Written by: Lindsey Boycott
Technology is transforming almost every industry – from finance to healthcare – and it's just getting started. Despite being the most significant asset market in the world, real estate is very much a fragmented, locally-based market fraught with complex rules and opaque fee structures. With the residential property market being worth $34 trillion, it's ready for a tech revolution. Luckily, several online platforms offer services to streamline the buying and selling process in essential ways.
A new phenomenon called “i-buyers” – or instant buyers – are coming onto the scene. For example, OpenDoor was founded in 2014 and now operates in over 20 cities. The firm uses a combination of big data and machine learning algorithms to appraise homes and make an initial offer – frequently within hours of a seller requesting one. People will usually pay a similar fee to that of an agent but without suffering the pain of a long-drawn-out process. OpenDoor raised a whopping $1.5 billion in funds from firms like venture capital giant Softbank who contributed $400 million to the company.
Knock is another example of a proptech startup that buys and sells houses. Founded by the team who launched real estate tech firm Trulia, Jamie Glenn, Karen Sakhuja, and Sean Black began Knock in New York. The company buys the new home first and sells the buyers home after they move. The firm raised $434 million over four funding rounds from VC firms like Foundry Group - that enjoyed successful exits like FitBit (NYSE: FIT), Zynga (NASDAQ: ZNGA), and SendGrid (NYSE: SEND).
Zillow (NASDAQ: Z) is a publicly-traded proptech firm that’s been around since 2005. It’s been through various reincarnations as the market and technology changed but it currently operates as an online real estate platform that connects buyers, sellers, and renters to one another. It’s acquired numerous companies over the years – including Trulia – to stay competitive in the online property tech space.
Despite the high profile of some of these online real estate providers, i-buyers only represent a tiny percentage of transactions. A combined number brings the total to 60,000 homes bought worth $8.9 billion in 2019 – equaling about 0.5 percent of all sales. Notably, within the 18 markets that i-buyers operated in, their share was 3 percent. What's important for investors to know about instant buyers is that they work best in communities where homes are new and relatively homogenous. The tech has yet to be perfected, however. A neighborhood like a Brooklyn row of brownstones built in the early 1900s may be far too unique for a real estate platform to manage.
Perhaps the most significant determinant of i-buyers success depends on whether a company's algorithms can accurately predict the price. According to Bridget Frey from real estate firm Redfin (NASDAQ: RDFN), the most important consideration is location, but it interacts with other factors. "You need a location to tell the algorithm what weight to put on the thousands of other variables you might look at."
It's a work in progress, and i-buyers are still working out some of the kinks. The ideal property is the mid-range property. They want to avoid the uncertainty that comes with too low-priced to too unusual a home because it tends to skew the results. But most of the time, they get it right.
People interested in this industry will like the low market saturation, the impact of technology, and the apparent attraction for buyers and sellers. It's a new space that's rich with potential, and for the right investor, it could offer a substantial pay off over the long run.
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