Should I invest in this real estate start up?

26 Replies

I've been approached about the possibility of investing in a real estate start up.  It is being founded by two multifamily real estate executives who also dabble in residential real estate. 

They are planning to start a real estate brokerage focused on the millennial home buyer. They feel that market is still a few years away from really heating up, but they are both big believers that many of today's renters will be tomorrow's homeowners and the demographics point to a boom in home ownership in the coming years.  They are planning to hire millennial agents and train them to sell to their peers, along with creating a technology platform where the firms clients will have an app and access to information and be able to communicate with their agent via the app and track the progress of their purchase, due diligence, etc.  Essentially, taking today's outdated methods and while not totally recreating it, making it more user friendly for tomorrow's homeowners.  They plan to start in our local market and expand over time if successful.  Their branding will be focused on many of these buyers and sellers.

Both of the guys starting the company have been successful in real estate and I believe both have the intelligence and personalities to cater to this type of crowd.  I'm not going to get into the details of the deal at this point, but more curious to hear what people think of the general idea.

I work in multifamily and have been reading studies that upwards of 80% of current millenial renters aspire to be home owners in the next 5 years.  I understand the headwinds they face, but I also believe if that level of demand is there, if even a percentage of that large demographic moves into the for sale market it will have a large effect on the market.

@Brian Burke @J Scott @Ben Leybovich  @Joel Owens @Will Barnard @Joe Fairless

@Steve Olafson @Brandon Turner  

 @Karen Margrave  @Lynn Currie

You may be on to something.  However, some "experts" like Grant Cardone say the younger generations are not buying homes like the previous generations did.  Grant says large multi-family is the best way to go.

I'm curious about how your endeavor goes so please update us as you can.

Best of success!

@Account Closed

I know I'm not popular enough to be called out, but I'll give you my opinion anyhow :P

I'm not a fan of the concept and I question what type of competitive advantage they would plan to bring to the next generation of home buyers.

As far as the concept is concerned, the millennial home buyer market isn't going to be as good as it has been for past generations. Millennials make less money, have a lower employment rate, and have much higher expenses (having children too early, fascination with shiny objects, lack of fiscal responsibility) than generations past. My peers feel they deserve more "hand outs" and just don't have the fire to work hard and earn their place in life. One of the reasons I'm getting into rentals is that I believe that today's renters will be tomorrow's renters as well. Breaking the cycle of poverty and poor financial decisions is a hard road to travel and few make the journey.

I'm not sure what type of competitive advantage you would realistically be able to build. Apps are all the fad right now, however, I see no advantage over using realtor.com or simply just texting / emailing your agent. I have this weird vision of the Domino's Pizza App where it has that bar and shows you your "pizza progress", just with real estate terms substituted for order, bake, quality, and delivery. Great for pizza, especially if I'm hungry and want to know the minute it will be delivered, but real estate? I'm not sold on the idea.

Anyhow, I think that the investment for you is going to come down to the guys who are doing it, not the idea itself. I don't see anything novel, groundbreaking, or otherwise earth shattering. If they're business smart and well motivated, I'm sure they can do just as well (or better) as any other brokerage firm, but I doubt this is a Facebook or Google in the making.

-Christopher

@Johann Kleisch

 Thanks for your comments. Large multifamily is the place to be...right now.  These guys are thinking ahead to where future opportunities are.  It won't be the place to be forever.  My personal belief is that once marriage and kids come along, a portion of this large demographic will be looking for more space.  Pretty tough to raise kids in a 750sf apartment downtown.

And I respect Grant Cardone and he is a great motivator.  He is doing some solid work in multifamily, but please keep in mind he's only been in the multifamily game a short while. 

I've been approached into "investing" in brokerage startups as well, by entrepreneurs with "years of experience" in the real estate industry.  I turn them down every single time.  

The capital requirement is usually around 25K - 50K.  I have to think that if these entrepreneurs are indeed "successful", how is it that they don't already have 50K to invest in their own grand plan.  And if they do, then they are certainly utilizing me as OPM whereby I take the equity risk while they go about their venture.  It just sounded too fishy for me.  Additionally, there's very little value proposition.  Do you not think every major and minor residential brokerage will be catering to these millenials if they want to start buying houses?

I'll admit, I have never done enough investigation into this, as I've turned it down just at the initial "sniff" test.  But I'm curious as to other people's experience and opinions, especially those who have start up their own brokerages. 

Is the business the brokerage or the platform/app?

If it is a brokerage I would like to see a reason they can do more volume and/or lower costs than the typical brokerage.  Are they planning on running the business?  A brokerage has relatively thin margins so there might be little to no profit if they are hands-off.

