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Real estate is next on tech's agenda
OPENDOOR, a startup that flips homes, attracted attention in June when it announced it had raised US$325 million from a long list of venture capitalists. The financing valued the four-year-old company at more than US$2 billion.
Three months later, Opendoor has more than doubled its cash pile. On Thursday, the company said that SoftBank's Vision Fund had invested US$400 million in it. The valuation for Opendoor remains the same. The haul is part of a race by investors to pour money into technology for real estate, or what Silicon Valley now calls proptech.
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 US$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 Zillow and Redfin. But the new wave of startups is tackling a wide range of areas - appraisals, building management, financing, co-working, co-living, building amenities and empty retail space.
The Vision Fund is one of the most aggressive investors in real estate tech startups. Mr Housenbold said that SoftBank's deep pockets - it has US$98 billion in cash to spend - may 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 Silicon Valley 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 US$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 Mr 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 per cent 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 only buys homes built in 1960 or later, worth US$175,000 to US$500,000, and not in need of major renovations or repairs.
Operating in more than a dozen cities, mostly in the South, it bought US$316 million of homes in August, up from around US$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 US 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.
Opendoor's business model has not been tested by a major dip in the housing market, causing some scepticism 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 scepticism often fades as they realise Opendoor makes money by providing a service to home sellers, rather than on price appreciation, Mr 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 help 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. NYTIMES