July 20, 2022
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4 min read
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The current home buying process is messy - it includes finding an agent; listing a house; securing a mortgage; packing; moving; working with several third parties; waiting for due diligence to be completed; and spending hard-earned money on large transaction expenses.[1]
However, consumer demand for a one-stop-shop that delivers all of the above is triggering consolidation and digitization of the homebuying space, as businesses look to answer the call for a smoother homebuying process.
DC Advisory’s US Real Estate team explores what this means for M&A and capital raises in the space >
Challenges with the homebuying process create the need for vertical integration
Through the consolidation of mortgage, title, escrow, and other services, search companies are vertically integrating the necessary transaction processes into an ecosystem where consumers can do everything in a one-stop-shop.[2]
A notable leader in this space is Compass. Even after purchasing five title companies in 2021,[3] on May 11, 2022, Compass acquired Consumer’s Title Company of California, Inc.[4] Compass is expanding into every part of the real estate transaction including mortgage; concierge; bridge loans; title; and escrow.[5]
Another major player, Redfin, has followed the same consolidation trend. Announced in January and closed on April 1, 2022, Redfin acquired Bay Equity Home Loans, a tech-based lending business, in a $137.8 million all-cash deal to expand its mortgage offerings. Redfin paid a $72.5 million premium over the book value of Bay Equity’s assets.[6] Redfin will be able to use Bay Equity to become more efficient at producing and selling loans.[7]
In 2021, venture capital firms invested $11.7 billion in Prop Tech, and investment continues through the first half of 2022. [8] On May 17, 2022, Updater Inc. raised $215 million from Vista Credit Partners.[9] Updater has previously raised $174.86 million.[10] The Updater mobile application serves to simplify the moving process by allowing moving parties to easily search for and transfer all their utilities and to manage other moving tasks all in one place.[11] In addition, Knock, an iBuyer that uses analytics to price real estate properties and predict price variations, recently raised $220 million in a late stage venture capital offering on March 16, 2022.[12] Knock has raised $717.50 million in its history and is valued over $2 billion.[13] Knock’s goals include expanding its Home Swap™ product, which provides consumers with a non-contingent offer to purchase a new home before selling a current one, and Knock Go™, a cash-like loan to first-time buyers.[14]
Prop tech is willing to take short-term margin cuts to achieve vertical integration
On June 30, mortgage tech provider Blend Labs, Inc. completed a $500 million purchase of Title365 from Mr. Cooper.[15] This transaction was the first major acquisition for the company and will be used to create a digital, all-in-one home-buying experience. Even though the purchase increased revenues by ~150% from 2020 to 2021, gross margins decreased from approximately 64% to 49%.[16] Blend’s margins became diluted with the acquisition of Title365, a pure services firm. However, Title365 will provide Blend with automated title commitments and streamlined communications with consumers and settlement teams.[17] This strategic purchase allowed Blend Labs to reach an adequate scale for the company to confidently go public, raising $360 million in an IPO a month after the acquisition.[18]
Vertical integration will lead to higher margins in the long-term
Recent investment in Prop Tech proves how the real estate transaction chain is evolving. As the landscape becomes further consolidated, consumers can now rely on the ease of use of a single platform.
This revolution rewards the adapting firms in synergies and larger long-term margins. Firms can now charge a premium price for the whole nine yards. We believe that the all-in-one real estate platform will own the end customer and their homebuying journey. The consumer will likely only interact with a single platform throughout the entire homebuying process, no longer requiring the navigation of multiple third parties. The connected end-to-end experience is easier for the consumer but costs more when compared with navigating the current fragmented vendor ecosystem for each step.
Our view is that consumers and investors will reward Prop Tech incumbents and entrants who remove friction when buying a home. Gone are the days of point solutions for homebuying.
Contact Jane Santini for a more detailed market update >
For information about this article read our full disclaimer >
References:
[1] ‘Modernizing Real Estate: the Property Tech Opportunity’, Forbes, 22 February, 2019
[2] ‘The Real Estate Transaction Is Broken. Tech Companies Want to Fix It’, Curbed, 21 March, 2019
[3] ‘Compass to Acquire yet Another Title Insurance Company’, Housing Wire, 28 September, 2021
[4] ‘Compass to Acquire Consumer’s Title Company of California’, American Land Title Association, 10 May, 2022
[5] ‘Compass to Acquire Consumer’s Title Company of California’, American Land Title Association, 10 May, 2022
[6] ‘Redfin Completes Acquisition of Bay Equity Home Loans for $137.8 million’, Redfin, 4 April, 2022
[7] ‘Redfin Completes Acquisition of Bay Equity Home Loans for $137.8 million’, Redfin, 4 April, 2022
[8] ‘Venture capitalists piled record $4B into proptech in Q1’, The Real Deal, 19 April, 2022
[9] ‘Updater’, Pitchbook, 15 May, 2022
[10] ‘Updater’, Pitchbook, 15 May, 2022
[11] ‘Updater Raises $215M to Simplify the Moving Process’, Built in NYC, 17 May, 2022
[12] ‘Knock’, Pitchbook, 4 June, 2022
[13] ‘Knock’, Pitchbook, 4 June, 2022
[14] ‘Knock Secures $220M in Funding’, FINSMES, 19 March, 2022
[15] ‘Mr. Cooper Group Completes Sale of Title365 for $500 million’, Business Wire, 6 July, 2021
[16] ‘2021 Form 10-K’, Blend Labs, Inc., March 31, 2022
[17] ‘Blend Labs, Inc. goes Public after Acquiring Title365’, California Land Title Association, 20 July, 2021
[18] ‘Blend Labs, Inc. goes Public after Acquiring Title365’, California Land Title Association, 20 July, 2021