Real estate tech companies continue to get hammered by high mortgage rates

From a $2B+ valuation to round after round of layoffs

Last week, I reported on Divvy Homes’ third round of layoffs in a year’s time. It was the latest casualty in a beaten down real estate tech sector.

I first wrote about rent-to-own startup Divvy Homes in September 2019 when it announced a $43 million Series B round to help in its mission to help more Americans “move from renters to [home]owners.” I then covered the company’s $110 million Series C in February of 2021.

Of course, at that time, it was a very different housing market. Interest rates were still relatively low and while markets were tight, people were still buying homes. Like most companies, Divvy was initially unsure as to how the COVID-19 pandemic would impact its business. But as 2020 went on — and the whole world spent more time at home than ever — Divvy said it only saw increased demand. So much so that the startup managed to raise another $200 million, just six months later, at an estimated $2.3 billion valuation.

Fast-forward to 2022. Mortgage rates had doubled and fewer people were putting their homes on the market or looking to buy a home. For a company like Divvy, whose business model involves purchasing homes and then renting them to people aiming to build equity, it was not a positive development.

Rising interest rates meant that the company likely had to charge more in rent to cover the mortgages it had taken out. So it’s no surprise that in 2022, both Fast Company and the New York Times reported that Divvy was supposedly charging higher rents than other landlords in some markets. It’s also not shocking that the startup laid off about 40 people in September 2022.

But that was just the beginning. In February 2023, the company let go of more workers. And last week, I reported on it laying off 94 employees, or about half its staff. Again, not a surprise considering that mortgage interest rates recently reached their highest levels in more than two decades.

The company declined to comment when I reached out, with my email to executives and the media relations team going unanswered.

A WARN letter viewed by TechCrunch stated that the job cuts affected people working in a wide range of roles, including the vice presidents of sales, compliance, people and comms/PR, as well as a senior recruiter, a number of software engineers and account executives.

The real estate tech, or proptech sector, has taken a big hit as mortgage interest rates have surged. Layoffs have abounded at both publicly traded companies such as Opendoor, Compass and Redfin and startups such as Better.com (which recently went public itself) and Homeward. Other startups didn’t survive at all. Reali announced in August 2022 it had begun a shutdown and would be laying off most of its workforce by the next month.

Real estate is a fascinating space since we’re all affected by it in one way or another. (Did you know I was a real estate reporter in a former life?!) While it’s not good to see startups laying off or shutting down, it’s unfortunately part of the cycles the industry regularly goes through. There are always ups and downs. Sometimes it’s a seller’s market. Sometimes it’s a buyer’s market. Sometimes it’s cheaper to rent. Sometimes it’s cheaper to own. Only one thing is certain: There’s never a dull day when covering this space. — Mary Ann

(opens in a new wiA new buyout option for employees

There are a number of reasons why a small business might need to transition to a new owner. And while startups, like Teamshares, have a lock on acquiring companies that don’t have succession plans, that might not always be what a company needs.

Last week I wrote about Common Trust, a startup offering an employee ownership buyout option. The company recently raised $2.6 million in seed funding in a round led by Crossbeam Venture Partners.

Zoe Schlag and Derek Razo founded the company in 2022 with the idea that employees often want to stay at a company with a great corporate culture and history of helping customers.

At Common Trust’s core is a unique legal vehicle called a perpetual purpose trust that enables small businesses to exit while also remaining independent.

“Employee ownership is the most scalable approach to serve this market, preserving generational businesses and quality jobs in cities and towns across America, and can be achieved at a fraction of the cost that brokers are charging, typically 10% of the transaction,” Schlag said in an email interview. Read more. — Christine

Weekly news

As reported by Zack Whittaker: “Square said there was ‘no evidence’ a cyberattack caused an outage that left customers and small businesses unable to use the payment giant’s technology on Thursday through early Friday. The payments technology giant said in a postmortem of the daylong outage that the outage was caused by a DNS issue. DNS, or domain name system, is the global protocol that converts human-readable web addresses into IP addresses, which allow computers to find and load websites from all over the world.” More here.

In a guest post, Navan’s Michael Sindicich writes that “fintech faces a reckoning. Over the past two years, central banks have hiked interest rates from their COVID-era lows to the highest levels for a generation. And now the business models that won consumers’ affection look increasingly tenuous. It’s only a matter of time until the house of cards collapses.” More here.

Citizens Bank is launching a new startup-focused private bank. Mary Ann talked at length with Sam Heshmati, who joined the institution as its head of emerging VC and innovation banking in July. Heshmati had worked at First Republic Bank for more than a decade and helped launch its startup practice. He details what it was like to witness First Republic’s collapse from the inside, as well as how Citizens aims to become the “‘go to bank’ for the innovation sector.” More here.

Source link