Editor-in-Chief Sarah Wheeler speaks with Backflip CEO Joshua Ernst about the challenges of property flipping in today's market and how the right technology can create opportunity in a country filled with older homes.
Sarah Wheeler: Did your background inspire you to start Backflip?
Joshua Ernst: Throughout my career, I've built and scaled software, technology businesses and interesting products across a variety of markets, including real estate tech. I've also spent a fair amount of time in finance and investing. And I've learned that capital generally flows through trust, and trust tends to flow through relationships and data.
What we've built at Backflip is a culmination of lessons learned about how capital works and should work — the opaque nature of capital in our markets and how we can make capital more transparent, more liquid, more equitable — intertwined with how software-driven products, data-driven products, and automated workflows can transform the user experience and lower the risk profile for all sectors and all operators.
SW: With low inventory and volatile mortgage rates, it's likely to be a tough market for remodel-resale investors.
JE: The fix-and-flip industry has been tough for decades, and Backflip real estate entrepreneurs (our members) can thrive in a market downturn if they think carefully about where, what and at what price they buy.
They need to think about the entire lifecycle of the property from the beginning, from cradle to grave. As long as they are thoughtful and take appropriate risks, they can balance a rising interest rate environment, etc. They are often exiting within six months, so paying a slightly higher interest rate on a relatively modest loan with a relatively low loan-to-value ratio for just six months doesn't dramatically change the profitability of the deal.
2023 has been a tough year for many markets, but Backflip has grown 5x from a relatively large base. Despite this environment, our members, on average, have made $82,000 in gross profit on each of these transactions. I think this speaks to the quality of the people who utilize our platform, as well as the software, data, and capital we provide, and, frankly, the resilience of this business model, which has been battle-tested through many different cycles.
SW: What differentiates your technology?
JE: At the highest level, Backflip provides an end-to-end suite for real estate entrepreneurs. They're an underserved population, they have a lot of problems, it's very difficult to run their business, and a lot of what they have to do is pretty analog and piecemeal.
Backflip supports entrepreneurs with three pillars of technology: workflow, data, and what we call underwriting. We empower entrepreneurs with purpose-built tools to help them think through what properties they want to buy, organize their investment pipeline, and analyze those properties more accurately and quickly so they can move on to their next deal and lower their risk profile.
And while they're underwriting these properties using their workflow, we're underwriting the properties with them, and we're also underwriting them as future capital partners.
SW: What are your thoughts on buying versus building?
JE: Most of what we do today is build, and we work with a lot of partners. Building gives us the joy of thinking from first principles: What do our customers need?
At this point, we've built something entirely new from the ground up that we're calling Analyzer. This is our platform, the core functionality of our business. If you're an investor, you can think of it as Zillow with rose-colored glasses. It's like Zillow meets Shopify, a platform that helps entrepreneurs scale their businesses.
We also offer loans, which are standalone but interconnected with Analyzer, so when you're analyzing a property, if you like the deal and you want to move forward, you can do it quickly and easily with the push of a button. It's built-in financing.
SW: How are you using artificial intelligence?
JE: The core foundation of our platform and business is to empower real estate entrepreneurs with predictive analytics. We provide all of the same information that Zillow and other companies provide – photos, AVMs that show current market value, etc.
But what’s far more interesting to these entrepreneurs and investors is the potential future value of this property – what the future rents and net cash flows will be if they want to hold it as a rental asset, and what the cap rate of this deal will be. And all of this is driven by MLS data and proprietary data, deep and robust analytics, and third-party data like AI.
SW: What keeps you up at night?
JE: I think we're scaling because it's a pretty big business now. Right now, we have tens of thousands of members on our platform, and we analyze over $10 billion a month on the app. Our run rate, or loan volume, is approaching $400 million, and we've been public about this business for about two years now.
So we're growing very quickly and battling some very interesting trends and headwinds in the market that we discussed at the beginning of this conversation. What does this mean for our members? How can we help them be as successful as possible? Because our members are the lifeblood of the platform's business.
SW: What do you think the future holds in five years?
JE: Actually, in many ways, we're just getting started. The latest figures for 2022 show just over 400,000 transactions recorded as resales. This number goes up and down during slow periods. For example, during the financial crisis, it fell by 50%, which translates to closer to 250,000 transactions per year. And, given where we are and where we're going, we're still small. In the markets where we're most involved, we have less than 2% share, and in many others, much smaller.
There are two things that don't always get talked about. The first is the age of homes. This is a global issue, but especially in the United States, the average age of a home is over 40 years old. Most homes in the United States were built after World War II, when suburban housing began to be built. And the average lifespan of most homes is between 20 and 40 years, which means that homes are past the point where they need renovation.
Second, we have this army on the ground, the members of Backflip, our heroes. These are the groups we need to empower to be as successful as we can be. And there are hundreds of thousands of individuals doing this today. Just like there was a wave of e-commerce entrepreneurs using Shopify, it was a small group of people who realized this was easy to do and they could scale their business. We believe that if we do this right, in five years, ten years, there will be an entirely new market in addition to the one you have today.
SW: What is your team like?
JE: We are a remote-first team. We launched this company post-COVID and currently have over 75 full-time employees spread across the continental U.S. One of the great things about remote work is that it allows us to source top engineering talent from the markets they want to live in. We also already have some of the best product people, capital markets people, and legal people in-house.
SW: What makes you optimistic about your company and the remodeling and resale business?
JE: In the short term, our members have proven that they are resilient and they're buying well. They're buying the right kinds of properties and, frankly, they're building homes at affordable prices, which has been a big factor in all of this.
The country has been underbuilt for a long time, so we're not meeting current demand in a big way. And the millennial generation is huge. And the average age of our clients is 39. It's a new wave of entrepreneurs who are willing to do something a little different, and many of our clients are working 9-to-5 jobs and investing in real estate on the side.
But they're pursuing a different path: They want financial freedom, so their journey would be very well served if they had the right frictionless, on-demand software in their back pocket to help them think about their next chapter — their real estate entrepreneur chapter.
The reason I remain optimistic is what's happening in the capital markets and in fintech in general: There's more institutional capital than ever before, and it's a different type of institutional capital than the SFR REITs and other institutions that are buying homes.
“To help entrepreneurs looking to buy the average $300,000 single-family home connect with people who have billions of dollars in assets and can offer the best, cheapest, easiest to use loan products. We're excited to bridge that gap and cut out the middleman.”