Real Estate at a Crossroads

by Gregory Charlop

  Gregory Charlop: Your model is an alternative to my expectation of the future, which I expect will mostly be internet-based brokerages. How will this type of destination office compete with the discount internet brokerages?

  Anthony Vitale: As far as competing financially, think of our clients as raw data. We now have control of their data. We can massage and anonymize it, using that data to put merchants and other recipients together. We will have the ability to provide curated third parties with access to that data for a fee.

  Gregory Charlop: Who do you envision would be particularly drawn to these offices? Would they be buyers, sellers, older folks, do-it-yourself types—everybody?

  Anthony Vitale: If we're smart, we’ll get almost everyone—both buyers excited to begin the next romantic chapter in their lives by fixing up their homestead, to sellers looking for ways to enhance the salability of their property. As well as financial people interested in the benefits of particular types of renovation, mortgages, home insurance, elder law, etc.

  Think of the HGTV demographic. Young couples watch these channels and love them, but they don't necessarily connect that with a real estate agent. They go out, find a house to buy, and then they start getting into fixing up a kitchen, doing all those things homeowners do. The real estate agent was excluded from benefiting from that revenue. Now, once again, we can be involved.

  Gregory Charlop: Earlier, you mentioned seniors. That's an area I'm very passionate about. I think your idea can work very well with seniors. How would seniors benefit from these hubs, or these destination real estate companies?

  Anthony Vitale: Greg, that certainly is a noble cause, and I commend you for your effort and involvement. Here’s how my vision can benefit not only that demographic but can be adjusted for other local niche markets as well. Think veterans, first responders, etc. It’s not hard to see how we can be instrumental not only in helping them transition into a senior facility or dealing with the sale of their home, but also providing a space for their needs. We can help their children and caregivers who are responsible for helping them to transition by providing handicapped access to our office’s “Senior Centers” located in communities with a large population of seniors. These centers carved out of our facilities can not only provide access to literature and resources, they can provide a neutral space for professionals such as elder attorneys, financial managers and even health care professionals to hold meetings or seminars on important topics to seniors.

  Again, it's reaching out to the community to bring people in through that hardscape, through that brick and mortar, and use it in a much more effective way. These, and many other initiatives we are unable to delve into here, can serve as a new blueprint for Real Estate 3.0.

  Gregory Charlop: Thank you so much for joining us. You provided a great counterpoint to my theory that internet brokerages will dominate the market, and you show a way that traditional brokerages can leverage the assets they have to not only compete but perhaps even open up entirely new market segments.

  Interview with Nav Athwal, Angel investor, Proptech enthusiast, and Co-Founder/CEO of District

  Gregory Charlop: Nav, you have a very impressive resume. You were an electrical engineer, went to law school, you even studied business. Tell us about yourself.

  Nav Athwal: I started my career in technology as an engineer. I worked for a firm in Oakland, California doing infrastructure design work and work as an electrical engineer. I was there for about a year. The company was called Earthtech. While I was an engineer, I also got my broker's license. I grew up in a real estate family, so I'd always been exposed to the asset from a young age. But getting my broker's license was my first foray into real estate on my own. So I started selling homes and helping people get financing, moonlighting while I was working as an engineer.

  I decided after a year of doing this, to go to law school, and I knew going into law school that I wanted to do real estate law. So, after graduating, I worked for a law firm in San Francisco called Farella Braun + Martel, LLP. I practiced there for about three and a half years in the real estate and land use group. My practice mainly entailed helping large institutional real estate clients acquire assets, lease assets and get entitlement and development rights for new ground up projects in San Francisco. This last piece of my practice was the most interesting and challenging as it was highly political, and San Francisco is notoriously difficult for development.

  While I was a practicing attorney, I started buying real estate, mainly small-cap multi-family and single -family homes. During that process, I realized just how broken and inefficient the process of raising capital was, both on the debt and equity sides. That was what prompted me to start RealtyShares, which is really a marketplace to connect capital from passive investors that want exposure to real estate to real estate operators and developers who want a much more efficient way to raise capital. So I left my law firm job in late 2013 and from then until November of 2017, I served as the Founder and CEO of RealtyShares. We had humble beginnings, but eventually achieved strong scale, helping raise over $800 million of capital for over a thousand projects around the U.S., in multi-family, retail, office, industrial, and self-storage. RealtyShares focused on a broad swath of different products, including debt and equity. While I was there as CEO, we were growing rapidly, having raised over $60M in venture capital and doubling how much we were funding every year. We were the leading platform of our kind. It was an amazing ride.

  In November 2018, I stepped down as CEO, and the board brought in a new CEO who formerly was the CEO of Cushman & Wakefield, a very seasoned executive. After leaving as CEO, I remained on the board while taking a much-needed break and thinking about what was next for me.

  One thing I realized during my time at RealtyShares is that (i) I love building software for large, slow- to- change industries to make them more efficient, and (ii) I love the early stages of companies. So RealtyShares over the last four years was a lot of fun, and I especially enjoyed the earliest stages of it when we were 10-20 people in a room trying to build a business from nothing.