Unless they have an extremely impressive prototype for a platform/app - it seems developing and marketing one could be a good way to spend a lot of money with little to no pay-off.

It is interesting to see other peoples take on the millennial personality. From the millennial sin my area I see people making good money but spending on themselves on things like travel and "shiny things" as someone else put it. But I also think they are only pushing off life for a while with things like children, home ownership, marriage, etc until their late 20s- early 30s. I personally think they will eventually move into home ownership and it will start happening soon. However, I don't think a brokerage just focusing on and catering to millennials is enough of a competitive advantage to catch on. I think millennials will create a shift in the brokerage industry, but I'm not quite sure what it will be. You can already see the changes the Internet and sites like realtor.com and zillow have brought to the industry. Agents and brokers are no longer the gatekeepers to the industry information so it is only a matter of time until the industry shifts to accommodate that.

I don't get it.  And I wonder if millennials would get it.  I have 2 of them working for me here in my office and when I read your description of the concept out loud they weren't sure why it would be any different than just using an agent from any other brokerage.  One said - "It's not about the brokerage, it's about the houses, the neighborhoods, etc..  I wouldn't care if my agent was the same age as I am.". 

I personally don't see any possible new beneficial ways for attracting the younger crowd as they age or mature because the ones ready to purchase a home will hopefully be more mature and not as easily distracted... Also i do see that younger people are lazier than our parents (myself included) so if they do decide to start to buy homes than a great investment would be an uber like app for lawn care on demand... Myself included have never bought a car off a dealer lot and i have owned quite a few and the property i own was bought off the two owners directly and i know many young people who browse craigslist for whatever they are passionate about ( either car parts or bike parts for projects etc...) and even though i think social networking has made people less social i think that people are becoming more of a social consumer and personally i always try to negotiate a good deal for myself to save what i can where i can... I may not be the ideal example but i think that more homes will be sold by owner in the future but that is my random prediction and i think you should buy a duplex near a technical university or a medical university to profit off the future generation but like i said purely random speculation...

Account Closedthe concept sounds interesting but without knowing the specific people behind it I wouldn't be able to make a judgement call. As with any investment (startup or real estate), I invest in people first then their product or idea. 

@Jesse T. the brokerage would be the main business.

@Peter John K I love the "Uber for Lawn Care" idea.  I'd pay for that every week!

One way that could get you or the company a lot of business is to work with investors and landlords to offer an affordable property management or brokerage service that doesn't keep a whole month of rent and start off providing rentals to the younger crowd and from there educate the renters about rent to own deals and proactively convert renters into buyers... which it seems even the phone companies have been able to use that method to get people to spend more on phones...

There was just a big article in my local paper about how Millennials are buying houses at a rate of only 65% of what past generations are buying. They want the freedom to move around, and not be tied down. 

Remember, a lot of them came of age right at the economic downturn and they joined adult life right when the housing market flew into the toilet. 

I don't see the advantage, and I agree with @Dev Horn 's assistants who say "I don't care how old my agent is."

Account Closed

Interesting - you can't have it both ways. If 80% of today's renters aspire to be home owners within 5 years, then why are your employers buying apartments at break-neck pace...and with a 10-year horizon, none less?!

Somebody is wrong here. The two perspectives don't mesh. Make your bed carefully, Sean - you'll sleep in it :)

I am doing some strategy consulting right now for a portfolio company of a large private equity firm. The company is a start up mortgage bank and the PE firm has committed $0.25b in capital-- any ideas are open for discussion on how to deploy. If I came to the exec team and said ..."millennial and apps" I think I would get laughed out of the room and asked if I was serious. Apps are ubiquitous ; nobody cares about them ...everyone has them and is making them. It is excessive. It is no secret companies are trying to transform into digital enterprises and adopting technology in the process. Is a brokerage firm with digital tools all that differentiated? Maybe, depends what kind. Not an app. Your demographic trend that forms the basis of the business model is about as predictive as baby boomers are going to be selling homes when they retire. No kidding what does that mean for target marketing or a niche? People buy homes because of life events not their age group. It just so happens many of those events are younger people-- promotions, marriage, firsts jobs, etc. I would do more research on demographic trends on millennials and find some empirical research (industry news, academic journals, etc) to support the claim. Everything I have seen indicates the opposite trend; urbanization is one of the global mega trends right now and would seem to indicate that migration of millennials into the suburbs from city life may not happen at all.
Originally posted by @Dev Horn :

"It's not about the brokerage, it's about the houses, the neighborhoods, etc..  I wouldn't care if my agent was the same age as I am.". 

 Bingo.  I might even be less inclined to buy a house from someone the same age as me.  This business plan doesn't speak to me in the slightest.

- A Millennial

They might have a track record but the company does not.

How much OF THEIR OWN money are they putting into this??

