Well-funded startups vie in hot real estate market

For most people, buying or selling a home is the biggest, most gut-wrenching transaction of their lives.

That’s why a new set of venture-backed startups are hoping to take the stress out of residential real estate by transforming the way houses are bought and sold.

Take Knock, which recently raised $32 million led by RRE Ventures. Unlike a traditional real estate agent, Knock promises to sell your home at market rates within six weeks. If it doesn’t sell, New York-based Knock will buy it for a guaranteed sale price that is determined at the beginning of the process.

Knock is going after a segment of the real estate market that is not being well served today. These are people who need to sell their homes quickly, like someone who already purchased another home and needs to sell their existing property right away.

“Knock’s value proposition is, let us help you sell your house and we’ll make it happen faster through a series of technology and data that we have,” says Raju Rishi, a general partner at RRE Ventures, who led the investment for the firm. “But more importantly, if we can’t get it sold within 60 days, we’ll acquire that home. So that really resonates with consumers. People really love having that backstop.”

Real Estate VC
Raju Rishi, general partner, RRE Ventures. Photo courtesy of the firm.

For his part, Rishi loves that the company is helmed by an all-star team led by Sean Black and Jamie Glenn, who were both founding team members at online real estate giant Trulia, which sold to Zillow for $3.5 billion. He also loves that residential real estate is a huge market, with more than $1 trillion in home sales annually, of which roughly six percent goes to real estate agents.

“Knock was a slam dunk investment for us,” Rishi says. “Real estate is ripe for disruption. Currently, there is a lack of transparency in the market which results in overpaying and inequity. That’s where technology can really change the equation.”

Rishi believes Knock is introducing a number of innovations to the market. In terms of the business model, it charges the same 6 percent as a traditional listing, but with the guarantee the home will sell quickly. What’s more, if the house needs any work to get it in ready for market, Knock will pre-pay for repairs up front and settle with its clients at closing.

But he says the real innovation is around technology and data. While declining to go into detail, he says that Knock has “tremendous machine learning and analytics to accurately price homes,” and that the company “can rapidly execute the transaction using proprietary technology that they’ve built internally.”

Of course, there are plenty of risks with an investment like this. The most obvious is what happens when the real estate market crashes and Knock is left holding a bunch of property that it can’t sell?

Knock tries to mitigate that risk by focusing on markets that are relatively stable and resilient. Currently, the company only operates in certain neighborhoods in the Atlanta area, but plans to expand to other metropolitan markets. Another way to minimize the risk factor is simply by selling homes faster and more efficiently than anyone else.

“The faster you can unload homes because of technology and capabilities you’ve built in-house, the less risk there is that those properties are sitting on your books when something happens to the market,” Rishi says.

In fact, Rishi believes the Knock investment is considerably less risky than another prominent venture backed startup called Opendoor, an online service that buys homes directly from sellers, and then puts the properties back on the market for a quick flip.

San Francisco-based Opendoor is essentially eliminating the hassle of showings, stagings and uncertainties for the seller by purchasing homes outright, no strings attached. To date, the company has raised $320 million from a litany of investors, including Kholsa Ventures, Norwest Venture Partners, GGV Capital and Fifth Wall Ventures.

“Personally, I like the Knock model because the number of transactions where you actually have to buy the home is a lot lower than the Opendoor model,” Rishi says. “That means the capital structure of the company is a lot lower, too. That is a huge advantage. I don’t think I want to be in the business of buying a ton of houses. You have to be a very deep-pocketed VC to withstand that.”

Perhaps the biggest complaint people have about real estate is that agents take a huge cut of the transaction, typically 6 percent split between the buying agent and the selling agent. For a million-dollar house, for example, each agent takes home $30,000, or $60,000 in total.

But several startups are trying to change the equation. Reali, an online real estate service focused on the San Francisco Bay Area, promises a refund of the standard buyer’s agent commission, as well as a discounted seller’s commission. San Mateo, California-based Reali, which raised $5 million in funding from Signia Venture Partners, charges both buyers and sellers a flat fee of about $5,000, with sellers saving nearly 3 percent on commissions and buyers getting cash back.

How does Reali do it? By eliminating agents altogether with an app that lets consumers handle every step of the home-buying process on their own. For instance, when buyers visit a home, the Reali app can unlock the door remotely, removing the need for an agent to be physically present. Reali also places Bloothtooth beacons throughout its listings, providing buyers with in-depth information about the home. Reali experts, who are licensed real estate agents working strictly on salary, are available for consultation in real-time via the app.

“We started studying the real estate market over a year ago, and saw real opportunities to disrupt it,” said Ed Cluss, a partner at Signia Venture Partners. “Buyers and sellers are handing a lot of money over to real estate agents for what can be a very small amount of work. The whole system is ripe for dramatic change.”

Another interesting startup is Los Angeles-based Open Listings, which gives buyers a 50 percent refund on fees their real estate agent would normally make. The company raised $6.5 million in Series A funding led by Matrix Partners.

But this doesn’t mean that real estate agents are an endangered species. Far from it. With such a big-ticket transaction as real estate, a large number of buyers and sellers will always insist on high-touch interactions involving real humans. That’s why Homelight in San Francisco is acting as a matchmaker service, hooking up consumers with the best real estate agents in their area.

“There are 2 million plus real estate agents in the U.S. market, and there was no great resource to help source those agents by quality,” says Tyler Sosin, a principal at Menlo Ventures, which led a $40 million round of new funding for the company. “But Homelight has figured out how to do just that in an elegant way.”

Real Estate VC
Tyler Sosin, principal, Menlo Ventures. Photo courtesy of the firm.

Homelight taps into a number public and proprietary data source to figure out things like how quickly a particular agent sells a home on average, how much over asking they get, and how responsive they are.

“Homelight’s job is to build a nationwide brand, so that consumers know where to go to find the best agent for selling their home,” Sosin says. “Right now, choosing an agent is based primarily on word of mouth, with no real data behind the selection process.”

Sosin was attracted to the company’s business model. Homelight only makes money if the agent they introduce to the home seller successfully lists and sells that home. When the sale is complete, Homelight takes a 15 percent cut of the agent’s commission. That means there is good alignment between the three parties—the consumer, the agent and Homelight—to get a deal done.

Given the sheer size of the market, it’s no surprise that the venture community is finally getting real about real estate. But the questions is whether they will flip these investments via a successful exit or will they flop?

Tom Stein is a Palo Alto, California-based contributor. He can be reached at tom.stein@yahoo.com.

Photo of real estate concept with house and coins on table courtesy of Photobuay/iStock/Getty Images