If real estate is seen as a dinosaur when it comes to adopting technology, title insurance may be the industry’s Argentinosaurus. The residential closing is full of manual processes and fees that complicate and drive up the price of homebuying, and according to Max Simkoff, consumers are losing out.
Simkoff is the founder and CEO of States Title, a startup looking to capitalize on the “pain points” in a residential closing process, from title insurance to mortgage and escrow and beyond. Last month, States Title raised $123 million in venture funding in a round led by Greenspring Associates (existing investors Fifth Wall Ventures and Foundation Capital also participated.) The round values the firm at $623 million and makes it perhaps the most well-capitalized startup taking a crack at title.
The Real Deal caught up with Simkoff to understand what his firm plans to do with the money, its partnership with homebuilding giant Lennar, and how it hopes to modernize the homebuying process.
This interview has been condensed and edited for clarity.
You’ve raised this money at a time when the cycle is, in a sense, being accelerated by the pandemic. Did your value proposition become even more urgent?
It did. We’ve gone from pushing a vision on the industry – that there’s too much friction, too much opacity in the process of closing a mortgage. With all the technology that exists and all of the other places consumers expect instant experiences – getting a ride on demand, watching streaming content, grocery delivery in two hours or less – it seemed somewhat ridiculous that there was still this mountain of paperwork and process to get your residential transaction closed.
We’ve been pushing this message a lot: “Hey, the technology exists- you can do this.” What’s happened now is that push has become more of a pull- we have people telling us that they need it.
Talk about the main pain points in a residential transaction today.
Ten years ago, for most people who are either buying or refinancing a home, they probably would have told you things like finding a home, or selling your home – that was painful. Having to find a realtor through a referral network, or having to find a lender. Just getting a mortgage was painful.
What’s changed now is that all of the biggest remaining pain points are in the closing, because that other stuff mostly got solved. You can find a home on Redfin and make an offer directly on Redfin. You can get prequalified for a mortgage through a point-of-sale application that these lenders use. So the pain points we focus on are on in the closing.
First, the title insurance piece itself, which is super opaque. What gave me reason to launch this business was my own personal experience. I was closing a transaction, I asked a series of questions about title, and it’s almost like with every answer I got, the less I understood the rationale for it, and the more uncomfortable I felt about the value of it. It was like “well, that makes sure you have clear ownership of the property.” Well okay, didn’t the person who own this home before me buy that product? ‘Yes, of course, they bought it too.” Okay, so I’m really only establishing ownership from that period, so I should probably pay less for it. “No, that’s not how this works – you actually pay more. It’s not priced on risk, it’s priced on property value.”
The rates, at least in New York, are set by this committee which is made up of the four or five biggest players. In any other world, that would be called a cartel.
(Laughs). It’s safe to say that the various ways that have been historically utilized have resulted in rates going up, not down. That struck us as odd because it’s not like the risk has gone up. It’s not like buying homeowners insurance for larger homes in Southeast Florida – rates go up because they need safer construction materials and they have to withstand hurricanes and the hurricanes have gotten more severe- that makes sense. Why you pay a higher premium for residential refinance title insurance on a home that’s been refi’d three times in the last 10 years where the only thing that’s changed is the value of the property went up? To us, that didn’t hold a lot of water.
The second pain point was the actual closing. Where and when you’re going to close, how you’re going to sign your docs. Most stakeholders – real estate agents, lenders, loan officers and sellers- were just willing to accept this pain. It’s like a necessary evil.
Is it a necessary evil, or is it the ingrained ecosystem? Because everyone is kind of wetting their beak a little bit. Brokers benefit. Developers benefit.
There are some regional differences. We don’t currently operate in New York- we’re trying to. New York, and this has been well documented by you guys, does behave quite differently. Even outside New York though, there’s a lot of what the industry has traditionally referred to as “junk fees.” Just think about that – that’s an industry term. It’s like, convenience fees, document prep fees…why are documents being prepped? We just completed this financing. $123 million. Documents got forwarded to me because things were happening relatively quickly. Maybe every fifth document I would get from a law firm would be a PDF. My response was always the same: “Put it in Docusign.” I don’t print PDFs and sign them anymore. Because it’s stupid.
