Inside Proptech Unicorn Pacaso’s meteorological rise – and its fallout

Pacaso’s Spencer Rascoff (right) and Austin Allison

goOd fences make good neighbors – unless your neighbor is an LLC and their house is a party palace.

Yael Bernier of Healdsburg, Calif., An idyllic Sonoma Valley outpost, recalls one of the city’s first contacts with Pacaso, the startup that sells shares of high-end homes to ambitious owners of second homes last spring. One of eight co-owners of a local Pacaso-sponsored property had just arrived from out of town, but the hot tub was not working.

“At midnight they asked someone to come over from San José to fix it,” she said, nearly two hours away. “Funny, unless you live next door in this quiet community.”

Pacaso’s meteoric rise from concept to a $ 1.5 billion valuation in less than a year has made the San Francisco-based startup, founded by former Zillow executives Spencer Rascoff and Austin Allison, one of the most successful proptech stories. His goal of increasing access to secondary property at a time when many cannot afford a first – and the ferocity with which he has pursued that mission – has also made him one of the most hated.

Critics of Pacaso say its success comes at the expense of communities, removing precious housing stock from already strained property markets and, echoing Zillow’s iBuying fiasco, dramatically overpaying to gain a foothold, driving property values ​​up. and excluding average buyers.

Pacaso says he’s democratizing ownership and doing his part to boost sustainability by filling homes that would otherwise be empty for much of the year. It is also helping to resolve the housing crisis by consolidating demand away from the median price point, he says. Second home buyers who would buy an average home can now enter the luxury segment.

Bernier, like others who objected to Pacaso’s arrival, was dismayed at the prospect of vacationers failing to pay occupancy taxes and apparently violating local zoning ordinances banning timeshares. on land designated for agriculture. Pacaso owners can volunteer their time at the properties to anyone.

It’s not just people in small towns who are challenging Pacaso and other platforms that facilitate short stays. Airbnb and VRBO, pioneers in the concept of the online vacation rental marketplace, fought for years to maintain their presence in major metropolitan areas like New York and Paris, as government officials sought to curb illegal activities by owners. opportunists, such as landlords converting buildings into unregulated buildings. hotels. The Pacaso platform, theoretically, could be exploited in the same way.

Local protests against Pacaso that started this summer continued into the fall, and Bernier and his neighbors called on local leaders to stop the startup’s progress. Officials, she said, crouched down, fearing the company would sue the town as it did near St. Helena.

In this case, which is ongoing, lawyers for Pacaso argue that its clients have full ownership rights and that the startup is in the business of co-ownership, not timeshare.

This is a distinction that even real estate professionals did not fully appreciate until recently.

A gray area

Pacaso’s business model is new in real estate, and therefore difficult to categorize. Through its platform, Pacaso then helps up to eight buyers establish a condominium through an LLC. Together, the members of the LLC pay Pacaso to manage the property and facilitate access.

At first glance, the model looks like a timeshare, but Pacaso says the equity stake in the property makes a crucial difference and it appears to have the backing of the real estate industry.

In September, the Real Estate Standards Organization established “condominium” as a separate type of asset. Pacaso played a key role in putting the issue to a vote, said Sam DeBord, CEO of RESO.

“The final vote was unanimous,” DeBord said.

Pacaso has touted RESO’s move as a victory that will pave the way for more growth, but it is unlikely to help his case in jurisdictions like Saint Helena, where officials want to shut down the business, Max said. Dilendorf, a lawyer specializing in real estate. and technology.

“This is something that they are going to advocate for years to come,” he said.

No rest for litigants

Pacaso’s legal crisis in California hasn’t stopped it from developing. In recent weeks, the business has expanded to Monterey Bay; three cities in Colorado; Jackson Hole, Wyoming; and his biggest international market, Spain, which he said is benefiting from demand for second homes, has been growing for decades. It is now present in around thirty markets.

The company plans to “dramatically increase” its footprint nationally and internationally over the next year, CEO Austin Allison said in an interview.

Allison showcased the company’s co-ownership ethic as part of the same sustainability movement that spawned the sharing economy and moved American businesses away from SUVs and cattle ranches towards greener solutions. At the same time, he touted the constitutional right to property.

“We don’t want to be in the litigation business by any means, and it’s not something we take lightly,” he said. “But we felt compelled to stand up for our owners.”

Pacaso did not stop buying houses in the enclaves of Sonoma and Napa Valley where he encountered the strongest resistance. “It’s business as usual,” he said.

Pacaso, in particular, filed a lawsuit against Saint Helena in April before city officials took enforcement action, according to local lawmakers.

To develop its business, Pacaso has relied heavily on local real estate agents, who are encouraged to pay a 3% referral commission on concluded transactions.

Since he participates in multiple listing services, Pacaso may post listings from other brokerage firms on his website, but he has sometimes extended his agreements to accommodate his condominium model. David Appelbaum of Sonoma, who organized a local opposition to the business, found his house, which was for sale at the time, listed on Pacaso’s site, but with incorrect prices and other information.

“There are all kinds of things that were wrong,” he said. “And we said, ‘Stop it, or you’re going to be in a world of pain. “ They got him back in less than an hour.

Allison said Pacaso awards all listings from other agents, per MLS rules, and displays the “whole house price prominently.”

“When an ad is of interest to our buyers, we then look to get that ad on behalf of our owners and bring the condo group together to buy it,” he said.

An imitator

Pacaso has already had enough success to spawn an impersonator.

Kocomo, a Mexico-based startup launched this year, has raised $ 57 million in pre-seed funding to pursue a similar condominium model, but focused on cross-border transactions – properties that require a three-hour theft rather than three. hour drive.

Another key difference: Kocomo, unlike Pacaso, allows owners to rent out their weeks to a third party if they don’t want to use them. The platform also allows for short-term trading within the network.

The company has so far negotiated three real estate purchases in Mexico involving US buyers, but is keen to expand into Latin America and Europe. He also wants to help Latin Americans buy property in American markets like Miami.

Cross-border transactions create more legal complexity, but Martin Schrimpff, co-founder and CEO of Kocomo, hopes the startup’s orientation towards vacation markets – places with hotels and resorts, where residents all over the world. the year do not have the same expectations for peace and quiet – spare him the initial frustrations of Pacaso.

“We’re pretty cautious about what kind of communities we’ll go to,” Schrimpff said in an interview.

For Pacaso, the headache may be just beginning. Los Angeles lawmakers are now exploring ways to prevent private equity firms, iBuyers, and other proptechs from profiting from the real estate boom at the expense of the middle class. This effort could have implications for new platforms like Pacaso if officials come to view its activities as destructive in the same way.

And in the upstate, the Sonoma County Supervisory Board presented an aggressive, united front against Pacaso in a meeting in mid-November. Regardless of its category, the startup has all the attributes of a hospitality business, said supervisor James Gore.

“If it looks like a duck, if it walks like a duck, if it quacks like a duck, then it’s a duck.”

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