Startups Transforming the Real Estate Market
Director of Venture Investing, Citi Ventures
Just as consumer behavior has driven the rise of mobile and online shopping for everything from daily needs like groceries or clothing to big-ticket items like cars or plane tickets, the real estate industry is quickly adapting to meet the needs of modern shoppers.
According to the National Association of Realtors, 44 percent of homebuyers today take the first step to finding their new home online. While 89 percent of buyers ultimately purchase their home through an agent or broker, the real estate space is quickly transitioning its business model to support potential home buyers throughout the entire purchasing journey. From easy to use online applications to better loan processes that support prospective home buyers, startups and legacy real estate companies are reevaluating how they do business.
The digital evolution of the real estate market has far-reaching economic and social impacts. The total value of all homes in the United States is over $31 trillion–a sum that’s larger than the country’s GDP (currently $21.44 trillion), which makes American homes one of the world’s largest asset classes. The changing expectations and behaviors of consumers, particularly new generational demands, create significant challenges for this industry.
Research shows that prospective Millennial and Gen Z homebuyers face a confluence of economic headwinds, including rising prices, ballooning student debt, and an entry-level housing shortage that is particularly acute in major metropolitan areas. According to online real estate broker Redfin, in 2012 a median income earner in the US could afford 44 percent of homes, but today that number has dipped to 32 percent—and less than 25 percent in major cities including San Francisco, Los Angeles, and New York City. Meanwhile, American homeowners have up to 84 percent of their wealth tied up in an asset that is both highly un-diversified and highly illiquid.
Furthermore, the current global pandemic poses unprecedented challenges to the housing market. According to another survey by Redfin, 50 percent of Americans anticipate the virus to have an impact – whether negative or positive – on the real estate industry. In some instances, the coronavirus is already seeing demonstrable effects: prospective home-buyers are resorting to virtual home tours, construction workers are struggling to gain access to home-building materials, and renters are invoking eviction protections in the wake of job loss. While these short term challenges become ever more apparent, real estate investors and proptech entrepreneurs are instead focusing on opportunities for technological innovation spurred by increasing demands for remote transactions – and startups are paving the way. Take ICON, for example, a construction startup using 3D printers, robotics, and advanced materials to build more affordable housing that reduces the number of workers needed onsite to complete its homes.
At Citi Ventures, we're keeping tabs on the real estate technology space and consistently identifying companies excelling in their quests to improve experiences for sellers, buyers and agents everywhere.
Start-Ups Leading the Change
To better support home buyers, real estate startups are harnessing technology and data to build innovative new models of home buying and selling—some of which create entirely new businesses and even asset classes by redefining homeownership entirely.
The real estate startup, Unison, helps support aspiring homeowners during the process by allowing institutional investors to co-invest in the down payment. In return, those investors receive a portion of any appreciation in a home’s value when it is later sold, transforming residential real estate into an investable asset class.
Other startups such as Divvy and ZeroDown have created similar “rent-to-own” solutions where the company covers most or all of a prospective homeowner’s down payment, takes ownership of the home and collects a monthly fee from the would-be owner that includes both rent and an equity payment. After two years or once the "tenant" has amassed a 10 percent stake in the home, the company will sell them the remainder.
Knock and Flyhomes offer a third option, pioneering trade-in models. Both companies purchase new homes for buyers in cash while helping them sell their current homes. This helps alleviate the “chicken-and-egg” liquidity problem that can arise when a homeowner needs to take cash out of their existing residence to buy a new one—but also can’t sell their old home before they have a new place to live.
A number of data-driven startups known as iBuyers, like Opendoor, are helping homeowners sell their houses quickly and painlessly. Opendoor allows homeowners to upload information about their houses and makes a cash offer on select properties within 48 hours, using proprietary data analysis to calculate offer amounts. If the owner accepts the offer, Opendoor charges them an amount slightly above a traditional real estate agent’s brokerage fee then attempts to sell the home for a profit.
While technology is disrupting many aspects of traditional home-buying and selling, the human touch remains a key part of the experience for most consumers. In fact, over 88 percent of home purchases in 2016 used a real estate agent, up from 69 percent in 2001.
Several companies are using digital technology to better support their agents and the consumers they serve, building consolidated platforms that put all the information and services they need at their fingertips. For example, Homelight acts as a data-driven matchmaker between buyers, sellers, and agents. Analyzing information from more than 40 million real estate transactions and over 1.4 million agent profiles, it compares and ranks local real estate agents in order to match buyers and sellers with the agent best suited to meet their specific needs. Homelight has also built one of the most comprehensive real estate iBuyer aggregator platforms, providing consumers interested in an Amazon-like “one-click close” with instant cash offers from iBuyers across America.
In 2018, venture capital investment in property technology companies hit $4 billion, up from under $100 million just five years before in 2013. As we look ahead, we expect investment to continue to increase in this sector. Citi Ventures, Citi’s venture investing arm, for example, recently broke property technology out into its own focus area vertical given the growing interest and appetite in this sector.
No matter how generations evolve and no matter what unforeseen challenges the housing market faces along the way, buying or selling a home will continue to be the largest and most impactful financial transaction in a consumer’s life. As new digital solutions continue to alleviate customer pain points, the housing market is poised for significant change and start-ups are leading the charge.