The last pain point is the sheer amount of fees and information around money that needs to happen so that a relatively complex transaction can get cleared. Let’s just say you signed your docs, and let’s hope you signed them correctly, and let’s hope you signed them in blue ink in a jurisdiction where that’s required for them to be properly recorded, not black because a notary made a mistake and those documents need to be re-prepped. Let’s assume you did all that correctly. There is so much financial information that’s now in paper documents that getting keyed and rekeyed and errors are happening as transfer taxes are being paid and mortgages are being paid off. It’s somewhat embarrassing in a world of Stripe and Square. Why are they being written down on paper, and copy/pasted?
You grew up in Portland, correct?
How close were you to the Wild Wild Country ranch?
(Laughs). I grew up fishing a lot. In central Oregon, on the Deschutes River. We took a couple trips where we actually camped right next to the ashram. We’re camping in the middle of the desert, and my dad is like, “hey, 10 years ago, that land right there, there was a massive movement here, and their leader had a fleet of Rolls-Royces.” And at the time, I was like, that’s ridiculous.
The reason I ask, is because, in a way, you [States Title] are taking on a very powerful, very well-organized cult. I’m wondering, when you came into this, what sort of resistance did you get from the powers that be?
There’s a quote that’s been misattributed to Gandhi. “First they ignore you, then they laugh at you, then they fight you.” And that’s pretty much been our experience with the title insurance industry.
When we came to market with our original product, which was an instant underwritten refinanced title insurance policy, the first reaction was “who cares.” You’ve got to put yourself in the mindset of early 2018. Interest rates had been at record lows. So most of them were like “nobody cares about refi, everyone’s on purchase, this is a one-trick pony, they’re not going to get traction.” And by the way, it’s expensive to start a title insurance carrier, full-stack. So they ignored us.
And you’re not coming from that background. You’re not a real estate person.
Exactly. And there were people from the title industry who had tried to launch new carriers and they failed. So they [the industry] was like, “if they couldn’t do it, these jokers, who have no title experience, no real estate experience, they’re not going to get there.”
I think they started to take notice when the insurance department [of California] fast-tracked us for the first underwritten title-carrier license in as long as anyone could remember. We worked very collaboratively with the regulator. We said, “here’s what we want to do. We want to instantly underwrite refi title insurance, we think it’s better for the consumer, better for the market.” I think it took us 10 months from first meeting to certificate of authority. This usually takes years.
When that happened, and the CDI [department] put out their own press release – the state of California had been relatively public about their frustration with the lack of competition in title – that’s when some of them [established players] started to take notice.
Did they try to buy you out, or lobby you out?
We did start to see some folks from the industry say “hey, you know, this certainly sounds similar to a number of other companies that tried to do things in the past that were potentially harmful to the real estate market.” But it was very light.
I think where it got a lot heavier is after the acquisition of North American [States Title bought the firm from Lennar in January 2019 in a seller-financed deal].
That was the first shot across the bow. The second one was that the refi market turned. Just when you thought interest rates couldn’t go any lower, they went significantly lower. We started getting a lot of traction with very large, centralized lenders. And then we started to expand our aperture, not just to focus on title insurance, but on the whole closing piece.
Which is why I think your name is a bit of a misnomer. Okay, so what’s in it for lenders?
Now our approach is instant end-to-end closing. Inclusive of title, fees and signature. We want everything to happen instantly, fully remote, fully digital.
And your fee, is it a flat fee?
The title insurance premium has to be based on the value of the property, because that’s the fee structure. However, we are setting fees lower than the industry. The way we can do that for now on refis is if we’re working with large national lenders, there is a concept of bulk rates- as long as they’re sending us volume. To be clear, the lender doesn’t decide to send you the order. They can only recommend to the borrower. But we give them an easy way to do it, because we’re like “we’re the best, we’re the fastest, and we’re the cheapest.”
Could you see the rates becoming tied less to property values, and more of a standardized per-transaction fee?
We would love to see rates be more intelligently designed to link to value. The value of underwriting a highly complex, purchase transaction for a home that hasn’t changed hands in 100 years, that’s almost like specialty underwriting. That transaction’s complex and probably requires a lot of work. But that’s not the majority of transactions.
