Original version posted on January 23rd, 2023 on Medium.
The house in the Hamptons. The mansion at Martha’s Vineyard. The palazzo at Palm Beach.
Over the years, U.S. culture has idolized second homes. For centuries, they have been symbols of status, wealth, and decorum.
However, second homes have (understandably) only been attainable for a small slice of the population. The top of the top of the income bracket.
Until today.
In the last three years, a new wave of startups has popped up to make second home ownership more attainable and affordable.
These startups have fundamentally challenged what it means to be a “homeowner” and rethought several key questions:
- 5% of U.S. households have a second home, but 65% are interested in one. How can we close this gap?
- The average second home sits empty for 320 days per year. Is there something we can do with this unused inventory?
- Managing one home is hard. Managing two homes is even harder, especially if you only are living there part time. How can we solve this problem?
In this article, we’ll explore how startups are tackling these problems, look back to understand we got to this point in Real Estate, and ponder what could be the winning model in this space.
Let’s dive in.
History
This NFX article does a great job painting the phases of Real Estate startups over the years. Here’s our TL;DR:
Phase 1 (pre-2004)
Pre-internet home buying
Before the internet, home buyers and sellers almost entirely relied on real estate agents to help facilitate transactions. People couldn’t buy or sell a home themselves for several reasons, but most notably because real estate agents had unequal access to MLS (multiple listing service) data. This data included key information for buying / selling a home, such as lists of homes for sale, home transaction histories, and detailed information such as the square footage of the house.
Without access to this data, buying or selling a home by yourself was a little bit like driving blind — so most people relied on agents to facilitate transactions.
Phase 2 (2004–2011)
The democratization of housing information
With the commercialization of the internet in the early 2000s, companies such as Zillow and Trulia started to digitize this information to build marketplaces of houses for sale online.
As these companies built their products, an unintended benefit is that they helped to create and democratize a public database of real estate data. Future companies would use this information as the backbone of their products.
Today, the amount of real estate data at our fingertips is incredible — you can just type in any address into Zillow and find pictures, transaction history, and an estimate of the home value.
Phase 3 (2012–2017)
Friction-reduction is the name of the game
After the democratization of housing information in the early 2000s, companies in the 2010s capitalized on public databases of real estate data to reduce frictions on the buyside and sellside of the home buying process.
These companies worked to expedite some of the bigger frictions that still existed in the industry, such as paper contracts, physical meetings with agents, long close times, and in-person meetings / tours.
Some of the bigger companies in this phase include:
- Opendoor: $1.9B raised, founded in 2014
- HomeLight: $743M raised, founded in 2012
- Offerpad: $355M raised, founded in 2015
- OJO Labs: $134M raised, founded in 2015
Phase 4 (2018-present)
New models of ownership
In the last several years, we’ve seen several key trends emerge:
- Home values have soared. From 2010–2021, the average price for a home sold in the U.S. increased by over 70%.
- Lack of purchasing power among millennials. Despite earning higher salaries, millennials have less purchasing power than any other generation.
- The proliferation of remote work. Since COVID, remote work has exploded. Now, with physical location mattering less to work, some people have begun exploring a digital nomad lifestyle.
With an affordability crisis on our hands and the proliferation of remote work, some companies have begun to re-think what it means to own a home in the first place.
Startups are responding to these issues in several discrete ways:
- Second-home ownership (focus of this article): Second homes are extremely pricey and largely unused. Is there any way to create a better model here?
— Pacaso: $1.5B raised, founded in 2020
— Kocomo: $56M raised, founded in 2021
— Fractal Homes: $30M raised, founded in 2020 - Rent-to-own: I want to buy a house, but can’t afford the 10–20% down payment. Are there any other models that would allow me to still get the house?
— Divvy Homes: $1.2B raised, founded in 2017
— Landis: $222M raised, founded in 2018
— ZeroDown: $136M raised, founded in 2018 - Fractionalizing real estate: I want to invest in real estate, but can’t afford a whole property. Why can’t I buy “shares” of properties like I do with stocks?
— Arrived Homes: $162M raised, founded in 2020
— Landa: $95M raised, founded in 2019
— Fintor: $9M raised, founded in 2021 - Co-living: Residential real estate prices have gotten crazy high. Can we legalize splitting residences into smaller pieces to lower the price?
— Cohabs: $203M raised, founded in 2016
— Bungalow: $171M raised, founded in 2017
— Common Living: $113M raised, founded in 2015
— PadSplit: $35M raised, founded in 2017
How they work
Now, let’s dive into how these second home ownership companies actually work.