  Gregory Charlop: Many of our readers are, of course, interested in the real estate industry, either as brokers or agents or executives. Does RealtyShares work with agents or brokers?

  Nav Athwal: RealtyShares did historically work with brokers to source deals. We worked with both transaction brokers as well as Mortgage/Capital markets brokers. At RealtyShares we funded both debt and equity in commercial real estate. Brokers participated by referring clients for both, although we saw more traction with brokers on the debt side. Brokers are a key part of our ecosystem; we've broadened the relationship we have with brokers and agents, both on the mortgage and the transaction side.

  Gregory Charlop: Could a real estate agent or broker approach RealtyShares to see if they'd be interested in funding deals?

  Nav Athwal: Yes. Agents actually can refer deals to us and also get paid for those referrals. We have a business development team that handles all of our deal sourcing efforts, and that team's email is bizdev@RealtyShares.com. The best way for agents to get in contact with RealtyShares is to shoot an email to our biz dev team describing the opportunity, and we're typically back in touch with the agents/brokers within 24 hours.

  Gregory Charlop: Can you tell me how RealtyShares determines which properties to invest in? Does it use a computer algorithm or artificial intelligence? What is your secret to figuring out how to invest?

  Nav Athwal: RealtyShares historically did things quite manually with respect to deal analysis and underwriting. We had a team of underwriters that came from the traditional real estate industry reviewing the deals in detail to ensure they were a good fit. Of course, over time, we sought to automate many aspects of this human driven underwriting. But when I left as CEO, things were still human driven. RealtyShares is a curated marketplace and very selective with respect to the deals that get accepted onto our platform. The hit rate is less than 10 percent.

  There are a couple of
criteria that right off the bat will exclude a deal. RealtyShares does not fund ground up development or deals with entitlement risk. Also, they typically look for transactions where the fundraising required is at least $1 million. RealtyShares doesn't provide capital for single-family residential projects...only commercial projects, so the capital needs are usually well above this threshold number. They also pass on deals that are offered by operators that are not seasoned. So, if this is your first deal or your second deal, and you don’t have an established track record and successful exits, we're usually going to pass on those sponsors/deals.

  Once RS determines a deal passes its initial sniff test, their seasoned underwriting team does a deeper dive. This team has experience across multiple real estate and private equity firms, such as BlackRock, Hines, Goldman Sachs, etc. The team reviews specifics around the deal, such as pro forma projections, to determine if the return that the sponsor is projecting is achievable. RS does a pretty thorough analysis to determine if the deal is a fit. Some of that's pure analog underwriting, and some of it’s based on data and technology. So, it's a good mix of old tried and tested and new fast and efficient.

  Gregory Charlop: If a real estate agent or broker came to you for advice about investing, what would you say?

  Nav Athwal: Get to know your market. I think one of the biggest strengths that agents possess is knowledge of the local market. So, the stronger that local knowledge is, the more a value add that agent is to their client. They're going to be able to find the right properties for the client, price them correctly, price them to sell, price them so that they're not listing it at a discount to what the property's worth. So, having that local market knowledge can add value and, ultimately, add a lot of value to the client.

  The second thing I encourage agents and brokers to do is leverage technology to their advantage. Whether it's winning the right deals, finding the right clients, making the transaction process more efficient or less costly for their clients, or just as a way to avoid being left behind.

  Gregory Charlop: You're an expert in both the technological and the legal aspects of real estate. One of the emerging trends now are iBuyers and other companies that disintermediate real estate agents. What are your thoughts about this trend? Do you think it represents the future of real estate?

  Nav Athwal: Great question. Real estate agents are so integrated into the sales and purchase process for real estate that I think it's going to be hard to displace them completely. If they are ever displaced, I think it's going to be 20 years down the line. I just don't think it's going to be any time soon. There are some interesting companies, Opendoor being one of the largest, that are trying to eliminate the role of the agent in the deal. A seller can come to them and say, "I want to sell my property," and within 48 hours, Opendoor will have an offer for them, and they can close the deal without agent involvement, without a showing/staging, without any of the hassles that usually come with the sale of a single-family home. Opendoor essentially becomes the buyer of that property, which means that they have to have a substantial balance sheet. Whether or not they're going to be able to scale that to every market, we'll have to wait and see. That model involves tremendous risk. If the housing market corrects, Opendoor is left holding the bag.

  I think charting 6 percent commission, regardless of what type of market you're in, is going to erode away slowly. In markets like San Francisco, where you're very supply constrained, and the transaction sizes tend to be larger, six percent is very expensive. Those homes typically start at $1M and are going for $1,000+ a square foot. I think taking 6 percent of that transaction doesn't really make sense, and the value the agent brings doesn't justify it. Whereas, that same type of transaction in a market like Phoenix or Dallas does make sense, because the size of the deal is smaller, and the supply/demand balance works much differently than in primary markets like SF or New York.

  There are startups now, such as Unlocked. They operate in the San Francisco Bay Area. They’re are changing that aspect of brokerage, and I think we'll see plenty more emerge to do the same in other markets. But, again, I don't see agents being eliminated from the transaction process any time soon because they are so ingrained within the home buying process, and most sellers are not comfortable doing such a large transaction without an expert helping them along the way.

