VCs Not Impressed With Web-based Real Estate

While venture-backed companies like LendingTree.com and Mortgage.com have created name-brand consumer portals streamlining and automating the mortgage approval and origination processes, it’s still hard to find widespread VC support for the online real estate sector.

Year to date, only 121 companies operating within the broadly-defined online real estate sector have scored venture deals, totaling $2.73 million. That number, while perhaps impressive in past years, is a paltry sum when compared to the $24.584 billion of private equity invested in the second quarter alone.

“From where I sit, I keep looking at business plans to find ones I think will make money and the prices they’re charging, and I’m stumped,” said Nathan Kornfeld, GMAC-Residential Funding Corp.’s managing director for merchant banking and head of the outfit’s venture arm. “There doesn’t appear to be a lot of money chasing the sector because it’s hard to make a business plan that will give good return on capital.”

Money Trickling Through

Despite such sentiments, however, investors have not abandonned the industry entirely. While there aren’t many origination deals around anymore, investors seem to be taking some chances in the real estate investment plays and enabling technologies. Fulfillment transactions, such as companies developing digital signature capacities and digital documentation models, are also coming into favor with venture investors, along with start-ups that can streamline the mortgage lending process and manage the relationship between lenders and borrowers.

Property Capital, an online real estate equity investment site with $6 million in venture backing, expects to close a $15 million Series B deal by year-end. Last week, Arlington, Va.-based Realeum secured $15 million in its first round of venture financing from Carlyle Venture Partners, Cohen & Steers’ Internet Realty Partners, ABP-US Investments and Venrock Associates. Realeum, the online venture of three publicly traded real estate firms, currently offers a Web-based property management product that manages the relationship between landlord and tenant. The recent equity infusion will fund new product development and software applications for customer care services.

If one lender can offer borrowers a mortgage through the Internet, cutting costs and expediting the process, then all the rest must do the same to remain competitive, said David Zhai, vice president and senior analyst in the structured finance department of Moody’s Investors Service. Automatic valuation models, and the companies that develop them, may be the next ticket for private equity investors into the real estate sector.

“When people try to reduce the cycle of time, automatic valuation models are the only choice,” he said. “They have to cut the human out. It’s about profitability.”

Indeed, E-Loan Inc. secured venture financing from Benchmark Capital as early as 1997. It scored an addition $40 million in private equity financing in January. Another online mortgage provider, MortgageIT.com closed a $36.5 million private placement in June.

“It’s a tremendous market in terms of size with an enormous amount of information inefficiencies and a great amount of capital expenditures and people intensive,” said Mary Briggs, president co-founder of San Francisco-based Property Capital.

Give and Take

Those are the same properties, however, that are signaling caution among investors.

“There’s a lot of companies in this space looking for money, but real estate is pretty fragmented. It’s hard to say you’ll capture a significant market share and advances in technology are a ways away,” said Kornfeld.

For its part, GMAC-RFC’s corporate venture arm has announced only two investments since its inception in June. Late in May, GMAC-RFC invested $4.1 million through a private placement in Basis 100, a Toronto-based e-commerce technology solutions provider for financial institutions that enables them to build, distribute and create a market for securities.

Most recently, the asset and mortgage-backed player announced an undisclosed equity stake in HomeAdvisor Technologies Inc.’s $100 million Series A round. HomeAdvisors is a Microsoft Corp. spin-off that automates the process of approving and financing a mortgage online and eliminates the closing cost of a mortgage.

Still, some entrepreneurs are hopeful.

“We clearly see continuing initiatives on the investment side,” said Ann Wengert, chief executive and co-founder of Property Capital. “We expect to see more focus of the equity side because the market is so tremendously fragmented.”