If it fails they should feel most of the pain before outside investors.

This isn't really an investment but a speculative play in nature. If you are throwing a little coin you can afford to lose then it's a gamble you might take. VC's that look at this stuff lose on many start ups but when they hit it big hope to make it past break even and then some.  

On the way to a doctor's appointment today I saw 2 new 300 plus unit upscale apartments being built.

I believe that even though vacancy in some markets is non-existent and rents are growing at crazy levels that it is not sustainable. In 2 to 3 years I see supply outpacing demand, vacancy going to 10%, and rents growing at a flat to 2% annual rate.

3 to 4 years ago buyers dumped bad debt with short sales and foreclosures and moved into cheap apartment housing. Fast forward to today and with the large apartment increases in rent the houses are becoming in vogue again. Remember the house piggy banks with refi's before?? I think homeownership levels will continue to rise as the painful increases in annual rent cause them to purchase again with low interest rates. Now that it has been years since someone's foreclosure or short sale the lenders are looking to make loans to them again.

There will always be demand for apartments on some level but I see them at the end of the cyle and cooling off in future years. Everyone is hyped on the NOW with the returns MF is doing. I am not buying it for the long term.  

This is why I like this forum. It's an opportunity to present an idea and get immediate feedback. Thank you to everyone for your comments. It seems only Joel Owens agrees with me about the future of apartments, but that's a separate discussion. And don't worry Ben Leybovich I'm not putting my life savings into this venture. I was remotely considering putting in a few speculative dollars to see what happens.

I'm not understanding what it is that they can bring to the table that would fundamentally change the experience, etc. Why would there be a benefit of working with someone your own age? 

Many of the Millennials have a lot of college debt, and are finding it hard to find good paying jobs. Rather than moving out and buying homes, many have moved back home, not being able to afford to live independently since the economy crashed. 

On the other end of the spectrum are those Millennials that are doing very well, want to live in the cities, use their money to travel, etc. After the crash, most think the potential for appreciation is slim so there's not the draw to real estate there once was. 

Personally, trying to break brokerages down into age segments, and finding a way to market specifically to them (which you'd need to be careful about due to discrimination issues) I'm not seeing the value in it. 

Any new technology would be available by all the other agents in other offices, so basically they're betting that for some reason Millennials feel more comfortable working with an office made up of all Millennials? I don't see it. Though, I'm a Boomer, so what do I know? 

Originally posted by Account Closed:

@Jesse T. the brokerage would be the main business.

 I would evaluate it as a new brokerage in that case.  I would look for the following:

1. Investment by the principals - if they are the controlling partners they should have 50% of their own money in the business.  Also any salaries they take should be after the company is profitable.

2. Ability for the company to borrow money - this can help avoid a scenario where you have to put up double or triple your initial investments.  Also this means the business plan has been somewhat vetted by a 3rd party.

3. Business connections with those needed to be successful.  This is probably the biggest thing the owners would be bringing to the table.  Agents/potential agents are the most obvious, but you also need partners for advertising, mortgage lending and services such as home repair and lawn care.

4. Profitability before innovation.  Even if the platform and app(s) are secondary making sure they don't drain the potential for profitability.  My approach would be to get the brokerage established and then start developing processes/technologies to beat the competition.

5. An acknowledgement of risks in the business model.  Some of them their may not be anything the company can do, but they should at least have some reasonable estimate of their probability.  Here is an example of a risk I see:

Getting new agents who start being successful and then leaving for other brokerages.  It sounds like the focus will be on new agents which is fine.  However what if the good one sees she is getting 20% of the sales in the office and the brokerage down the street is getting 10 times the business?  It might not even take a better split for her to figure she is better off with 5 to 10% of the business there.

6. An exit strategy.  Something that is fair for all parties.  I would run it through everything from a debt of 1/2 of start-up costs to the business being worth 10 times the initial investments(or some very optimistic but possible multiple) 5 years down the.

Originally posted by Account Closed:

@Jesse T. the brokerage would be the main business.

@Peter John K I love the "Uber for Lawn Care" idea.  I'd pay for that every week!

 On second thought maybe partnering with Peter John K on Uber for Lawn Care would be a better use of funds for speculation :)

Looks like most of the opinions are on the side of "no thanks" and several with suggestions of more info is needed. I would say I have enough info to make a wise decision and that would be a firm no. I don't care how successful these two are and their concept is highly flawed. More important than all of that, most brokerages do not make money, in fact, they often lose money. Where they make money is having in house escrows and loan departments. Both of those are highly profitable while brokerages are not. Agents make the lions share of the profits in that industry and this specialization with millennials will not change that fact.

If you want to toss some money to see if it flys back at you, I would recommend you look elsewhere.

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