  I go back to the question you asked before: what advice do you have for agents? Agents who know their market well and can leverage technology will bring value to the transaction, and that, in turn, will make them a critical part of the deal. Agents who are expecting 6 percent in markets like San Francisco, where they often have multiple offers as soon as the property is listed, are taking advantage of the market dynamics and aren't really adding enough value to justify that cost to the client. They're going to slowly be disrupted.

  Gregory Charlop: If you were advising someone in college who was debating whether to go into real estate or not, what advice would you give them? Would you say, become an agent, don't become an agent, or go into some similar field?

  Nav Athwal: Well, it depends on a few things. First, I'd ask them, “Do you like sales?” Because being an agent is a lot about sales—selling yourself, being able to sell a property, being able to sell an offer from a potential buyer. Sales is a key component of being an agent. So, if you hate sales, hate making phone calls, hate client outreach, if you hate marketing yourself, I think it's the wrong industry—no matter how much you like real estate as an asset class.

  The second thing I'd say is, yeah, if you love sales, you love real estate, it can be very lucrative. Because, if agents are good, if they know their market, if they're able to market themselves, if they're good salespeople, they can potentially make a really good living, especially in markets like San Francisco, Palo Alto, New York, Miami, Austin, Los Angeles, etc. If you like sales, if you like real estate, you want a flexible schedule, you want to be your own boss, I think it can be the right career for you. Those are the questions you need to ask yourself beforehand. But, you also need to understand that the market is very competitive, and you need to do what you can to differentiate yourself. Think outside the box, and there, technology can help.

  Gregory Charlop: What are your thoughts about some of the emerging technologies in real estate? I’ll mention two: virtual reality and augmented reality.

  Nav Athwal: I think virtual reality and augmented reality are very interesting. I think it's getting a little crowded and a little saturated, but I think the reason it's so exciting for real estate is real estate is a physical asset. I mean, you have to walk the property, really get a sense of the neighborhood, the property interior and condition, etc. And often it's hard to get out to view the property. That's where I think VR and AR can help. Also, let's assume you have raw land that you want to develop into apartments or a hotel, and before undertaking the construction process you want to visualize what it could look like. Typically, that's through one-dimensional plans, but if you can create a virtual tour of that property, you could actually market it before you put a single stick in the ground. So, I think virtual reality, augmented reality, can have a really interesting application to real estate, especially given the tangible, physical nature of the asset.

  Gregory Charlop: I think a lot of Millennials may start to expect to use virtual and augmented reality since they're playing video games that use that. How about artificial intelligence?

  Nav Athwal: Absolutely, and I'm very excited about AI's application to real estate. Real estate is a very data-rich asset. There are thousands of data points involved with a single deal, with respect to the deal itself, the financials of the deal, etc. Given the data-rich nature of the asset, I think it's especially susceptible to artificial intelligence. So, I think things that are very analog today, like underwriting and deal sourcing, could be driven by AI in the future. The next Blackstone will be highly dependent on technology and AI for their investment decisions.

  So, I do think AI is going to make big waves in the real
estate market. It's going to create a lot more efficiency in real estate while reducing human error and allowing for predictive sourcing and underwriting that isn't possible today under the traditional model.

  Gregory Charlop: What about Bitcoin? That has attracted a lot of attention recently. What role do you see for Bitcoin, or, more generally, blockchain in real estate?

  Nav Athwal: Well, first and foremost, I'm annoyed I didn't invest in Bitcoin seven years ago. I would be a lot richer than I am today. But beyond that, I think Bitcoin's applications to real estate will be limited. The reason I say that is because Bitcoin is treated more like an asset than a currency.

  Blockchain can be very interesting. I think blockchain is still a very immature technology. It's going to be a decade or more before it's truly adopted within real estate as something that can change, for example, title, and how title is recorded. Compare the analog way it's done today vs. what it can be with blockchain. I think that blockchain will be a much broader application to real estate than Bitcoin itself. However, I'm not that well versed on blockchain technology. I'd call myself a novice at best. I do know that there are some very interesting companies emerging that are promising to use blockchain technology for real estate transactions, specifically in the world of title. However, I do think it's going to take some time before it's adopted because it requires the existing title companies to get on board, and they are usually very slow to move.

  Gregory Charlop: Any other hot, new technologies that you see on the horizon?

  Nav Athwal: Proptech is completely transforming so many aspects of real estate that it’s hard to pinpoint just a few, but I'll try. Appraisals is a prime example. Companies like Bowery Valuation and HouseCanary are automating the appraisal process, making it cheaper and faster.

  Companies like Airbnb and WeWork changed the way we think about how we use space. Airbnb has created the largest hotel company in the world, yet it owns no real estate. WeWork is doing the same for commercial office space. A lot of office leases are very rigid; they have five-year terms, and there's no sense of community or "fun" in those spaces. But, with WeWork, landlords are rethinking how they've been marketing their spaces and structuring leases. I think that's going to continue to change as WeWork and Airbnb continue to dominate their respect markets and grow larger in size.