Last week, real estate startup NoBroker raised $51MM to bolster its push to capture the real estate brokerage market. 

Broking Bad

Amit Agarwal and Akhil Gupta, both engineers who were hunting for houses in Mumbai and Bangalore, had terrible experiences searching.

Most house hunting would involve visits to multiple, often suboptimal houses, accompanied by middlemen. Everyone who has ever looked for a house, or rented one, would know this person by one name.

The "broker".

The whole process for house hunting is assisted by the usual scooter driving, smooth-talking broker. At the end of the home search, if a home is sold or rented, the broker takes a fee. For rentals, it can be as high as 18% of the annual transaction value. 

A highly disorganized market, most brokers are individuals. Estimates peg the number of brokers to be 10L+. Brokers would be found in areas of expensive real estate, and hence are concentrated in metro cities. 

With more than 75MM urban households, and people changing homes once in 4-6 years, more than 15MM houses would likely change every year. With 1MM brokers, each broker could likely need to flip 15 homes, or one every month.

It was to facilitate these brokers that an erstwhile startup giant was born. 

A Housing of Cards

The Indian real estate market is pegged to be worth $120Bn, with a contribution of 12% of the GDP.

It was this massive market that Housing.com, with a $1MM domain name, was trying to crack. Started in 2012 by a dozen IIT Bombay graduates, Housing wanted to make the purchase or rental of houses smooth. With a slick UI/UX and a first-time map-based real estate search. 

The company did have a radical view of helping brokers transact, and helping customers look for houses in a transparent manner. Due to its unique approach to discovery, the company gained significant traction. 

Watching Housing grow on the sidelines was personally my first brush with an aggressively scaling startup. Within two years of its starting, the company raised a mammoth $100MM, and was one of the biggest recruiters from IIT Bombay.

But history is always a teacher, and Icarus is a story that plays out over time. In line with the story, Housing looked up.

As Housing kept looking up, the rise up began to start unravelling. The CEO jousted with investors, and most publicly got ugly, the decline began as fast as the rise. Within two years of the investment, the founder-CEO was fired and team began scaling down. It took 2 years to go up, and another 2 years to rapidly decline. 

By the end of 2015, Housing was in trouble, and NoBroker had just raised it's first $3MM.

Game of Homes

NoBroker took the zero fee strategy to real estate, something that Zerodha brought to India in a big way.

Like I had elaborated on Zerodha's money making machine, NoBroker removed fees on transactions. Like its name very clearly and aggressively suggests, there will be no broker. 

The prized home, with many suitors, had a new player in the game. 

NoBroker directly connected the buyer and seller, known as the C2C or the P2P model. Without the broker involved, there would be a significant amount of money, and livelihood taken from the broker.

The no-more-brokers were furious and wanted to keep the claim to the home. 

It escalated to a real battle, with brokers physically assaulting the NoBroker staff in their office. A visibly shaken CEO was unable to understand how this could happen in Bangalore. 

The war was on, and NoBroker was fighting to disrupt an age-old market. Just like every other player in a large market, like Uber, fought a well-entrenched incumbent. 

Without broker commissions, the company had to build trust amongst strangers. 

Stranger Things

Starting initially with no fee, the company soon started with a nominal subscription fee.

As it was a marketplace, the company had to rely on homeowners and homebuyers. Using detailed data collection techniques and models, the company ensured that no broker could list on its platform.

But removing the broker also left a void of trust that the company had to fill. 

As is visible in these videos of customers, with similar narratives likely managed by the company, there is an element of truth. Most people using the platform would be sceptical of whether the house seller is genuine. More importantly, they would want to know whether the house is as promised.

As Akerlof postulated in his seminal paper on the "market for lemons", markets for goods that have information asymmetry get flooded with bad players. For example, second-hand cars and rented homes need a trusted intermediary to ensure "what you see is what you get"

NoBroker would have to step into this void.

Using detailed verifications and the advantage of data, NoBroker positioned itself as the third party. With a "relationship manager", who basically would play a brokers role for many tenants/sellers, the company ensured the transaction was managed.

