Can the Real Estate Industry Be Remodelled?

The Hutch Report

We have become more accustomed to the idea of industry disruption since the internet and technology revolution took off but it is nothing new. In fact, industry disruptors have been around for more than 100 years. The classic example is the Ford Motor Company. Before they made the automobile available to many, wagon and carriage businesses, and the makers of buggy whips were the dominant industries. Ford revolutionized transportation and became a major disruptor.

The industries that suffer most from disruption are those whose players have no real differentiation — or, worse, are disadvantaged. For example, ride-sharing companies such as Uber, found it easy to disrupt the taxi industry because GPS systems and smartphone technologies had eroded the competitive edge that was previously held by the geographical knowledge base taxi drivers used to hold.

In addition, industries ripe for disruption are normally those where there are clear inefficiencies or lack of organization. The activity chains are overly complex and information flow is slow and error prone.  This leaves the door open for improvement. The real estate market is one of those industries.

We have identified the following companies who believe they have found some inefficiencies and are attempting to alleviate them by changing the way the residential real estate is bought and sold. They want to remodel the industry.

Opendoor

The Hutch Report

Opendoor was founded in 2014 and is headquartered in San Francisco, California. Opendoor buys houses and owns them, acting as a middleman (as opposed to a matchmaker) in residential real estate transactions. They will not, however, buy every house. Qualifying properties include single-family homes built after 1960 with a value between $125,000 and $500,000. Their business model is two fold. They charge service fees which start at 6% and rise to 12% for more risky properties, and earn from any difference between what it buys houses for and what it sells them for. They also work with real estate agents and offer to pay full buyer commissions, as well as seller commissions if a sale comes from an agent.

Their total funding amount to date has been $320 million from 4 series rounds and roughly 50 investors.

Offerpad

The Hutch Report

OfferPad was founded in 2015 and is headquartered in Gilbert, Arizona.  They claim to be a direct home buyer that will “…buy quality homes at competitive prices…and remove the hassle of selling your home…” Like Opendoor, they will buy your home as it is and without the seller’s needing to make repairs or upgrades to the home to get it sold. Additionaly like Opendoor, OfferPad’s service is limited to certain cities and house profiles.  Homes must be built after 1960 with a value that does not exceed $500k. They charge $7,500 as the OfferPad service fee and an additional 3% in closing costs.  The average commission of 6% of the sale price is deducted from proceeds at closing.

Their total funding amount to date has been $260 million from 2 funding rounds and one investor. The funding was debt financing.

Knock

The Hutch Report

Knock was founded in 2016 and is headquartered in Atlanta, Georgia.  Knock is an online home trade-in platform. Launched by founding team members from Trulia.com, the company uses data science to price homes accurately, technology to sell homes quickly and a dedicated team of professionals to guide homeowners through the selling process. Knock believes that the problem they are solving is illiquidity. They state that 47 percent of home buyers need the money out of their existing home to make the deposit and get the mortgage on their next home. They employ technology to guarantee market price for your home in 6 weeks or less, even if Knock has to buy it. The fees that Knock charges are very similar to Opendoor and Offerpad. In addition, they charge an 8% interest rate for at least 60 days.

Their total funding amount to date has been $34.5 million from 3 funding rounds and 9 investors. The latest round was a series A.

The question is: Are these companies really disrupting anything? It is usually the commission that sellers are hesitant about when thinking of selling a property. These startups still charge a commission plus extra fees to the seller for the convenience and service. In addition, not all their services are accomplished online, as with traditional real estate you still have the staff coming to your home for the offer, inspections, and the walk through.

As in all these cases, they don’t really seem to be reinventing real estate sales as much as they are adjusting the marketing message to the customer. There is most definitely a market segment for their business models but it does not seem to be for everybody. If you want the best deal for your home you can probably still do just as well with a traditional realtor if you are not in a hurry.

These new business models are quite risky and places pressure on their pricing and valuation models. It is still not sure how they will manage in a real estate downturn. They could potentially rent if they find themselves stuck with a load of inventory, however that would all depend on the current debt agreements they have in place.

Nobel Prize-winning economist Robert Shiller, and founder of the Case/Shiller Index, when asked to comment on Opendoor’s business, said to Forbes,

“Bid-ask spreads, he notes, reflect information asymmetry, and if home sellers know more about their properties than Opendoor does, it will be vulnerable. With so many variables, Shiller says, some of which may be anecdotal, such as whether the schools in the neighbourhood are getting worse, it’s difficult to build a precise model.”