Disrupting the lettings market

Disrupting the lettings market

Feb 24, 2016
Startups Crash Real-Estate Brokerage Market
Editor Editor

A new generation of technology-focused startups are charging into real-estate brokerage, rolling out an array of mobile services in hopes of grabbing a piece of the red-hot U.S. apartment market.

Companies such as Padspin Inc., RadPad Inc. and Zumper Inc., all launched in the past four years, are offering new tools for prospective tenants to find apartments, often connecting them directly with landlords and cutting brokers and agents out of the process.

Many of the services zoom in on common renter frustrations, from high broker fees and mispriced or invalid online listings to “bait and switch” advertisements for one apartment that are actually peddling another. The target audiences: tech-savvy millennials eager to ease the financial sting of renting an apartment, as well as landlords looking for qualified tenants.

“There’s not enough data regarding apartment inventory available to the average person,” said  Jeff Segal, founder of New York-based Padspin, which is trying to supersede brokers entirely. “Brokers monopolize that data and charge a massive ransom.”

Brokers, for their part, say they play a critical role, especially in places like New York.

“Brokers can really help outsiders and locals navigate our complicated real-estate world, which is very different from any other place,” said  Tony D’Anzica, a broker and a director for the Manhattan Association of Realtors. “If you want to live here, you have to pay for it.”

The new services come at a time when rents, particularly in big cities, are soaring. Americans spent $535 billion on rent in 2015, according to research from economists at Zillow.com, up from $451 billion in 2011.

That is partly because the ranks of renters are swelling. Last year, the number of families and individuals renting in the U.S. rose to 43 million, up from 34 million a decade earlier, according to a December report from the Joint Center for Housing Studies of Harvard University.

In tight markets such as New York and Boston, tenants pay high broker fees to land apartments, often as much as 15% of the annual rent. In other places, like Chicago, San Francisco and Miami, landlords often pay agents about 6% to 8% of an annual rent to market listings and screen tenants.

The new companies aim to give renters more options for less. RadPad, a Los Angeles-based company created in 2013, has about 1.2 million listings nationwide and presorts them to help renters find the best listings more quickly. Each listing is given a score that takes into account the quality of the listing photos, the landlord’s responsiveness and the accuracy of the listing address.

For $30, RadPad will help users compile a rental application, run a credit check, verify income and apply for multiple apartments at once. Tenants can pay their monthly rent electronically by debit card for free or pay 3.49% per rent payment using a credit card.

By helping renters compile applications, companies like RadPad and Zumper also solve a problem for landlords: unqualified tenants. One of the main reasons landlords use agents is to save time screening applicants.

Zumper, based in San Francisco, offers a tenant-screening service directly to landlords and agents that includes a credit, criminal-background and eviction check. The service, called Zumper Pro, also markets listings to renters.

Padspin bypasses brokers entirely. Outgoing tenants and landlords post photos and descriptions on Padspin, and then it connects them directly to potential renters, whom Padspin screens. People who find a place to live on Padspin pay a fee of about 1% of the annual rent.

Leasebreak, also founded in New York, has a similar concept but includes brokers in the process, alongside tenants and landlords.

“We are taking the current ecosystem and working within it,” said founder  Phil Horigan, who was a broker for 11 years and said great brokers can save renters time and find them better homes. Leasebreak focuses on leases of a year or less.

Some of the new companies liken themselves to the wave of technology-fueled companies in other industries that are taking on intermediaries in a bid to win business from smartphone-wielding millennials.

“The online rental industry is still a very messy, fragmented space,” said  Brian Boero, a partner with 1000Watt, a marketing and strategy firm that has a lot of real-estate clients. “All of this startup activity is mostly localized now, but these companies offer interesting innovations that the big guys may eventually copy or acquire.”

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