Real estate is the next Uber for technology companies, venture capitalists
Opendoor, a home-based startup, drew attention in June when it announced it had raised $ 325 million from a long list of venture capitalists. The financing valued the four-year-old company at more than $ 2 billion.
It was just an entrance. Three months later, Opendoor has more than doubled its cash flow. On Thursday, the company announced that it had received an investment of $ 400 million from SoftBanks Vision. The rating for Opendoor remains unchanged.
The so-called megaround for Opendoor was not the only major real estate contract signed by Vision Fund on Thursday. The company also invested $ 400 million in the high-end brokerage compass, which valued the company at $ 4.4 billion.
Transportation is part of an investment race to spend money on real estate technology, or what Silicon Valley now calls “Proptech.”
New technology companies are monitoring the entry of old industries such as taxis and hotels. Venture capitalists look for the next area that can be infused with software and data. Many have seen real estate potential as parts of the industry, such as pricing, mortgages and property management, have started working on software that can make their business more efficient.
Last year, $ 3.4 billion was invested in real estate technology start-ups. This is a five-fold increase over 2013, according to CB Insights, a start-up provider. One company, Fifth Wall Ventures, is fully specialized in Proptech.
“Tech is starting to establish itself and is opening the eyes of investors,” said Jeffrey Housenbold, Managing Director of SoftFonds Vision Fund.
Until recently, the major technological innovations affecting the residential real estate market came from SEO sites such as Zillow and Redfin. But the new wave of start-ups covers a variety of areas – estimates, facility management, financing, co-working, co-living, equipment construction and short selling space.
The Vision Fund, one of the fastest growing investors in new real estate technology companies, has written big checks to Katerra, a construction company; WeWork, an office rental company; Lemonade, a startup in the home insurance industry; and Oyo Rooms, a hotel company in India.
Housenbold said SoftBanks could have large pockets ($ 98 billion in cash) that could affect the market.
“With so much attention being devoted to the Vision Fund, people have become more curious,” he said.
Opendoor, one of the largest startups in the “Proptech” category, gives the Vision Fund an entry into housing construction. The Silicon Valley Company was founded in 2014 by venture capitalists Keith Rabois and Eric Wu, CEO of Opendoor. With SoftBank’s money, it has raised more than $ 1 billion from investors like Khosla Ventures and GGV Capital.
According to Wu, Opendoor’s goal is to move as easily as he does at the touch of a button. Although this remains a distant reality, the company has simplified the sales process. He uses a combination of data, software and a team of 50 human assessors to evaluate the value of a home. If a customer accepts the value of Opendoor for their own home, the company buys it and calculates an average of 6.5%.
The company says it offers sellers increased security – many conventional home sales fail – and flexible foreclosure data to avoid double mortgages. It also eliminates the need for a real estate agent. Opendoor employs 100 licensed real estate agents to advise clients when needed.
Opendoor only buys homes built in 1960 or later, worth US $ 175,000 to US $ 500,000, and does not require major renovations or repairs. In more than a dozen cities, notably the southern United States, $ 316 million was purchased in August, compared to approximately $ 100 million in January. After minor repairs, he sells homes for an average of 90 days.
Before his last down payment, Opendoor wanted to expand into a new city every month. Now he wants to double that pace. By the end of the year, the company is expected to be present in 22 cities in the US.
Growth has created competition: OfferPad and Knock offer similar services as Opendoor, and Zillow and Redfin, both listed, have also entered the domestic market.
“For a moment we were literally the only ones doing that because it’s complex,” Wu said. Size is an advantage, he said: More transactions mean more data to help Opendoor evaluate deals and increase the purchasing power of local home improvement retailers.
Wu said he thought that reducing harassment and moving expenses would lead to more people moving, which would increase the market.
“The number of houses is limited, but when people move more often, the liquidity of the supply in the system increases,” he said.
Opendoor’s business model has not been put to the test by a massive collapse of the real estate market, leading to some skepticism about its ability to function in the long term.
“The vast majority of investors who hear this first think this is a bad idea,” said Stephen Kim, an analyst at Evercore ISI, a research firm. But skepticism often disappears when they realize that Opendoor is making money by offering home sellers a service, rather than raising prices, Kim said. Even if the company sells successfully, transaction costs are an important activity.
Jason Childs, Chief Financial Officer of Opendoor, said the company’s geographic diversity and an average duration of 90 days could help protect the company from a possible real estate crash. Ten years ago, the real estate crisis hit real estate owners long term, he said.
The Phoenix businesses of Opendoor are already profitable, aside from the cost of their headquarters in San Francisco, and Dallas is “on the verge of profitability,” said Childs.
The long-term success of the company lies in its ability to rent houses. Half of the people who now receive Opendoor offers sell their homes to the company. Opendoor has not provided information on the extent to which its offers corresponded to the final sale price of the houses that it had not bought.
In recent months, Opendoor has also extended its home sales directly to customers, supported by SoftBank’s involvement, rather than by traditional brokers. She acquired Open Listings, a teleshopping site, to offer a service called “Exchange,” where Opendoor manages the entire buying and selling process for one person or one family. This service is now available in Dallas. It also offers buyers of mortgages and securities.
But Mr. Wu does not assume that one thing will completely disappear: the work of the estate agent. Instead, he expects an officer’s job to take on an advisory rather than an administrative role.
“What you can not automate is this advice: which neighborhood, which school district, how much can you afford,” he said. “It’s important to have an expert next to you.”