NoBroker was solving your house problems. 

Doctor House

The company grew from 35K customers in 2015 to 600K customers by Feb 2016. 

The $4Bn brokerage market was all for taking for the company. As a marketplace for listings, it was monetizing through subscriptions and ads. For people paying INR25-30K as brokerage ($500), an INR 3K-5K plan would be a no brainer.

While slashing the "brokerage" by 80% would contract the overall market by a 5th, roughly to a ~$1Bn, it would also make transacting homes easier. In a growing market, this strategy would help with gaining significant market share. 

Why would NoBroker go after a contracted market, with most purchases one-time for many years?

As you would remember, the residential real estate market is massive. Utilising the platform would get NoBroker the literal foot in the door. It could upsell and cross-sell multiple home-related services and products.

The company was getting in at the beginning of the customer house lifecycle. Over the lifetime of renting/purchasing a house, customers would need various goods or services.

NoBroker was not just a buyer/seller marketplace for homes, it was pushing to create an ecosystem. 

Competitors such as 99Acres, Magicbricks, Housing and Grabhouse were warned. 

Brokelyn Nine-Nine

2017 would be a turning point for the industry. 

Housing would be merged for lesser than what was invested in, despite a last-ditch attempt to save the company. Grabhouse would also fall, being acquired for Quikr for lesser than it had raised. What would remain would be 99Acres and MagicBricks. 

The hot rental market would cool, cool, cool.

As a pioneer of online real estate listings, 99Acres would be lagging behind its hipper juniors, as it continued to push listings. Customers would end up searching for NoBroker on 99Acres - would it be Bye Bye 99?

As MagicBricks and 99Acres would play catchup, NoBroker would continue to scale even faster. Over 2018, the company would engage in 1.05 lakh buy-sell transactions. With 97K rental deals and 8K house sale deals, one would wonder why there be so many rental deals. 

Given NoBroker had no fees for transactions, higher volume real estate transactions (renting) would be more value for money on the platform. In effect, the platform, through its fees, would self-select for rentals. 

Because rentals would result in more transaction activities, it would allow NoBroker to have more engaged users. These users could be monetized through other channels.

NoBroker had not only acquired the customer, but also property related spend.

Rick and Property

Over the year, NoBroker introduced various streams to continue to monetize the ecosystem.

Rental agreements, packers and movers, NRI listings were one of the first few offerings the company made. The more interesting movements into becoming an ecosystem player, though, were even more closely linked.

It would be managing rental payment flows. 

As any ecosystem company would know if you sit in the flow of money you make money. The rental payment would ensure that the number of interactions of a customer with NoBroker is even higher. 

This ecosystem would result in an increasing scale for the company. Most recently, it had 1MM+ connections, added 75K+ listings monthly and saved $10MM of brokerage monthly. 

Assuming the company makes 20% of actual brokerage, that would be ~$2MM of revenue every month from the "no-broking" business. One would expect additional incomes from the rental flows, where it would make a small fee from rent. 

With 2.5MM+ listed properties, assuming 80% are rented, that is 2MM properties. If all the rent flows through NoBroker, assuming 14K of rent ($200), it is $400MM of rental flows each month. Even 1% of fees is $4MM.

It is little wonder why the company has been able to raise so much money.

Rent, They See Us

The company can scale to become a honeypot for rental originations. 

Utilizing the successes in India, the company could similarly scale to high real estate density metros across South East Asia. With very similar markets, the company could replicate its end to end transactional model across other ecosystems.

In essence, the company remains true to its name of being "NoBroker", as it is not a broker but a property company. Facilitating transactions helps it get a leg into the property.

Housing and the real estate markets across any geography are massive, as living and accommodation are core human needs. The company will face similar or even greater resistance from well-entrenched brokers in other markets.

It's $51MM fundraise, though, will ensure it's well capitalized to think bigger. At a likely valuation of $200MM, it is at ~5x revenue. But, with 2.5MM properties, it is an implication of extracting $80 of value/property - which seems fairly doable.

NoBroker could reimagine real estate, and looks well placed to disrupt housing (and Housing)