Editor-in-chief Sarah Wheeler spoke with Joshua Ernst, CEO of Backflipto talk about the challenges of real estate flipping in today’s market and how the right technology can unlock opportunities in a country full of older homes.
Sarah Wheeler: How did your background lead you to start Backflip?
Joshua Ernst: Throughout my career, I have built and scaled software, technology companies and interesting products in various markets, including proptech. I have also spent a significant amount of time on finance and investing. And what I’ve learned is that capital generally flows through trust, and trust usually flows through relationships and data.
What we’ve built at Backflip is the result of the lessons we’ve learned about how capital could and should work – the opaque nature of it in our market, and how it can be much more transparent, much more liquid, and much more fair. And that’s intertwined with how software-driven products, data-driven products and automated workflows can transform the user experience and the ability to lower your risk profile across all industries and all operators.
SW: With low inventories and volatile mortgage rates, this appears to be a challenging market for fix-and-flip investors.
YOU: The fix-and-flip industry has been challenged for decades. Backflip real estate entrepreneurs – our members – can do well in down markets, as long as they think about where and what they buy, and at what price.
They need to think about the entire life cycle of real estate from the beginning, from cradle to grave. As long as they are thoughtful and take the right amount of risk, they can balance things like rising interest rates. They often leave within six months, and so paying a slightly higher interest rate for a relatively modest loan at a relatively low Loan-to-Value (ratio) on the property for just six months does not dramatically change the profitability of the business. agreement.
2023 was tough for much of the market, and Backflip grew five times faster and from a relatively meaningful base. Our members are still making an average of $82,000 in gross profit on each of these transactions, despite the circumstances. And I think it speaks to the quality of the people on our platform and the software, data and capital that we provide. And I think it speaks to the resilience of this business model, which, frankly, is being tested in several cycles.
SW: What sets your technology apart?
YOU: Truly at the highest level, Backflip offers an end-to-end suite for real estate entrepreneurs. It is an underserved cohort with many pain points. It is quite a challenge to run their business; much of what they have to do is quite analog and disconnected.
Backflip supports them with three technological pillars: workflow, data and what we call acceptance. We help these entrepreneurs with purpose-built tools to think about which properties they might want to buy, build their investment pipeline, analyze those properties both more accurately and faster, so they can move on to the next deal and hopefully price them can reduce. risk profile.
And as they endorse these properties using the workflow, we endorse the properties together with them. We also endorse them as potential capital partners.
SW: What are your thoughts on buying versus building?
YOU: Most of what we do today is construction. We also work together a lot. Construction gives us the pleasure of thinking from first principles. What are the customer’s needs?
At this point we built from the ground up, from scratch, what we call Analyzer. That is the core functionality of our platform, of our company. You could think of it as Zillow with rose-colored glasses if you were an investor – kind of like Zillow meets Shopify, a platform that helps these entrepreneurs scale their businesses.
We also have loans, which are standalone but connected to Analyzer. So while people are analyzing properties, if they like a deal and know they want to move forward, they can press one button and do it quickly and easily. It’s embedded finance.
SW: How do you use artificial intelligence?
YOU: The core of the platform and the company is helping these real estate entrepreneurs with predictive analytics. We give them all the same information that Zillow and others would give them: photos and the AVM with current market value.
But much more interesting for these entrepreneurs and for our investors is the potential future value of this property – the potential future rent and net cash flow, the maximum interest rate of this deal if they want to keep it as a rental property. And it’s all driven by third-party data, with MLS data and proprietary data, deep and robust analytics and AI.
SW: What keeps you awake at night?
YOU: I think it’s a scaling up of what is now quite a substantial business. We currently have tens of thousands of members on our platform performing over $10 billion in analytics on our app every month. Our run rate, loan volume, is approaching $400 million and we only launched this company publicly about two years ago.
So it’s grown very, very quickly and is fighting all the really interesting dynamics of the market and the headwinds that we discussed at the beginning of this call, what that means for our members. How can we help them to be as successful as possible? Because they are the lifeblood of the platform’s activities.
SW: What will the future look like in five years?
YOU: In fact, in many ways we are just getting started. The latest figures from 2022 show that just over 400,000 transactions were registered as ‘flips’. It goes up and down during slow years. Like during the great financial crisis, it fell by 50%, so you’ve had almost a quarter of a million transactions a year. And based on where we are now and where we’re going, we’re still at a very subscale level. We have less than 2% market share in our deepest market, which is much less than many other markets.
What isn’t always talked about are two things. One: how old the houses are. This is a global problem, but especially in the US this applies to the average housing age over 40 years old. And most homes in the US were built after World War II, when we started building suburbs. And the average lifespan of most homes is 20 to 40 years. So we have gone far beyond the need to rejuvenate houses.
Secondly, this army that is on the ground, the Backflip members, our heroes, these are the groups that we can really help to be as successful as possible. And there are hundreds of thousands of these individuals doing this today. Just like we saw this wave of e-commerce entrepreneurs using it Shopifythat was a small group until it became easy enough to do so and you could scale your business. We believe that if we do this right, in five or ten years a completely new market will emerge alongside the current market.
SW: What does your team look like?
YOU: We are a remote-first team. We started this company post-COVID and currently have north of 75 individual full-time employees spread across the contiguous US. One of the great things about remote is that we have top technical talent from the markets where they want to live. And we already have the best financial product people, capital markets people and legal people in-house.
SW: What makes you optimistic about your company and the fix-and-flip business?
YOU: We have proven, even in a short time, that our members are resilient and buy well. They buy the right type of inventory and, quite frankly, they create homes at an affordable price, which is a big part of all of this.
Our country has been underdeveloped for so long that we lag far behind current demand. And the millennial generation is huge. In addition, the average age of our customer is 39 years. This is a new wave of entrepreneurs who want to do something atypical, and many of our clients have a 9-to-5 principle and also invest in real estate.
But they follow a different path. They want financial freedom. And so, with the right hassle-free, on-demand software in their pockets to help them think about this next chapter, this chapter of real estate entrepreneurs, their journey is off to a great start.
The last thing that makes me consistently optimistic is what’s happening in the capital markets and what’s happening in fintech in general. There is more institutional capital than ever, and it’s a different type of institutional capital than the institutions that are the SFR REITs that buy homes.
Helping our entrepreneurs who purchase a single-family home that averages $300,000 connect with someone who has billions of dollars and can provide them with the best, cheapest, and easiest-to-use loan products – we’re thrilled to be able to do this to close the gap bridge and cut out the middlemen.
