This article by R.A. Schuetz originally appeared on Houston Chronicle.
Sydnee Eldridge’s phone pings every time a house in her price range in the MacGregor neighborhood of the Third Ward hits the market.
The alerts, for three-bedroom homes priced from $250,000 to $350,000, come from Houston Association of Realtors, Zillow and Redfin. Yet no matter how quickly she acts, other buyers were beating her to an offer.
“We found several houses where we saw them the weekend they were listed,” Eldridge said. “We put an offer in the same day. And there was already an offer in on it.” Sometimes in cash.
“It gets down to a point where you can’t really compete.”
What Eldridge didn’t know was that she was competing against a pool of investors that includes some of the largest hedge funds in the world, many of whom are armed with cutting-edge technology created by Entera, a Houston company, that’s designed to identify deals faster than she ever could.
Competition for homes in this price range ratcheted up in the wake of the subprime mortgage crisis a decade ago. As the bottom of the housing market fell out, institutional investors saw another opportunity: cash flow from rental properties. Hedge funds began snapping up single-family homes and turning them into rentals in huge numbers, reducing the pool of housing available to entry-level buyers.
The ability of institutional buyers to roll up these properties has been enabled, in part, by Entera, co-founded by Martin Kay. Amid the housing crisis Kay, who had proved his data mining and analytic service chops in the energy and infrastructure sectors, turned his attention to real estate, using data to automate the process of identifying homes that would be profitable to turn into rentals.
From that was born Entera, which provides the same service to institutional investors, allowing them to find homes before they even hit the market and place offers on them in minutes.
If a regular homebuyer has a hard time competing, well, that’s kind of the point. “We hope we’re very hard to compete against,” said co-founder Robert Salmons.
To demonstrate, Kay flipped open his laptop and pulled up Entera’s dashboard. The test user had already taken an onboarding quiz indicating its investment strategy; on the home screen were the four properties Entera’s algorithm believed were the best fit.
Click on a property, and various statistics pop up: the listing price, prices and rents for comparable homes, the estimated costs of repairs, a recommended initial offer and, most importantly for many investors, the capitalization rate — a measure of the annual profit that could be made renting the home as a percentage of its value.
One more click would enable the investor to place an offer on the property.
“On average, our customers take three minutes from the time a property hits the market to the time they make an offer if they don’t send someone out,” Kay said. Investors have the option to schedule a visit or send one of Entera’s evaluators to check out the property on their behalf.
Entera’s software has helped investors buy several thousand homes a year, including hundreds in the Houston market.
Order from chaos
When the housing downturn hit a decade ago, Salmons, who had worked as a builder and grew up in family of real estate professionals, decided to leave real estate for good. There were too many unknowns that made it difficult to know how an investment would pan out, he said. “It was always going to be a gambler’s business.”
His daughter and Kay’s were friends, and the dads got to talking at a birthday party in 2009. Kay was attracted to Salmons’ description of real estate as a complex, chaotic system.
“My biggest thing is I love taking qualitative things and turning them into quantitative things that you can measure,” Kay said. “I love that.”
Salmons was hooked by the possibility of using data to impose order.
Within a few months, they created a model to predict which local properties would offer high returns and appeal to environmentally-minded renters. Backed by funding from some wealthy individuals, they formed Greenlet, a business that bought and operated properties. Kay tested the model by standing on the steps of the Harris County Courthouse with a million dollars’ worth of cashier’s checks in his pocket, vying to bid on foreclosed homes their model had chosen.
The properties they acquired quickly leased at the rents they expected, repairs cost near what they’d predicted and the neighborhoods they had chosen had quickly appreciating home prices.
They upped their investment to $100 million. Using data, it seemed, had mitigated a great deal of risk. Salmons stopped biting his nails and quit smoking cigarettes.
“Once the recession became an opportunity for investors, then the game became the ability to identify (properties) faster than everybody else,” Salmons said. “We could identify what made sense within minutes of it coming on the market, and we were able to win acquisitions.”
Big companies took notice, and Salmons and Kay soon realized that it was easier to provide a services than to raise funds to acquire property themselves. In 2017, they founded Entera to do just that. Kay and Salmons sold off the bulk of the Greenlet properties and started Entera. Kay said the company has worked with the nation’s largest investors, including Blackstone, whose former subsidiary Invitation Homes purchased 2,600 Houston-area homes in 2017, and American Homes 4 Rent, which owned 3,200 Houston-area homes at the end of 2018.
Key to its high-volume model is Entera’s ability to aggregate data on a large number of properties (the company claims it has 18 percent more properties than the multiple listing service in the Houston market), then show investors only the subset most closely associated with their needs. Some needs — most investors look for at least three bedrooms and two bathrooms — are easy to match. Others — such as a hip neighborhood — require a little more interpretation.
