Editor in Chief Sarah Wheeler sat down with Joshua Ernst, CEO of Backflip, to talk about the challenges of flipping real estate 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’ve built and scaled software, technology businesses and interesting products in different markets — including proptech. I’ve also spent a significant amount of time in finance and investing. And what I’ve learned is that capital generally flows through trust, and trust tends to flow through relationships and data.
What we’ve been building at Backflip is a culmination of lessons learned around how capital could work and should work — the opaque nature of it in our market, and how it can be much more transparent, much more liquid, much more fair. And that’s interwoven with how software-driven products, data-led products and automated workflows can transform the user experience and the ability to lower your risk profile for all sectors and for all operators.
SW: With low inventory and volatile mortgage rates, this would seem to be a challenging market for fix-and-flip investors.
JE: The fix-and-flip industry is battle-tested over decades. Backflip real estate entrepreneurs — our members — can do fine in down markets, so long as they’re thoughtful about where and what they buy, and at what price point.
They have to think about the whole property life cycle, from cradle to grave, at the onset. As long as they’re thoughtful and take the right amount of risk, they can balance things like a rising interest rate environment. They’ll often exit 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 only six months doesn’t dramatically change the profitability of the deal.
2023 was difficult for a lot of the market, and Backflip grew by 5x and from a relatively meaningful base. Our members, on average, are still making $82,000 in gross profit on each of these transactions, despite the environment. And I think it speaks to the quality of the people that are on our platform, and the software, data and capital that we are providing. And I thinks it speaks to the resiliency of this business model which, quite frankly, is battle-tested over different cycles.
SW: What differentiates your technology?
JE: Really at the highest level, Backflip offers an end-to-end suite for real estate entrepreneurs. They’re an underserved cohort that has a lot of pain points. It’s very challenging to run their businesses — a lot of what they have to do is fairly analog and disconnected.
Backflip supports them with three pillars of technology: workflow, data and what we call underwriting. We help these entrepreneurs with purpose-built tools to think through which properties they may want to buy, to curate their investment pipeline, to analyze those properties both more accurately and quickly, so that they can move on to the next deal and hopefully lower their risk profile.
And then while they’re underwriting these properties using the workflow, we’re underwriting the properties with them. We’re also underwriting them as prospective capital partners.
SW: What are your thoughts on buy versus build?
JE: Most of what we do is build today. We also partner a lot. Building gives us the pleasure of thinking from first principles. What is the customer need?
At this point, we’ve built from the ground up, completely novel, what we call Analyzer. That’s the core functionality of our platform, of our business. 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 business.
We also have loans, which is a standalone, but interconnected to Analyzer. So, as folks are analyzing properties, if they like a deal and they know they want to move forward, they can press one button and quickly and easily do it. It’s embedded finance.
SW: How are you leveraging artificial intelligence?
JE: The core foundation of the platform and of the business is helping these real estate entrepreneurs with predictive analytics. We give them all the same information that Zillow and others would give them — pictures and the AVM with current market value.
But much more interesting to these entrepreneurs and to our investors is the potential future value of this property — the potential future rent and net cash flow, the cap rate of this deal if they want to hold it for a rental asset. And that’s all driven through third-party data, with MLS data and proprietary data, deep and robust analytics, and AI.
SW: What keeps you up at night?
JE: I think it’s scaling what is now a quite substantial business. At this point, we have tens of thousands of members on our platform doing upwards of $10 billion of analysis per month on our app. Our run rate, loan volume, is nearing $400 million and we just launched this business about two years ago publicly.
So, it’s grown very, very quickly, and battling all of the really interesting dynamics of the market and the headwinds that we discussed at the beginning of this conversation, what that means for our members. How can we serve them to be as successful as possible? Because they are the lifeblood of the business of the platform.
SW: What does the future look like five years out?
JE: We are actually, in a lot of ways, just getting started. The latest numbers, in 2022, showed that a little over 400,000 transactions were recorded as flips. It goes up and goes down during slow years. Like in the great financial crisis, it dropped by 50%, so you’ve had closer to, like, a quarter million transactions a year. And based on where we’re at and where we’re going, we are still very much sub-scale. We have less than 2% market share in the market where we are the deepest, and we’re much less than that in many other markets.
What’s not always talked about is two things. One, how old the houses are. This is a global problem, but specifically in the U.S., the average house age is more than 40 years old. And most of the houses in the U.S. were built after World War II, when we started building suburbia. And the average useful life of most homes is 20 to 40 years. So, we are well beyond needing to rejuvenate homes.
Second, this boots-on-the-ground army, the Backflip members, our heroes, these are the groups that we are well served to empower to be as successful as possible. And there are hundreds of thousands of these individuals who are doing this today. Just like we saw this wave of e-commerce entrepreneurs using Shopify, that was a small group until it became easy enough to do and you could scale your business. We believe if we do this the right way, in five years or 10 years, it’s a whole new market in addition to the current market.
SW: What does your team look like?
JE: We are a remote-first team. We started this company after COVID and at this point, we’re north of 75 individual full-time employees, scattered throughout the contiguous U.S. One of the beautiful things about remote is we have top-tier engineering talent from the markets where they want to live. And we already have the best-in-class financial product folks, and capital markets folks and legal folks in-house.
SW: What makes you optimistic about your company and the fix-and-flip business?
JE: We’ve proven, even in a short amount of time, that our members are resilient and buying well. They’re buying the right type of inventory and, quite frankly, creating housing at an affordable price point, which is a huge component of all of this.
Our country has been underbuilt for so long that we are well short of the current demand. And the millennial generation is humongous. Also, the average age of our customer is 39 years old. This is a new wave of entrepreneurs who are excited about doing something a little bit atypical, and a lot of our customers do have a 9-to-5 and then they invest in real estate on the side.
But they’re pursuing a different path. They want financial freedom. And so, having the right frictionless, on-demand software in their pocket to help them think through this next chapter, this real estate entrepreneur chapter, their journey just sets up really well.
The last thing that makes me continually optimistic is what’s happening in the capital markets and what’s happening in fintech generally. There’s more institutional capital than ever, and it’s a different type of institutional capital than the institutions that are the SFR REITs, that are buying homes.
Helping our entrepreneurs who are buying a single-family residential home that is, on average, $300,000, to connect with someone who has billions of dollars and can provide them the best, cheapest, easiest-to-use loan products — we love being able to bridge the gap and cut out the middlemen.
