How Real Estate Tech Disruptions Could Impact M&A

Real estate is a relatively analog industry, however, tech advancements are poised to disrupt parts of the market. Real estate tech founders who offer new solutions in alternative financing and home sale workflows may be ripe for M&A opportunities.

Tech opportunities in alternative home financing

Now that average mortgage rates have settled around 6-7%—up from 2-4% in 2021 and 2022—home sales have cooled significantly. In fact, U.S. home sales in 2023 fell to a 28-year low of 4.09 million due to higher financing costs putting downward pressure on demand for new mortgages. Plus, many homeowners don’t want to sell and give up their locked-in low rates, constraining the supply of existing homes for sale.

Meanwhile, home values have increased dramatically over the last few years—from a median sales price of $322,500 in Q2 2020 to $417,700 in Q4 2024. Homeowners who want to tap into this new equity without selling (and giving up their current mortgage rate) are more likely to consider alternative financing products, such as home equity loans and lines of credit (HELOCs), bridge financing, equity sharing, and assumable mortgages. Though not new, such services are being enabled by an increasing number of online tech platforms and marketplaces, with the goal of creating more flexibility and lower prices for consumers.

While home sales are down, real estate tech that offers creative ways for homeowners to tap into their equity may attract particular interest from investors.

Optimizing the home sale workflow with tech

With a smaller transaction pie from which to take a slice, online property marketplaces like Zillow taking more market share, and a slew of lawsuits targeting agent commissions, there’s more pressure on real estate professionals than ever to cut operating costs. Consequently, tech that helps agents, brokers, and other intermediaries do their jobs faster and more efficiently may have more opportunities for growth.

For example, AI that enhances property listing photos can lower the need for professional photo editors. Similarly, AI that overlays virtual furniture on listing photos could eliminate the cost associated with physically staging the homes. Further, virtual reality (VR) and augmented reality (AR) technology can help create virtual home tours so agents can host fewer open houses. VR is also facilitating virtual appraisals helping underwriters speed up underwriting.

In short, any tech that streamlines the home sale process by aiding or removing intermediaries may be in higher demand now that commissions are hard to come by.

M&A Considerations for Real Estate Tech Founders

Choosing when to sell or raise capital for your company is all about timing. If your business is predicated on home transactions, it may be better to wait until home sales pick up. However, if you offer an alternative financing product, it might be a good time to explore M&A deals. If and when mortgage rates come down, the demand for alternative financing products could fall if the origination market heats up, and your business may attract fewer investors. So it might be best to seize the day and sell into growth.

On the transaction side, tech solutions that solve for inefficiencies in the home purchase transaction are in relatively high demand. With fewer commissions to go around, real estate professionals want to extract as much from each sale as possible. Workflow optimization will still matter once home sales pick up, but not as much since stakeholders will generate higher revenues either way. It’s the difference between $250 thousand to $400 thousand vs. $2 million to $2.5 million. Both are improvements, but if your earnings are relatively low, you’ll have to try much harder to find efficiencies.

Bottom line: If your business is performing well, now may be a good time to consider investment. If not, consider waiting for the broader housing market to improve and riding on its coattails.

M&A Risks & Opportunities

Real estate tech companies that are sensitive to commercial property values may want to explore M&A options sooner rather than later. Since remote work increased dramatically in the last few years, office buildings have struggled with higher vacancy rates and weakening cash flow. To make matters worse, $2.2 trillion in commercial real estate debt is coming due before the end of 2027. Many building owners will be forced to refinance at higher rates or foreclose, further lowering property values.

In contrast, real estate tech that helps monitor and regulate the environmental impact of commercial buildings may benefit from seeking investment. According to a CBRE Econometric Advisors (CBRE EA) report, states and municipalities nationwide are passing legislation requiring businesses to report and, in some cases, reduce their carbon footprint. To comply with these new regulations, building owners must invest in specialized sensors, Internet of Things (IoT) technology, and software that can track their buildings’ energy output and emissions.

Attracting Investor Interest In Real Estate Tech

Real estate comprises a significant portion of the U.S. economy (nearly 17% of GDP, according to the National Association of Realtors), and there’s a constant churn of Americans moving, having kids, downsizing, etc., so being in the middle of those transactions is valuable. However, the property brokerage market has already been consolidated into a few major players. So there will likely be more investment opportunities in tech companies that create efficiencies in the market.

As a real estate tech founder, a good way to attract investor interest is to double down on solving a specific paint point where you have a competitive advantage. Once you become an incumbent in that space, you could diversify into other services, at which point you might attract sales more easily through brand recognition. Until then, if you want to sell or raise capital, focus on improving key SaaS metrics for running and selling your business. Then you could be better positioned to entertain potential M&A opportunities.

This material and the opinions contained herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

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