Divvy Homes and EasyKnock Struggle: Proptech Downturn

Proptech Startups Face Challenges Amidst Shifting Market Conditions

A significant number of property technology (proptech) companies, established and initially financed during a period of historically low interest rates, are currently experiencing substantial difficulties. Investment in U.S.-based real estate startups has decreased sharply, falling from $11.1 billion in 2021 to $3.7 billion last year, as reported by PitchBook data.

Consequently, some companies are seeking acquisition, while others are being forced to cease operations entirely. These developments represent the latest setbacks in a challenging environment characterized by rising interest rates and a prolonged slowdown in funding for real estate fintech ventures.

Recent Acquisitions and Closures

Divvy Homes, a startup focused on rent-to-own models, is reportedly being acquired by Maymont Homes, a Charleston, South Carolina-based entity and a division of Brookfield Properties, according to a report by Fast Company.

Simultaneously, EasyKnock has unexpectedly shut down, as reported by NPR. This decision followed multiple lawsuits filed against the company and a consumer alert issued by the Federal Trade Commission (FTC) regarding its contentious sale-leaseback practices.

These practices involved purchasing homes from owners and then leasing those same properties back to them.

Divvy Homes and Brookfield Properties

While Divvy Homes has not issued an official statement, a source with knowledge of the negotiations has confirmed to TechCrunch that discussions with Brookfield are underway and a purchase agreement is nearing completion.

This source refuted claims that the acquisition is a distress sale. However, the potential purchase price from Brookfield remains undisclosed, leaving it uncertain whether the deal represents a favorable outcome for Divvy.

Signals of financial strain at Divvy Homes emerged in 2022, initiating a series of staff reductions. By November 2023, the company had implemented its third round of layoffs within a single year.

Funding and Valuation History

The startup, operating for nine years, had secured over $700 million in both debt and equity funding from prominent investors, including Tiger Global Management, GGV Capital, and Andreessen Horowitz (a16z).

Divvy’s most recent funding round occurred in August 2021 – a $200 million Series D led by Tiger Global Management and Caffeinated Capital, resulting in a valuation of $2 billion. This followed a $110 million Series C round announced just six months prior.

According to PitchBook, Divvy Homes’ last recorded valuation stood at $2.3 billion in 2021.

EasyKnock’s Financial Situation

EasyKnock, which positioned itself as the first tech-enabled provider of residential sale-leaseback solutions, was founded in 2016 and raised $455 million in funding from investors such as Blumberg Capital, QED Investors, and Northwestern Mutual’s venture arm, as per PitchBook data.

Approximately $200 million of this funding was in the form of debt utilized to facilitate home purchases, according to an individual familiar with the company’s operations.

Underlying Causes of the Struggles

What factors contributed to these difficulties?

During its peak, Divvy Homes differentiated itself by targeting renters aspiring to homeownership. The company’s model involved purchasing a home for a renter and leasing it back to them for a three-year period, allowing the renter to accumulate savings for eventual ownership.

However, the Federal Reserve’s decision to raise interest rates in 2022, aimed at controlling inflation, proved detrimental to companies like Divvy Homes. The increased rates limited their capacity to acquire properties and generate profits from those acquisitions.

EasyKnock’s business model also relied on home purchases and leasing. It attracted homeowners with lower credit scores by offering immediate access to cash, coupled with the option to repurchase their homes in the future.

Rising interest rates negatively impacted EasyKnock, as the company relied on debt financing. Furthermore, the company faced additional challenges, including over two dozen lawsuits and allegations from the Michigan attorney general of employing “deceptive practices.”

These practices allegedly involved acquiring homes from financially vulnerable individuals at reduced prices and subsequently charging them inflated rental rates.

Sources indicate that EasyKnock was insolvent at the time of its closure, burdened by substantial debt.

Looking Ahead

Given that interest rates remain relatively high and funding remains scarce, further challenges and similar news are anticipated within the real estate fintech sector throughout the coming months and potentially into 2025.

Do you have information regarding a proptech startup facing difficulties? Please contact Mary Ann at maryann@techcrunch.com or via Signal at 408.204.3036, or Marina.temkin at techcrunch.com.

This article was updated on January 18 to clarify the nature of the sale Divvy is reportedly pursuing.