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3 Real Estate Disruptors at Fire-Sale Valuations

Few industries are in need of disruption quite as much as real estate. The process of selling a home is clunky, at best, brokerage fees haven’t changed significantly in decades despite lots of technological advancements in the industry, and there aren’t many clear market leaders in the property management field.

However, like in most other industries, most fast-growing real estate disruptors have been beaten down in the recent market decline, and some of the most promising companies are trading for a fraction of the highs. Here are three, in particular, that look appealing right now.

The only major brokerage trying to solve a big problem

The brokerage business is clunky and full of inefficiencies. While several innovative brokerage firms focus on technology to improve the homebuying and selling processes, Redfin (NASDAQ: RDFN) is the only one that not only leverages technology, but also is disrupting the traditional pricing model.

If you aren’t familiar, the standard commission when you sell a home is in the 6% ballpark, with half going to the seller’s agent and half going to the buyer’s agent. Redfin charges 1.5% or less for the seller’s commission and gives buyers rebates for the commissions their agents receive, which can save the average home seller thousands of dollars.

In addition to its brokerage business, Redfin has a large mortgage operation, title and settlement services, and an iBuyer (RedfinNow) that buys homes directly from sellers. It also recently acquired the valuable RentPath brands (including Apartment Guide and rent.com). With shares 87% below their 52-week high, now could be a smart time to consider this truly disruptive company for your portfolio.

This market leader has less than a 1% share

The vacation rental industry is surprisingly fragmented. Sure, there are millions of properties listed on Airbnb and similar portals, but these are managed by many different property managers and individual homeowners. As far as actual vacation rental management goes, no company has greater than a 1% market share.

Vacasa (NASDAQ: VCSA) hopes to change that and become the first national vacation rental manager to achieve scale. It currently has over 35,000 vacation rentals under management, but this is less than 1% of the market. There’s plenty of opportunity here: The vacation rental market is estimated at more than $200 billion in annual spending worldwide, and margins for full-service management are high. Plus, travel demand is surging as pandemic-era restrictions have largely been lifted. 

In the first quarter of 2022, $494 million of gross booking value flowed through Vacasa’s platform, more than doubling year over year, and the company is expecting about $1.15 billion in revenue for the full year. Although the company is operating at a loss now, management expects to be profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis starting next year. With a market cap of less than $1.4 billion and a solid balance sheet, Vacasa is certainly one to watch.

Selling a home needs process improvement

While Redfin is doing a great job of innovating in the brokerage business, the iBuying model is also starting to gain traction. With roughly $6 trillion in home sales nationwide in a typical year, there’s plenty of room for both models to be successful. However, iBuying solves some of the biggest consumer pain points.

Specifically, by using a company like Offerpad (NYSE: OPAD) when selling a home, you simply get a cash offer, accept it, and close on a date of your choosing. There’s no need for showings, negotiating, worrying about repairs, etc. And with the real estate market slowing down considerably, the iBuying model can be even more appealing to sellers who want a quick transaction.

Offerpad isn’t the largest iBuyer in the market, but it’s the most efficiency-focused, which can be an especially important characteristic in a tough economy. The company was profitable (on a GAAP basis, not an adjusted one) in the first quarter of 2022 and for the full year of 2021. As the business scales and adds more features, things could get interesting if the company can keep profitability growing.

These are not low-risk stocks

To be clear, I think all of these have transformative potential and could produce 10X returns (or more) if they can execute on their respective visions. But it’s important to keep in mind that no stock capable of this is in the low-risk category.

All three of these are likely to be rather volatile — at least in the near term while they’re in rapid growth mode — and all could certainly be under pressure if growth slows unexpectedly. Disruption isn’t easy, but the risk-reward profile of these three companies makes a lot of sense at the current level.

Matthew Frankel, CFP® has positions in Offerpad Solutions Inc and Redfin. The Motley Fool has positions in and recommends Airbnb, Inc., Offerpad Solutions Inc, and Redfin. The Motley Fool recommends the following options: short August 2022 $13 calls on Redfin. The Motley Fool has a disclosure policy.

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