Online real estate serviceKnockis finishing up a$32 million Series A roundled byRRE Ventures. The new company, founded by former Trulia executives, promises to handle the details of home sales in exchange for the traditional six percent commissions. Unlike legacysellers, though, Knock promises you market-rate returns on your house in advance. And if, for whatever reason, your home doesnt sell, Knock will buy it.
The problem thatKnock and its competitors OpenDoor and OfferPad are trying to solve is simple: most people cant count on the timelines for home sales and home purchases to align. Harvesting the idea of an online marketplace and fusing it with predictive analytics to forecast prices, these companies aimto take the pain and uncertainty out of real estate transactions.
Knock is testing its model in Atlanta,Georgia a municipality known for its relative lack of housing-market volatility. The general narrative of the most recent recession was one of complete collapse. But some markets, like Washington, D.C., withstood the times betterthan others, like Las Vegas.
We are picking markets with the most going for them, good economic diversity and the least amount of risk,explainsSean Black, CEO of Knock.
In the long term,Black says that he would like Knock to be present in every market. But he admits that rural (i.e. Iowa) and very active markets (i.e. NYC or SF) will require a lot more data to offset risk and inspire confidence.
Knock is aiming to only take 10-20 percent of homes on its balance sheet. Competitors like OpenDoor accept more risk by purchasing all homes and operating fully on balance sheet. The challenge for Knockis ensuring that the homes they do buydont become a product of adverse selection. In other words, you dont want Knock investing heavily in its worst-quality homes.
To combat this, Knock goes to great efforts to ensure discipline in the houses it promises to sell. Its focused on home values between $150,000 and $500,000 andit inspects all homes to weed out bad apples.
But even with solid inventory, every company in this space is betting that it can price homes correctly. The first to liquidity is the first to data, so Knocks gamble is that its model offers the least amount of friction for consumers.
Raju Rishi, general partner at RRE Ventures, explained to TechCrunch that Knocks approach doesnt require as much capitalization and that its focus on the six-week window decreases economic uncertainty and the hurdles through which the companys computational models must jump.
Individual sellers are protected on Knock. Prior to a transaction, homeownersagree to contracts and Knock sets aside capital in its reserves like an insurance company.
Its a cyclical market and we are going to have to be prepared to ride the cycles, added Black. We only need to be six weeks ahead. Home sales happen a lot more often than elections, its easier to predict.
If push comes to shove, Knock can always rent homes to cut down on the potential downsides of economic volatility.Blackstone took a similar approach by making a bet that it could make money renting previously foreclosed homes.
Knock says its initialSEC form D filing only shows aninitial close of $12.5 million. The company alsonotes that an insignificant amount of todays reported Series A is in the form of venture debt, and that it has secured very generous, uncapped terms for purchasing homes with debt.Redpoint, Greycroft, Correlation Ventures, Great Oaks Venture Capital,Corazon Capitaland FJ Labs are also participating in todays round.