Startups like Opendoor, Offerpad and Zillow have sent ripples through the industry.
“They have fairly healthy balance sheets, so for every property they buy and finance themselves, it’s one less property a buyer or borrower of ours buys,” said Pollack.
Their not-so-secret weapon is data.
“We have access to sellers, we have data on buyers, we can reduce days on market because we can pre-market [properties] to a seller,” Zillow CEO Spencer Rascoff said during an April interview on CNBC. “So we have a lot of advantages here.”
Home-flipping startups have raised more than $751.6 million since 2016, according to data and research firm PitchBook.
Some of them include Knock, a New York-based home trade-in platform launched by former Trulia executives, which has raised $34.5 million since 2015.
In May, Perch — which is based in New York but trades homes in Texas — closed a $30 million fundraising round. The year-old company, which gives houses a “certified pre-owned warranty,” is also working to automate the closing process, said CEO Court Cunningham.
“We think we can get to a one-click close,” he said, describing the prospect of buying a house with the click of a mouse compared to trading and signing endless documents.
Cunningham said debt investors like the fact that companies like Perch flip homes in weeks. “We are sitting on inventory that’s an appreciating asset that people will lend against for 10, 20, 30 years,” he said. “So, it’s an attractive investment from a debt perspective.” On the equity front, there are few other industries with so much untapped potential, he said. “The only other alternative is to do it the old-fashioned way,” he said. “There’s a lot of green field.”
Opendoor, which uses an algorithm to buy and sell homes, is the giant in the space. The company is valued at around $2 billion after a $325 million fundraising effort this spring, which attracted such investors as General Atlantic LLC, Access Technology Ventures, Lennar Corp., 10100 Fund and Invitation Homes.
That cash infusion will be used to expand to 50 markets from 10.
“Our goal is to allow people to buy and sell real estate without any friction online,” CEO Eric Wu said at the time.
Shortly after Opendoor’s financing, however, Zillow made waves by announcing it would expand its pilot “Instant Offers” program, in which buyers can request a cash offer from Zillow. (After a quick face-lift, Zillow aims to sell the property at a higher price.)
“We think of it like Netflix moving into originals,” Rascoff said in the CNBC interview. He has since described the program as one that could become a “$1 billion profit opportunity annually” for the company. Meanwhile in May, Redfin said it would spend up to $25 million on home purchases, up from $10 million. But Redfin CEO Glenn Kelman has been more constrained than Rascoff.
“I know everyone’s excited, because Zillow got into it over the past few weeks or months,” he said during a May earnings call. “I am excited about it too, but that is a capital-intensive business.”
He said at some point, the market will turn and the cost of capital will be higher. “The fact that capital is so cheap right now has brought plenty of us into this business, but we’re just cognizant of what happens on the other side of that.”
Nonetheless, investors say new home-flipping startups are not exposed to real estate volatility. “The time they’re holding the property is pretty short; they’re not exposed,” said a principal of one VC firm, who was not permitted to speak on record. For example, Opendoor’s model works in almost any market because the company can use data to adjust its risk. (If analysts project a housing shock, for example, Opendoor would increase the discount it offers to sellers. In ebullient markets, it could invest more in renovations, or vice versa.)
“These businesses are so consumer focused,” said the investor. “We don’t often give them enough credit for that.”