Real Estate

What The Surge Of VC Interest In Real Estate Tech Means For The Industry

In today’s digital/mobile world, most of the purchase transactions we perform are done in a modern, convenient fashion. Most Americans’ online shopping patterns have evolved from buying commodity items like books to more personalized items like clothes and groceries. More recently, transactions that historically were more expensive or complex are becoming more commonplace. For example, the process of buying a car is becoming widely adopted as an easier and perhaps more affordable transaction to complete online versus the old-fashioned way.

But what about buying a home? Despite advances in consumer home search functionality thanks to pioneers like Zillow and Trulia, most of the home buying process is still largely controlled by real estate agents, and the transaction aspect of buying a homes has remained mostly inconvenient, offline and, frankly, undisrupted. But my company is among a number of startups that are looking to change that by innovating the way we buy and sell homes, with the ultimate goal of providing consumers with greater control, convenience and affordability.

Innovation in the residential real estate technology space is not a new thing, but it’s certainly been heating up recently. Startups in the category have raised a total of nearly $4 billion in 2018, compared $519 million in 2013. The pace and attention that we’re experiencing right now is on a much bigger scale than we’ve ever  seen — by far.

What is real estate technology?

Real estate tech can be broadly defined as any software or technology-based solution and service that touches the real estate vertical. A few of the main categories include tech-enabled brokerages, property data/valuation providers, listing/search services, marketplace/liquidity providers, leasing/property management, title/closing services and mortgage/lending providers. When thinking about the life cycle of any residential property, real estate tech encompasses anything that involves discovering, financing, managing or selling a home. Our businesses make up a massive sector that still operates in a mostly manual, non-digital fashion.

Why so much interest from VCs?

While there are a variety of forces that are influencing a surge in capital into real estate tech startups, there are a handful of key economic, demographic and market timing factors that are leading to the influx of interest and cash.

1. A large number of millennials are waiting on the sidelines to buy homes.

They’re strapped with college debt and living with their parents at the highest rate ever. VCs are betting on startups that they believe will provide mechanisms for better access to housing and more creative financing methods to achieve the American dream. Some of the latest innovations include startups offering rent-to-own programs, co-living/co-ownership and zero-down financing. One of the biggest challenges millennials face today is student loan debt. Startups that can counteract the effects of student debt will win with younger, first-time buyers.

2. Talent and resources have shifted toward emerging tech markets.

Growing tech markets like Austin, Denver, Portland and Raleigh continue their win streaks, adding new software companies each year and expanded tech workforces, generally leading to better economic conditions in those communities. But they’re also coping with expensive home prices and low housing inventory. Startups are thoughtfully introducing new models to reconcile these dynamics, suggesting that VCs expect these housing challenges to remain for the foreseeable future.

3. Portions of the lending and home closing process are being digitized.

Twenty years ago, real estate agents would carry hard copies of purchase contracts to their buyers and review everything manually. Today digital contract signing has become fairly commonplace, but everything that happens after that is still mostly manual. This includes the delivery of earnest money, signing of mortgage docs, obtaining title insurance and the process of “closing” on your home via an attorney. But the last leg of the transaction is now (finally) becoming a more digitized process via online notaries, better mortgage underwriting software and the adoption of escrow management software by closing attorneys. The confluence of all of these advances occurring almost simultaneously has created a very favorable window of opportunity for innovating the homebuying process, and some VCs are assembling portfolio companies that play in each part of the transaction.

4. Consumer demand for liquidity and convenience.

In the last few years, the real estate technology category known as iBuying has gone from a mostly unknown service to a mainstream offering that homeowners can now consider when selling their homes. These services provide homeowners cash offers for their homes and the convenience of closing the transactions as fast as three weeks from contract signing. Homeowners are beginning to opt for these services not only due to the convenience of avoiding repairs/improvements to their homes, but because they need the liquidity in order to proceed with other life decisions — like moving out of state, getting divorced or proceeding with the purchase of another property.

What should we expect next?

When it comes to funding, innovation and change in the real estate space, we’re in the very early innings of a long ballgame. Most of us startups in the real estate technology space are simply establishing a presence and attempting to garner some degree of brand recognition at this point. We’re a far cry from full-on “disruption” of the traditional system of buying and selling homes that’s been in place for the better part of 60 years. But the one major source of optimism for VCs is the anecdotal evidence that suggests that many consumers are unhappy with the traditional framework of the home transaction process. So long as this satisfaction deficit exists, it provides a very large window for innovation and disruption within the real estate space.

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