4 Fintech Companies Disrupting Real Estate

How Property Sales Are Changing In a New Era of Declining Commissions

Reviewed by Thomas BrockReviewed by Thomas Brock

The real estate industry, long resistant to change, is undergoing a seismic shift—one that leaves some consumer advocates concerned that homebuyers could be left without the ability to decipher complex property transactions, often the most important of people’s lives. As we’ve reported, a landmark 2024 National Association of Realtors (NAR) settlement effectively ended the long-standing practice of listing agents offering to split their commission with buyers’ agents. As that change still reverberates throughout the industry, fintech companies have an opening to reshape a sector already transformed in recent decades due to the rise of the internet and smartphone apps.

Key Takeaways

• Fintech companies leverage technology to make real estate processes easier and more efficient.
• The National Association of Realtors (NAR) 2024 settlement on commission structures created opportunities for tech-driven companies to offer alternative models and potentially lower consumer costs.
• Despite inventive approaches, many real estate fintech firms are still struggling to achieve consistent profitability, highlighting the challenges of a difficult real estate market.
• Market volatility, regulatory changes, and competition from traditional real estate players and other tech companies are significant challenges for these firms, as well as anyone who wants to take their place.

Below, we examine four of the companies best positioned to surge ahead in a momentous period for the real estate market and American homebuyers. As traditional real estate fees (typically 5% to 6%) face downward pressure, we’ve separated the often-inflated claims “disrupters” make about their products from the real and broad shifts these firms are helping to bring about in a transforming industry.

What Is Real Estate Fintech?

Fintech’s impact on real estate goes beyond just digitizing existing processes or having apps for your phone. It’s already altering how properties are bought, sold, or invested in:

1. Streamlining transactions: Fintech platforms simplify the complex process of property transactions, from submitting offers to closing, reducing paperwork and time.
2. Making real estate investing more widely available: Through fractional ownership and crowdfunding platforms, fintech is making real estate investing accessible to a broader range of investors.
3. Data-driven decisions: AI and big data analytics provide property valuations and market predictions.
4. Alternative financing: Fintech companies offer mortgage and financing products, filling some gaps such as traditional commission structures change.
5. Blockchain products: The technology behind cryptocurrencies is being explored to create more secure and transparent property records and transactions.

As commissions are set to come down, buyers, in particular, will be hunting for ways to compare agent fees and negotiate transactions with sellers without the traditional guidance from agents previous generations of buyers were accustomed to.

This shift creates a prime opportunity for fintech firms to fill the gap, offering tools for price comparisons, negotiation assistance, and transaction management. To get a sense of where fintech is most likely to see growth, here’s a table of the critical aspects and expected effects of the 2024 NAR settlement:

4 Fintechs Changing the Real Estate Industry

Below, we’ve identified four fintech companies well-positioned to help shift the evolving real estate landscape as Zillow (still on our list) has already done in the 2010s. We focused on companies that address key challenges arising from the NAR settlement, such as transparency in prices, accessibility for first-time buyers, and making the process more efficient. We also considered each firm’s growth trajectory, the value it offered shareholders as well as clients, and their potential to scale up in the changing market.

These firms represent a diverse range, from digital mortgage platforms and iBuying services to fractional real estate investing and AI-driven property valuation tools.

1. Opendoor Technologies Inc. (OPEN)

Founded over a decade ago in Tempe, Arizona, Open Door manages a digital platform for residential real estate transactions in the U.S. The company’s core business involves buying and selling homes, though it has expanded into other areas of the real estate sector. Here are key aspects of the company’s offerings:

• Instant offers: Opendoor’s flagship product uses algorithms and market data to provide cash offers on homes, typically within 24 hours. The company then renovates (when needed) and resells the properties.
• Flexible closing: Sellers can choose their closing date, offering convenience and certainty in the selling process.
• List with Opendoor: This service enables customers to list their homes on the Multiple Listing Service (MLS) while also receiving a cash offer from Opendoor.
• Opendoor marketplace: This platform connects home sellers with institutional or retail buyers.
• Home tours: Buyers can self-tour Opendoor-owned homes without needing to coordinate with an agent.

Opendoor also has ancillary services to support its operations and for additional revenue streams, including real estate brokerage, escrow, real estate licensing, and construction services. They also offer property and casualty insurance.

Relevance in the Post-NAR Settlement Landscape

By eliminating the need for listing agents and providing transparent pricing, the company is among those most likely to benefit from the NAR settlement. For buyers, especially those who might be hesitant to hire an agent due to direct fees, Opendoor’s self-service model provides an alternative path to homeownership.

