Online real estate service Knock is finishing up a $32 million Series A round led by RRE 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 legacy sellers, though, Knock promises you market-rate returns on your house in advance. And if, for whatever reason, your home doesn’t sell, Knock will buy it.
The problem that Knock and its competitors OpenDoor and OfferPad are trying to solve is simple: most people can’t 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 aim to 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 better than others, like Las Vegas.
“We are picking markets with the most going for them, good economic diversity and the least amount of risk,” explains Sean 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 Knock is ensuring that the homes they do buy don’t become a product of adverse selection. In other words, you don’t 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. It’s focused on home values between $150,000 and $500,000 and it 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 Knock’s gamble is that its model offers the least amount of friction for consumers.
Raju Rishi, general partner at RRE Ventures, explained to TechCrunch that Knock’s approach doesn’t require as much capitalization and that its focus on the six-week window decreases economic uncertainty and the hurdles through which the company’s computational models must jump.
Individual sellers are protected on Knock. Prior to a transaction, homeowners agree to contracts and Knock sets aside capital in its reserves like an insurance company.
“It’s 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, it’s 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 initial SEC form D filing only shows an initial close of $12.5 million. The company also notes that an insignificant amount of today’s 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 Capital and FJ Labs are also participating in today’s round.