)

    So, to wrap this up, disruption in real estate has occurred in the information flow, but will be difficult to achieve in the transaction flow, especially in the residential real estate market.

  3. Clarisse Siu

    There is a post today on Crunchbase on real estate start ups. Including it here for your reading interest: http://info.crunchbase.com/2014/10/hotel-on-park-

  4. Great blog.