By Jake Fingert, Partner, Camber Creek And Nate Loewentheil, Senior Investment Associate, Camber Creek, a former Special Assistant to President Obama, Economic Policy
Henry Ford once said, “For most purposes, a man with a machine is better than a man without a machine.” The U.S. financial sector seems to agree. Over the past four years, U.S. funding for fintech companies has more than quintupled, from $3.39 billion in 2014 to more than $14 billion in just the first two quarters of 2018. More than 50 fintech companies globally have reached the $1 billion “unicorn” valuation. Fintech is transforming everything from payment processing to capital formation to investment management. Amidst all this change, we believe the most exciting growth opportunity for fintech is at the intersection of finance and real estate, where entrepreneurs can revolutionize how the world’s largest asset class is financed, traded, managed, and insured.
Progress is underway. The first wave of realty fintech, which dates back to as early as 2006, focused on the massive U.S. residential housing market. The housing market is a logical entry point: it is enormous ($33.3 billion), dominated by expensive intermediaries, and rife with hidden costs and long delays. Entrepreneurs are slowly but surely knocking down those barriers and offering new consumer financial products (or old products at new speeds) at every point in the lifecycle of home ownership. Today, you can get qualified for a mortgage in a matter of minutes (Morty, Better Mortgage), make a cash offer without actually having cash (Ribbon), finance a renovation without resorting to a credit card (Greensky), and get acash offer on a home online (https://www.zillow.com/).
These companies are forcing incumbents to finally move into the digital age. Take mortgage brokers, for example. Most “digital” mortgage brokers are just old mortgage brokers with a website. A potential customer still sends endless documents to a broker, gets quotes back and has multiple conversations by phone.
Uploading is faster than mail, but the process is essentially the same – and possibly less secure. Better Mortgage changes the equation. They take two pieces of data – income and credit – and qualify an applicant for a mortgage within three minutes, with a “verified pre-approval letter” available within 24 hours. Better Mortgage doesn’t originate the loans themselves – yet! They’ve simply figured out a faster way to approve a potential borrower and reduce friction in the market.
Since the JOBS Act of 2012, which enabled online real estate investing, another cohort of companies has emerged to democratize and simplify residential real estate investing. Companies like Fund that Flip, LendingHome, and Patch of Land, for example, target the “fix & flip” market. Others, like Roofstock, help investors purchase residential homes with a renter already in place. There are similar companies that offer access to commercial properties, like ShareStates, and others that offer a diversified real estate portfolio, like Fundrise. These platforms all share a few key characteristics: they reduce capital requirements, bring down painful transactions costs, and provide transparency and visibility.
There remains plenty of runway in the residential sector. In a recent survey of residential real estate brokers, for example, brokers highlighted the need for secure communication, secure collaboration tools, and E-closing.
There are also major opportunities for realty fintech in other real estate verticals. Take construction, for example. According to the Federal Reserve Bank of St. Louis, banks make approximately $12 billion in construction loans per week, or $600 billion a year. These loans are made in stages, called “draws.” The process for getting a draw is cumbersome: general contractors send over excel sheets, blueprints, and inspection reports, which are then individually reviewed. Getting a loan can take two weeks, ten days if you’re lucky. That can mean a long and expensive pause on a complicated project.
Now Contract Simply, a construction loan software company, is working with banks to speed up the draw process. Contract Simply’s technology significantly reduces the time it takes to process a loan, which means faster payments for subcontractors and more interest for banks, all while digitizing the workflow to improve compliance and record keeping. Instead of ten days, banks are pushing out draws in as little as two days.
Or take asset management. For institutional investors, the key question is not necessarily how to finance but when to make the acquisition, when to renovate, and when to sell. Skyline AI, which raised $18 million in July 2018, gathers data from more than 130 data sources going back 50 years to create “data lakes” which can have as many as 10,000 data points on a single asset. Analyzing the data, Skyline can provide actionable investment and management advice. They have already partnered with Greystone and JLL.
A final example is the insurance market. Two new entrants – Rhino and Lemonade – are trying to upend incumbents in rental and housing insurance by simplifying the application and claims process. Lemonade, for instance, takes a flat fee each month from customers, pays out claims instantly, and then donates all remaining proceeds to charities like Teach for America.
Modernizing the financial infrastructure of the real estate industry will create enormous value for consumers who will be able to access more affordable and more customized financial products more quickly. When it comes to homebuying, what is the most important financial transaction in many Americans’ lives will no longer be the most complicated. We’ll see similar process improvements in insurance, in construction, in brokerage, in renting, and in every other market segment. Capital markets will grow more efficient as more data on real estate transactions becomes more visible to more people. Simultaneously, a new cohort of Americans will have the opportunity to benefit from real estate investing. It is a future of more transparency, greater speed and ultimately more flexibility. The future for realty fintech and real estate is bright and we are eager to watch as the next generation of entrepreneurs steps up.
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