The largest asset class in the U.S. — residential real estate — is changing before our eyes. Since 2013, $45 billion of venture capital has flowed into the new proptech companies like Knock, Compass, and Opendoor that are reinventing the real estate transaction. On the lending side, the top ten mortgage lenders include six non-bank lenders and only two players that were actively competing just a decade ago.
Change is happening fast but it’s still the early innings. Today most home buyers and sellers suffer through a no-tech closing process with endless forms, signatures, and checks to write. Yet it’s only a matter of time before the status quo is replaced by digitization, connectivity, automation, and streamlined customer experiences.
We like investing in big trends like this. They create disintermediation, incumbents that struggle to stay competitive, and the formation of large new businesses. We think that our latest investment, Spruce, is perfectly positioned to take advantage of these trends and become the next titan of affordable, transparent, and frictionless title insurance and escrow services to forward-thinking mortgage lenders, investors, and PropTech companies..
A 100+ Year Old Process that (Almost) No One Likes
A property’s title is the legal evidence of ownership. Title records are maintained at the county level and, even in 2020, are rarely digitized much less available online or via API. Title insurance exists to protect the lender and buyer against surprises like unclear ownership. Title insurance has two interesting characteristics: it insures against something that has already happened, and it is purchased by customers who have little say in whether or not they buy it and from whom.
Taken together, closing costs and title insurance premiums add up to about $20B annually.
The industry works this way because the title, title insurance, and escrow processes are controlled by the “Big 4” legacy players that are all quite happy with the $20B status quo. It is a unique industry dominated by reverse competition, where these companies distribute through local real estate agencies and mortgage lenders who then “recommend” their products to end customers. And while end customers ultimately pay for the product, they rarely question the choice of title vendor because those fees just get mixed into the closing process and its underwhelming, non-digital experience.
You could say the Big 4’s core competency is T&E spending directed towards ensuring local real estate agents and mortgage lenders don’t start asking whether there’s a better way. This has gone on for 100+ years at this point.
This is all changing, though, as more proptech companies focus on a superior purchase-to-close experience. These platforms want to operate at national scale where they’re able to facilitate a real estate transaction in any locality. This ambition creates the need for a national title company that can deliver a seamless experience no matter the condition of the underlying title records (from digitized counties in Florida to the most ancient of public records rooms in rural Oklahoma). And that brings us to Spruce.
The Spruce Advantage
Spruce doesn’t believe the world needs to be this way. Spruce is focused on digitizing the title, title insurance, and escrow processes with the picks and shovels of seamless, API-powered infrastructure. Their primary customers are the originator of a real estate transaction, mid-market refi/mortgage lenders, and the rapidly growing ranks of proptech purchasing platforms.
The Spruce story starts with co-founders Patrick Burns and Andrew Weisgall, who built Betterment’s digitized broker experience. They saw a similar opportunity in title, closing, and escrow. Spruce has created industry-leading APIs allowing them to integrate digitally into the new wave of proptech companies and forward-thinking lenders. In talking with industry insiders, we hear again and again that Spruce is already seen as a frontrunner in tech-forward title insurance.
With Spruce, title search is done at a national level and national scale, meaning that end consumers and their intermediaries get faster turnaround and digital progress updates. This is unheard of in a pen-and-paper industry that relies on update phone calls, emails, and even the occasional fax. Likewise, their escrow capabilities replace paper checks and high-fraud-risk wire transfers with modern transaction experiences. Their ultimate goal is a seamless fully digital experience that includes everything (except maybe the notary), delivering a process that fits into the lifestyle of the end consumer and creates fluidity, improved closing speed, and reduced costs for their proptech and lender customers.
Signs of DocuSign Circa 2005
Scale saw tremendous success in the first wave of real estate technology via our investment in DocuSign. That company looked at the status quo of hand signing paper documents then invented and popularized a much better, digital alternative.
We think that Spruce is leading a similar revolution in the title, escrow, and closing parts of the real estate process. We are very excited to lead Spruce’s $29M Series B investment round where we’re joined by industry peers Bessemer Venture Partners and Zigg Capital. Onwards and upwards.
Chris Yin contributed to this article.