Financial Performance and Outlook

In the first quarter of 2024, Opendoor sold 3,078 homes and generated $1.2 billion in revenue, a 62% decrease in revenue year-over-year (YOY). On the flip side, it bought 3,458 homes in the same quarter, a 98% increase YOY.

Opendoor faces competition from traditional real estate models and other “iBuyers,” the industry term for Opendoor and similar firms. The company’s success will depend on its ability to accurately price homes, manage inventory, market itself to buyers and sellers alike, and adapt to market fluctuations.

2. Zillow Group Inc. (Z)

Zillow, founded in 2004 and based in Seattle, Washington, has already changed real estate—it’s now a synonym for app-based residential real estate buying and late-night voyeurism on what your neighbors’ homes are worth. Despite this, it faced significant challenges in the early 2020s:

• iBuying failure: In 2021, Zillow abruptly shut down its Zillow Offers iBuying program after substantial losses. The company had to write down inventory and lay off about 25% of its workforce.
• Financial impact: This venture resulted in a $881 million write-down in the third quarter of 2021 and a net loss of $528 million for that year.

The failure of Zillow Offers—Fortune called it a “disaster”—forced the company to refocus on its core business as a digital real estate marketplace. As such, its next move was to collaborate with Opendoor for iBuying services. That partnership is in a few dozen markets, enabling home sellers on Zillow to request an instant offer from Opendoor.

Zillow has also invested in tools for real estate professionals like ShowingTime+. It’s been putting in the work to strengthen its relationships within an industry whose agents and brokers both love and hate Zillow for much the same reason: their clients come to them primed with ideas found from exploring real estate on the platform.

The company has also been putting its high-margin Premier Agent business front and center. This context is crucial for understanding Zillow’s strategies in fintech: The company’s past struggles with direct homebuying have made it more cautious, with a far greater tendency to partner with firms than try to recreate the fintech itself. Its brands also include Trulia, StreetEasy, HotPads, and Out East.

Relevance in the Post-NAR Settlement Landscape

Zillow is positioned well to adapt to changing commission structures. The company’s strong brand recognition and high consumer traffic make it a valuable partner for homebuyers and sellers alike. Like our next choice, Redfin, it’s essentially inescapable for those in residential real estate now.

Financial Performance and Outlook

Despite ongoing industry headwinds, Zillow reported revenue of $469 million, with a net income of $21 million for the quarter. This suggests that the company’s strategic shifts and cost-management efforts are bearing some fruit. Importantly, Zillow has a solid and consistent user base, reporting an average of 218 million monthly unique users across its platforms.

Zillow occupies a site of tension in the sector: it has to balance its relationships with conventional real estate agents while enabling technologies leading away from the existing model. However, that could prove crucial to its success: the company’s focus on working with consumers and real estate professionals should help it navigate the mid-2020s better than other real estate fintech firms.

3. Redfin Corporation (RDFN)

Founded in 2002, based in Seattle and Zillow’s primary competitor, Redfin is also a no-brainer for inclusion here. The company’s platform includes an online real estate marketplace for buying and selling homes, and it also offers mortgage, rental, and title/settlement services.

Relevance in the Post-NAR Settlement Landscape

Redfin finds itself at a critical juncture as the real estate industry grapples with significant changes from recent legal settlements. In March 2024, just as the NAR agreed to its settlement, Redfin entered into one of its own to resolve antitrust claims for $9.25 million. This wasn’t its first significant settlement. Two years before, it reached a $4 million settlement with the National Fair Housing Association (NFHA) and allied groups that alleged its policies resulted in fintech forms of redlining.

“We must ensure that companies do not use their technologies, including digitally-based platforms, to deny people the housing opportunities and services they deserve,” said Lisa Rice, president and CEO of NFHA. She called the steps Redfin promised in the settlement, including changing its minimum housing prices and other practices, “a positive move,” even as she said it’s a warning to others in real estate fintech.

Recent industry changes present both challenges and opportunities for Redfin. The company may need to adjust its business model, particularly in compensating agents and interacting with homebuyers. For instance, the NAR settlement’s requirement to obtain signed buyer agreements before home tours could impact Redfin’s ability to attract clients. However, Redfin’s technology-driven approach and existing flat-fee model may position it well to adapt to a market with potentially lower and more transparent commissions.

