3 Real Estate Disruptors During Fire Sale Appraisals
Few industries need disruption as much as real estate. The process of selling a home is clunky at best, brokerage fees haven’t changed significantly in decades despite many technological advancements in the industry, and there aren’t many clear leaders market in property management.
However, like in most other sectors, most of the fast-growing real estate disruptors have been taken down in the recent market decline, and some of the most promising companies are trading for a fraction of the highs. Here are three, in particular, that look attractive right now.
The only big brokerage trying to solve a big problem
The brokerage business is clumsy and full of inefficiencies. While several innovative brokerage firms are focusing on technology to improve the process of buying and selling homes, red fin (RDFN 4.80%) is the only one that not only leverages technology but also disrupts the traditional pricing model.
If you’re unfamiliar, the standard commission when you sell a home is around 6%, with half going to the seller’s agent and half going to the buyer’s agent. Redfin charges 1.5% or less for seller’s commission and offers buyers discounts for the commissions their agents receive, which can save the average home seller thousands of dollars.
In addition to its brokerage business, Redfin has a major mortgage operation, title and settlement services, and an iBuyer (RedfinNow) that buys homes directly from sellers. It also recently acquired the valuable RentPath brands (including Apartment Guide and rent.com). With stocks 87% below their 52-week high, now may be the time to consider this truly disruptive venture for your portfolio.
This market leader has less than 1% market share
The vacation rental industry is surprisingly fragmented. Of course, there are millions of properties listed on Airbnb and similar portals, but these are run by many property managers and individual owners. With regard to the actual vacation rental management goes, no company holds more than 1% market share.
Vacasa (VCSA 0.99%) hopes to change that and become the first national vacation rental manager to achieve scale. It currently has over 35,000 vacation rentals under management, but this represents less than 1% of the market. There’s a lot of opportunity here: the vacation rental market is estimated to be worth more than $200 billion annually worldwide, and the margins for full-service management are high. Additionally, travel demand is increasing as pandemic-era restrictions have been largely lifted.
In the first quarter of 2022, $494 million in gross booking value passed through Vacasa’s platform, which more than doubled year-over-year, and the company expects around $1.15 billion dollars of revenue for the full year. Although the company is currently operating at a loss, management expects to be profitable on an adjusted earnings before interest, tax, depreciation and amortization (EBITDA) basis from next year. With a market cap of less than $1.4 billion and a strong balance sheet, Vacasa is definitely one to watch.
Selling a home requires process improvement
While Redfin is doing a great job of innovating the brokerage industry, the iBuying model is also starting to gain traction. With around $6 trillion in home sales nationwide in a typical year, there’s plenty of room for both models to succeed. However, iBuying solves some of consumers’ biggest problems.
Specifically, using a company like Block of offers (OPAD -3.85%) when selling a home, all you need to do is get a cash offer, accept it, and close on a date of your choosing. There is no need for visits, negotiations, hassles of repairs, etc. And with the real estate market down considerably, the iBuying model may be even more attractive to sellers who want a quick transaction.
Offerpad isn’t the biggest iBuyer out there, but it’s the most focused on efficiency, which can be an especially important feature in a tough economy. The company was profitable (on a GAAP basis, not adjusted) in the first quarter of 2022 and for the full year 2021. As the business evolves and adds more features, things could get interesting if the company can maintain its growing profitability.
These are not low risk stocks
To be clear, I think all of these have transformative potential and could produce 10X returns (or more) if they can execute on their respective visions. But it’s important to keep in mind that no stock capable of this is in the low-risk category.
All three of these are likely to be quite volatile – at least in the short term while in rapid growth mode – and all could certainly come under pressure if growth unexpectedly slows. Disruption isn’t easy, but the risk-reward profile of these three companies makes a lot of sense at the current level.