When looking for a hip neighborhood, Entera’s software will consider traffic, bars, coffee shops, restaurants and yoga studios in an area, as well as the presence of certain brands — such as Whole Foods — that are in pursuit of the same demographic. For a millennial family-friendly home, Entera looks at the age, education and diversity of the people living in the neighborhood, as well as the area’s safety and elementary schools. For a chef’s kitchen, Entera had to find roomy kitchens with lots of counterspace and a certain caliber of appliances, information gleaned in part by training a computer to interpret images posted on multiple listing services.
Between 2,000 and 3,000 characteristics are assessed for each property, which Entera uses to narrow a field of 40,000 Houston homes to the half-a-dozen that are most likely appeal to the investor.
In addition to hip and family-friendly properties, Entera is often asked to find homes that are great deals.
This, of course, is exactly what Eldridge had been searching for the old-fashioned way in the Third Ward.
Houston real estate agent Shadrick Bogany said he saw a connection between institutional investors and the current shortage of affordable homes on the market.
“The tightest market is that $200,000 and below,” said Bogany. “Institutional buyers are buying those. And they can just write a check.”
Brian Spitz, president of Big State Home Buyers, an all-cash buyer of single-family homes, said institutional buyers such as Invitation Homes, American Homes 4 Rent and Cerberus have reshaped the market. According to Spitz, investors tend to target the same price bracket that most homebuyers consider affordable — sub-$250,000 — because they tend to have a high cap rate.
“It puts a lot of pressure on the most important segment of the real estate market,” he said.
For decades, wages and home prices grew at the same pace — the median price of a Houston-area home cost around two-and-a-half times a median salary, according to a Harvard University study. But in recent years, that has changed dramatically. In 2017, the median price of a home was 3.7 times a median salary.
While some economists believe home prices and wages are linked — meaning that, with time, homes would return to historic levels of affordability — Spitz believes the introduction of institutional investors has changed the game.
“The demand from institutional investors will drive the price growth even if wages can’t,” he said.
And Entera is tuned into what investors want.
“Investors want everything you want,” Kay said. “Plus they want yield.”
In time, he said, Entera’s services will be available to all homebuyers. Yet while the company has already begun serving smaller investors, the buyers who have driven Entera’s technology are the ones who buy in bulk.
“When they want to buy 50,000 houses, they have to be very, very thoughtful and data-driven,” Kay explained.
Entera doesn’t charge users for access to its software, collecting instead a commission on each transaction. Commissions can be around 2.25 percent or lower, depending how many homes an investor is buying, below the 3 percent a seller usually pays a buyer’s agent. Kay and Salmons wouldn’t disclose Entera’s revenue, but it is enough to cover its 17 employees and approximately 100 contract workers. Its full-time staff is split between real estate agents in Houston and tech workers in San Francisco, while its contract workers do the on-the-ground work such as home inspections in each of its 11 markets.
The company, which has built databases for Houston, Dallas, Atlanta and other Sunbelt cities, is looking to expand and is gearing up for its first round of traditional venture capital funding.
High-volume businesses have led to technological developments in the past, often creating tools for big investors that later move down to the individual market. For example, large banks led the shift to automated stock market trading, which later evolved to the online trading available to everyone.
Now, anyone can buy and sell stock for as little as $5 a trade. As a result, commissioned stock brokers have become an endangered species, a fate that could befall traditional real estate agents if Entera’s platform reaches the masses.
Andrea Chegut, director of the MIT Real Estate Innovation Lab, said that as more people have access to the types of information and analysis Entera provides, it becomes easier for individuals and small groups to make smart investments.
“If I have the same access to the same information that a bigger institutional investor has, then we’re on a level playing field,” she said. “It’s creating competition.”
Scott Doctor is an example of one type of investor Entera has helped. On a recent Friday afternoon, he walked through a Medical Center-area home he was renovating to sell. Doctor, who buys as many as five houses a month, purchased the property through Entera and had already found someone who would buy the home post-renovations through the platform. In the past, he said, he was only willing to invest in properties within a 15-minute drive of his home. “It’s scary to buy something without seeing it,” he said. “And it’s hard to judge.”
But now, Doctor says he feels comfortable viewing Entera’s various metrics of a home to buy as far afield as South Carolina. “It’s opened my eyes in other areas.”
Eldridge, whose search is limited to Houston’s Third Ward, said she would have loved to have had a platform that would allow her to see comps and the estimated costs of repairs, then place an offer right away. “That would be phenomenal.”
One day, she may. Kay estimated it will take three to five years for Entera to build a system that will be available to individual homebuyers.
“We’re moving incrementally from the biggest buyers of homes, which are what we have now, to the more professional buyers of homes, to the small investors who buy one investment property,” Kay said. “And we will reach consumers. It’s coming.”
This article has been corrected to reflect that Entera has not worked with real estate investor Cerberus.