You talk about instant underwriting. How instant is instant?
That’s on refinance transactions, which is the bulk of the market right now. We can generate a clear-to-close commitment in less than a minute. That’s a process that has typically taken two or three days.
I guess the difference is you’re not actually checking each deed. What’s the norm in general insurance? It is actuarial [calculating risk] processes, right?
That’s back to the theme of, “are we doing something novel by applying probabilistic underwriting to real property information?” Not particularly. The concept of insurance being a well-educated guess with capital behind it is something that property/casualty insurance, homeowners insurance, life insurance, they’ve been using for 100 years. It’s just that title never worked that way.
In your own article, you quoted someone as saying, “hey, this is an industry that’s about risk avoidance.”
There was an amazing quote in that one: “It’s like an umbrella on a sunny day.”
But then, in that same quote, they were like: “But it’s that 1 percent of time that you need it.” Well, if you really only need something 1 percent of the time, then you should not need to put the same fixed cost against every policy.
What’s the standard payout? Is it 4 percent?
In the last two years, it’s probably running sub-4 percent
So for every $100 in premiums, the firms are paying out $4 in losses.
Just to put that in perspective: homeowners insurance, for every $100 of premiums, $50 to $70 of that is going to pay losses. Efficient insurance markets are ones where most of your premiums go to pay claims. You are paying for value. The value you get is in being protected, and the protection is evident when claims are being paid. In title, the industry has long made the case that the reason you know you’re getting value is because you don’t HAVE claims. That to me, I don’t know…
There’s a few cases of high-profile deed fraud. There’s a pretty bizarre case to do with Anbang, the Chinese giant, a $5.8 billion transaction where there’s been some fake deeds. The industry tends to grab those examples and says “look, a million transactions may go by, but something like this, this is why you need us.”
That’s why our position is: Take a commercial transaction, title insurance for a skyscraper that’s being refinanced. That should be specialty underwriting. Largely manual. It can probably take weeks- that’s fine. The reality is that’s not the majority of transactions. You’ve got 10 million residential transactions a year, give or take. The vast majority of those are average American consumers doing a $150,000, $200,000, $250,000 refinance. Or a $300,000, $400,000 home purchase. The average potential title loss on those is a fraction of that amount.
Is your product market-agnostic? Would your job be the same in New York, California, Florida?
There are some state requirements and regulations that need to be respected. Thankfully, most states have the flexibility to let us do this algorithmically. Not just the underwriting stuff… the closing stuff, the fee stuff, the signature stuff. Most people are finally coming to understand that title companies are closing the whole transaction, and it’s really incumbent on us to remove all that friction.
A lot of these established players have a lot of political clout. Have you got into that whole influence game? What sort of lobbying are you involved in?
Lobbying is kind of a loaded term. It often implies that you’ve got a lobbyist. Most of our efforts to date have just been to talk to regulators. When we got licensed as a new insurance carrier with a new method of underwriting, I think I did in-person meetings with 15 or 20 insurance commissioners across the country. Most of them have come to realize that the world of insurtech has come to change many things for the better. If you sit down with them and you explain how what you do is better for consumers, most of them responded positively. We talked to a few of them who said, “heads up. Some of your incumbent competitors have been in here and given us a fair warning that you guys were coming. It wouldn’t be appropriate to talk about what they said but we’d like you to know that we’re super appreciative that you came out and helped set the record straight. That helps us make a balanced decision.” I think it speaks for itself that we got approval in almost every state that we applied for a license in.
What’s your timeline for New York?
You’d have to ask the New York DFS about that. We had some early meetings with them. They were very thoughtful, they asked very good questions. I’m hopeful that we’re able to operate there soon.
Let’s talk Lennar. You went to one of the biggest homebuilders in the country [$22.3 billion in 2019 revenue] and said “we want to partner with you.” You started with title but you’ve evolved into other parts of the closing. Since you’re tied up with a homebuilder like that, what other opportunities do you see? Are you going to branch into even more aspects of the transaction?
For now we’re just focused on making sure that title and closing become simple, seamless, invisible and less expensive. If we can do that well, our partnership with Lennar allows us to solve many problems together. