Numerous proptech startups, which emerged and secured funding during the era of low interest rates, are currently facing significant challenges. Data from PitchBook reveals that investments in U.S.-based real estate startups plummeted from $11.1 billion in 2021 to $3.7 billion last year. As a result, some companies are opting to sell their operations while others are shutting down.
The two latest instances illustrate the adverse conditions stemming from a challenging interest rate landscape and a prolonged decline in funding within the real estate fintech sector.
The rent-to-own prop-tech company Divvy Homes is being acquired by Maymont Homes, based in Charleston, South Carolina, as reported by Fast Company last week. Maymont is a division of Brookfield Properties.
EasyKnock has suddenly ceased operations, as highlighted by an NPR report last month. This closure came after several lawsuits were filed against the proptech firm and a FTC consumer alert regarding its controversial sale-leaseback model, which involved purchasing homes from owners while simultaneously leasing them back.
Despite not providing comments, a source familiar with Divvy confirmed to StartupSuperb that discussions are underway with Brookfield, indicating they are “close to finalising a purchase agreement.” This source denied that the acquisition is a fire sale. However, neither the company nor the source disclosed the potential purchase price, leaving uncertainties about whether it represents a favourable deal.
Divvy’s situation had already shown signs of distress as early as 2022, with the company beginning to implement layoffs. By November 2023, Divvy had executed its third round of layoffs within a year.
The formerly prominent startup had raised over $700 million in debt and equity from prominent investors, including Tiger Global Management, GGV Capital, and Andreessen Horowitz (a16z). Divvy’s last reported funding round occurred in August 2021—a $200 million Series D funding led by Tiger Global Management and Caffeinated Capital, which valued the company at $2 billion. This Series D round was announced just six months after a previously completed $110 million Series C. The last known valuation for Divvy Homes stood at $2.3 billion in 2021, according to PitchBook.
EasyKnock, a startup that promoted itself as the first tech-enabled residential sale-leaseback provider, was established in 2016 and had secured $455 million in funding from investors, including Blumberg Capital, QED Investors, and Northwestern Mutual’s corporate venture arm, according to PitchBook data. Approximately $200 million of this funding was in debt form, utilised to acquire homes, as confirmed by a source familiar with the startup.
What led to these failures?
During its peak, Divvy Homes distinguished itself from other real estate technology firms by assisting renters aspiring to become homeowners. It allowed individuals to select their desired homes, renting them for a three-year period while they accumulated the financial resources needed to purchase the homes outright.
However, the Federal Reserve initiated interest rate hikes in 2022 to combat inflation. For companies like Divvy Homes, which included home purchases in their business model, these high rates proved detrimental, curtailing their capacity to acquire properties and profit from these transactions.
EasyKnock’s business model similarly entailed acquiring homes and leasing them back. Nevertheless, its approach attracted homeowners with poor credit histories by providing them with prompt access to cash and the option to repurchase their homes at a later date.
High interest rates adversely impacted EasyKnock as well, particularly since the company operated under considerable debt financing, according to insiders. Additionally, the startup faced numerous challenges, including over two dozen lawsuits against it, and the Michigan Attorney General alleged that the company engaged in “deceptive practices” by purchasing homes from financially distressed individuals at low prices and charging them exorbitant rents.
Sources indicated that EasyKnock was insolvent when it ceased operations, heavily burdened by debt.
With interest rates remaining relatively high and securing funding still proving difficult, it is likely that more such news from the real estate fintech sector will emerge in the coming months and potentially throughout 2025.
