The next industry to be disrupted by technology: real estate
The next industry to be disrupted by technology: real
estate
Opendoor, a startup company that flips homes has San
Francisco as its headquarters.
Opendoor, based in San Francisco, is one of the largest
in the “proptech” category. It joins Seattle-based Zillow and Redfin.
Many venture capitalists have homed in on real estate as
a big opportunity for tech startups because parts of the industry — like
pricing, mortgages and building management — have been slow to adopt software
that could make business more efficient.
By Erin Griffith The New York Times September 30, 2018 at
3:40 pm Updated October 1, 2018 at 10:55 pm
SAN FRANCISCO — Opendoor, a startup that flips homes,
attracted attention in June when it announced it had raised $325 million from a
long list of venture capitalists. The financing valued the 4-year-old company
at more than $2 billion.
That was only an appetizer. Three months later, Opendoor
has more than doubled its cash pile. On Thursday, the company said it had
gotten a $400 million investment from SoftBank’s Vision Fund. The valuation for
Opendoor remains the same.
The so-called mega-round for Opendoor was not the Vision
Fund’s only major real-estate-related deal Thursday. The firm also co-led a
$400 million investment in the high-end brokerage Compass that valued the
company at $4.4 billion.
The hauls are part of a race by investors to pour money
into technology for real estate, or what Silicon Valley now calls proptech.
Having watched tech startups upend old-line industries
like taxis and hotels, venture capitalists are casting about for the next area
to be infused with software and data. Many have homed in on real estate as a
big opportunity because parts of the industry — like pricing, mortgages and
building management — have been slow to adopt software that could make business
more efficient.
Last year, real-estate tech startups raised $3.4 billion
in funding, a fivefold increase from 2013, according to startup data provider
CB Insights. One firm, Fifth Wall Ventures, is entirely dedicated to proptech.
“Tech is starting to make inroads to becoming adopted,
and it’s opening the eyes of investors,” said Jeffrey Housenbold, a managing
director at SoftBank’s Vision Fund.
Until recently, the biggest tech innovations to hit the
residential real-estate market have come, from listing sites like Seattle-based
Zillow and Redfin. But the startups in the new wave are tackling a wide range
of areas — appraisals, building management, financing, co-working, co-living,
building amenities and empty retail space.
The Vision Fund, one of the most aggressive investors in
real-estate tech startups, has written large checks to Katerra, a construction
company; WeWork, an office rental company; Lemonade, a home-insurance startup;
and Oyo Rooms, a hotel company in India.
Housenbold said SoftBank’s deep pockets — it has $98
billion in cash to spend — might be influencing the market.
“Given the vast amount of attention on 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 residential housing. The San
Francisco-based company was founded in 2014 by venture capitalist Keith Rabois
and Eric Wu, who is Opendoor’s chief executive. With the money from SoftBank,
it has raised more than $1 billion from investors including Khosla Ventures and
GGV Capital.
Opendoor’s goal is to make moving as simple as the click
of a button, according to Wu. While that remains a far-off reality, the company
has simplified the process of selling a home. It uses a combination of data,
software and a team of 50 human evaluators to assess a home’s value. If a
customer accepts Opendoor’s value for their home, the company will buy the
property, charging a 6.5 percent fee on average.
The company said it offers sellers certainty — many
conventional home sales fall through — and flexible closing dates, helping them
avoid paying double mortgages. It also eliminates the need for a real-estate
agent. Opendoor employs 100 licensed real-estate agents to advise customers if
they request it.
Opendoor buys only homes built in 1960 or later, worth
$175,000 to $500,000 and not in need of major renovations or repairs. Operating
in more than a dozen cities — mostly in the South, and not in Seattle — it
bought $316 million of homes in August, up from around $100 million in January.
After some light fixes, it sells the homes in an average of 90 days.
Before its latest cash infusion, Opendoor planned to
expand into one new city a month. Now it plans to double that pace. The company
said it expects to be in 22 cities in the United States by the end of the year.
Its growth has spawned competitors: OfferPad and Knock
offer comparable services to Opendoor, and Zillow and Redfin, which are both
publicly traded, have entered the house-flipping market as well.
“For a while, we were literally the only ones doing this
because it’s complex,” Wu said. Size is an advantage, he said: More
transactions mean more data to help Opendoor price its offers more accurately,
as well as more buying power with local suppliers for renovations.
Wu said he believed that reducing the annoyances and
costs of moving would entice more people to do it, which would increase the size
of the market.
“There are a finite number of homes, but if people are
moving with more frequency, that increases the liquidity of the supply in the
system,” he said.
Opendoor’s business model has not been tested by a major
dip in the housing market, causing some skepticism about whether it can work
over the long term.
“The vast majority of investors who hear about it
initially think it’s a bad idea,” said Stephen Kim, an analyst at Evercore ISI,
a market research company.
But the skepticism often fades as they realize Opendoor
makes money by providing a service to home sellers, rather than on price
appreciation, Kim said. Even if the company breaks even on a sale, the
transaction fees are a meaningful business.
Jason Childs, Opendoor’s chief financial officer, said
the company’s geographic diversity and 90-day average flips helped shield it
from a potential housing-market crash. In the housing crash a decade ago, the
holders of long-duration assets were affected the worst, he said.
Opendoor’s Phoenix operations are already profitable,
excluding the cost of its headquarters in San Francisco, and Dallas is “on the
edge of profitability,” Childs said.
But Wu does not foresee one thing going away completely:
the job of the real-estate agent. Rather, he expects an agent’s work to shift
to more of an advisory role, instead of an administrative one.
“The thing that cannot be automated is this notion of
advice — what neighborhood, what school district, how much you can afford,” he
said. “It’s important to have someone who is an expert alongside you.”
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