[Editor’s note: originally published on Thomvest Ventures]

Over the last several years we’ve witnessed a surge in startup formation and venture funding across nearly every aspect of real estate. In 2018, VCs funneled $3.6B into real estate technology companies, and 2019 has shown no signs of a slow down — more than $5B has been invested through the first three quarters of the year.

To help wrap our heads around the growing universe of startups in the sector, we created two market maps last year highlighting the technology companies operating across residential and commercial real estate. We came away from this exercise impressed by the level of innovation occurring within an industry that has traditionally been slow to adopt technology.

As investors in the asset class, both via our venture fund and real estate investment company, we’ve been actively studying how technology is being utilized in real estate. We’ve spent time with entrepreneurs, industry experts and real estate operators in order to develop a thoughtful point of view on the opportunities for technology companies. Our intention has been to answer the following questions:

• Why is now the right time to build a technology company in the real estate sector?
• What are the most interesting sub-sectors within real estate where technology can make an outsized impact?
• Which companies within these sub-sectors do we admire?

Today we’re sharing publicly the research we prepared to answer these questions and ultimately guide our investment decisions. This report is embedded above and available via PDF here.

Why do we like real estate?

Venture investors often look for startups disrupting large markets, and it doesn’t take an expert to recognize that real estate is our country’s largest asset class. More than 6 million home sales occur annually, representing $1.4T in aggregate transaction volume. These transactions are often complex and expensive, involving multiple parties (like agents, attorneys, inspectors, and title companies) who each take a fee or commission for every transaction. In total, intermediaries capture more than $80B of transaction value annually. We see technology as both a means of driving transaction efficiency and an enabler of new transactions by better matching demand and supply.

But why is now the right time to invest in real estate technology? There are a few meaningful tailwinds we’ve identified:

Consumers prefer digital experiences: We’ve seen rapid adoption of digital tools utilized during the home buying process, including popular listing platforms like Zillow and Realtor.com. Today, nearly all buyers (95%) use the Internet in their home buying process, up from 37% a decade ago. We see technology being utilized more regularly across all aspects of home ownership, including mortgage, closings, and post-transaction activities like home improvement and property management.

Rise of non-bank lenders and alternative credit: Following the housing crisis in the mid-2000s, we saw a severe pullback in large banks’ willingness to originate mortgages. This in part led to the rapid rise of non-bank lenders like Quicken Loans, loanDepot, and Caliber Home Loans. Today non-bank lenders represent the majority of mortgage originations in the US. These lenders are often more willing and able to embrace technology in service of providing a better customer experience.

Property and buyer data has been digitized: Important in enabling new transaction models is the availability of data to accurately underwrite individual properties and borrowers. Models like Opendoor are predicated on their ability to quickly generate estimates around home value, repair costs, and hold time in order to arrive at an offer price for each home they purchase. Automated valuation models (AVMs) have grown in popularity over last several years, and enable technology companies to accurately price properties at scale.

Rising home prices necessitate new buying models: Since the Great Recession, we’ve seen a steady rise in home values, particularly in major metropolitan areas. And we haven’t seen a commensurate rise in wages — home prices are rising faster than wages in 80% of US markets, according to ATTOM Data. About half of current renters cite the down payment as a major obstacle to buying a home, according to Freddie Mac. To help combat this, we’ve seen many companies develop hybrid rent and own financing products that lower the barriers to home ownership.

Which companies are best positioned to succeed?

We see several interesting entry points for technology companies — all rooted in enabling a more seamless transaction experience. We believe the biggest winners in will have the following attributes:

Alignment of capital, technology, and services: We believe that successful real estate technology companies will build or enable “full-stack” experiences that marry multiple aspects of the transaction process. The challenge here is around bringing multiple proficiencies into a single organization: companies must be great at building digital products, managing the operational complexity of real estate, and raising the debt capital required to scale a business.

Responsive to changes in consumer demand: Startups in the real estate vertical must take advantage of their agility relative to incumbent banks, and design products and services that reflect today’s consumer needs. This can take the form of new credit products (for example, down payment assistance products like Unison), novel housing models (for example, Bungalow’s shared living offering), or better digital experiences (for example, Blend’s one-tap pre-approval).

Connecting disparate parties on a single platform: Much of the inefficiency associated with a real estate transaction can be traced back to coordination hurdles. Multiple stakeholders are required to get a transaction across the finish line, including agents, lawyers, title companies, inspectors, appraisers, and notaries (the list goes on). We see lots of low-hanging fruit around improving transaction efficiency, and believe that standardizing on a specific product or platform will lower transaction costs, prevent errors in the process, and decrease time to close.

Are you building a company in the real estate vertical? We’d love to talk.

[Originally published on Thomvest Ventures]