Pacaso, the clear market leader in terms of funding, makes the pitch pretty clear on their website homepage: “second home ownership for 1/8 the cost.”
At a high level, these companies are redefining “home ownership” by letting several people all co-own the same house.
Most models involve people buying “shares” of a house, which correspond to the cost they pay and the amount of time they can spend in the house (e.g., 1 share = X number of days in the house per year at an $X cost). With this innovation, now multiple people can achieve the status of saying “I have a house in the Hamptons,” even though it’s only one house.
You may have heard of this concept before and are thinking “hey, this sounds like a timeshare.” It’s similar, but all of these companies are explicit that this structure is not a timeshare. It basically boils down to two main differences: with this structure you 1) actually own equity in the house (vs. a timeshare where you don’t) and 2) can actually sell your share on the open market if you don’t want it anymore (vs. the horror stories of getting stuck in a timeshare).
Aside from the cost barrier they are alleviating, these companies are solving another key hurdle to owning a second home: property management. All of these companies act as property managers to help deal with all the maintenance and cleaning headaches that come with owning a home (or two).
The different models
While there are a bunch of companies in this space, there are only a handful of unique models here. Here are the main ones:
- The Pacaso model: Tons of companies are trying this model popularized by Pacaso, the most famous member of the bunch. In short, Pacaso buys luxury vacation homes, renovates them, turns them into an LLC, sells ⅛ shares of the property each corresponding to 44 days of ownership per year, and then becomes the property manager. Pacaso has raised the most in this space by far ($1.5B), which has understandably led to other similar companies popping up in different regions. Lots of these companies in the chart below have a very similar model to Pacaso — they have all somehow come to agree that breaking up properties into ⅛ shares corresponding to exactly 44 days of ownership is the best model…
- The Summer model: Summer is taking a different approach. Instead of splitting up ownership into ⅛ chunks, they make second home ownership affordable by listing the house on Airbnb when you’re not there. They also offer a “try-before-you-buy” model that allows for gradual ownership of the home. With this model, you are indisputably the owner of the house. However, it’s still TBD how this model will perform — it’s unclear from the outside if this model is really 10x better than just hiring a traditional Airbnb property manager.
Second home ownership market layout
Here is a market layout of the companies working to enable second home ownership, categorized by where these companies sell fractionalized second homes.
ALL (!!!) of these were founded in the last three years and lots of them have raised serious venture capital since 2021. The companies that have raised the most to-date are:
- Pacaso: $1.5B raised, founded in 2020
- Kocomo: $56M raised, founded in 2021
- Fractal Homes: $30M raised, founded in 2020
- Myne Homes: $24M raised, founded in 2021
- Ember: $17M raised, founded in 2021
- Summer: $14M raised, founded in 2020
Look at the start dates on these companies… this space is clearly exploding!
If we missed a company on the list — let us know! Drop us an email at goodstuffnearby@neighborhoodstudios.com.
What’s next in second home ownership
Here are the approaches we think are interesting (some that are being attempted, some that are not), in and around the second home ownership space:
- Removing down payment friction: All of these companies still require customers to put up a significant down payment in order to purchase a share of a second home. While some companies here are introducing solutions to help with that (e.g., Pacaso 5% down offering, Summer 20% down offering), they still translate to up to $1M down depending on the home. Could there be a feasible business model in second home space that drastically reduces the down payment for a second home (similar to what Divvy Homes has done with first homes and their 1–2% down payment)?
- City homes: Flyway (founded in 2021) in the U.K. is attempting a slightly different angle than the “Pacaso model” by offering 1/12 ownership shares of houses in the heart of European cities, not necessarily in traditional vacation spots. Rather than having a primary home and a secondary vacation home, could the future of living involve having several equal homes in various cities?
- Flexible living: Landing and Selina are rethinking the traditional 1-year apartment lease by catering to younger people who don’t want to be tied to one location. Is there a world where this flexible living / digital nomad model merges with second home ownership models?
- Other interesting approaches: Virgil co-invests with you to help you buy a bigger home. Loftium is trying to create a new category of “host-to-own.” Withco is doing Divvy Homes for small businesses. Are any of these the right angles that could be applied to second home ownership?
This space feels like it’s reached 10% of its potential.
Could there be other models where co-ownership makes sense? Are there other types of properties, locations, or business models where this could be effective?
What do you think is next?