Financial Performance and Outlook

In the first quarter of 2024, Redfin increased its revenue by 5% YOY to $225.5 million, and its rentals revenue was up significantly, 16%, to $49.5 million. The company also had a net loss of $66.8 million, compared with $57.3 million a year earlier. Despite the larger net loss, Redfin’s revenue growth in a difficult real estate market could demonstrate the company’s ability to keep gaining market share. The strong performance in rentals suggests it’ successfully negotiating its way into an important part of real estate—growth that could redound to the company if renters remain with it when they transition to homebuying.

4. Crowdstreet

CrowdStreet is, as its name suggests, a real estate crowdfunding fintech platform, providing users with direct access to commercial real estate prospects. Once registered, investors can browse various offerings, including individual properties, funds, and real estate investment trusts (REITs). The company—except as part of broad industry shifts—shouldn’t expect too many changes from the NAR settlement.

To take part in CrowdStreet’s deals, users must complete a know-your-customer process to verify their status as accredited investors. Once that’s done, they can invest in individual deals, CrowdStreet-managed funds, or REITs, each with a business plan, financial plan, key assumptions, risks, and return structures.

• Investment selection: Investors can filter deals based on investment strategy (e.g., core, value-add), structure (e.g., debt, equity), and geographic region.
• Due diligence: Each deal, the company says, undergoes complete background checks and financial assessments.
• User experience: Investopedia’s reviewers said this was among the major plusses for the company—one of the best in a competitive industry. The platform is user-friendly, with tools and data to help investors make more informed decisions.

As of 2024, the company has facilitated $4.2 billion in investments for more than 798 real estate deals since 2014. The platform has more than 300,000 investors, with 168 confirmed realized deals, and its track record on those deals is a 17.9% realized internal rate of return and a 3.1-year holding period.

CrowdStreet earns money from fees from the sponsors who put their deals on CrowdStreet’s platform, in addition to charging a management fee for the funds and REITs it oversees. CrowdStreet also charges fees to clients with privately managed accounts, where it helps investors build portfolios of real estate deals.

Performance and Outlook

CrowdStreet has had strong growth and a robust platform to attract higher-quality deals than its competitors. It also reports a growing base of accredited investors.

CrowdStreet faces several challenges, not least a fiasco coming from its own executive suite: in July 2023, its CEO, Tore Steen, stepped down after $63 million went missing from deals involving a real estate developer called Nightingale Properties, which was raising money to buy office buildings in Atlanta and Miami and had gone bankrupt. The U.S. Department of Justice is still investigating both firms. CrowdStreet has said it’s since tightened its financial controls, and it’s replaced Steen with a new CEO, Jack Chandler.

Meanwhile, the company has responded to the slow housing market by shifting to offerings of debt and preferred equity, waiting until a better market before it returns more fully to common equity investments.

What is Fintech?

Fintech refers to financial technology. Any use of technology that helps people or businesses manage their finances and financial processes falls under the fintech umbrella.

Are There Risks to Using Fintech?

Fintech provides many benefits to consumers and businesses, but there can also be risks. One example is seen with Zillow’s efforts to enter the house-flipping business based on algorithmic predictions about future price movements for housing. But losses can pile up quickly in the housing market, as the recent experience of the sector with the pandemic and the high interest rates that followed has demonstrated all too well.

What Are the Major Challenges Facing Fintech Companies?

Two major challenges for fintech businesses are data security and regulatory compliance. Keeping customer data safe can be difficult, but data is necessary for effective operations. Regulation is also constantly evolving and a major change in rules affecting a fintech company could negatively impact the company’s bottom line.

The Bottom Line

Despite serious challenges this decade—at times, property sales haven’t just been slow but moribund—the real estate industry is undergoing a significant transformation. The latter has, in part, been driven by companies leveraging fintech to streamline real estate deals and mortgage origination, as well as improve the customer experience. Four key players include Opendoor, Zillow, Redfin, and CrowdStreet. Each has a different strategy for profiting in the sector, from Opendoor’s iBuying model to Zillow’s comprehensive real estate marketplace, Redfin’s tech-enabled brokerage services, and CrowdStreet’s crowdsourced investment model.

These fintech companies are poised to capitalize on real estate’s shifting landscape, but they face formidable challenges: market volatility, regulatory scrutiny, and the pressure to achieve profitability in a fiercely competitive environment. As the industry evolves after the landmark NAR settlement, these companies are undoubtedly playing a pivotal role in reshaping how people buy, sell, and finance homes. However, prudent investors must proceed with caution. In the world of fintech, the self-supposed disruptors in a changing industry often become the disrupted.

Read the original article on Investopedia.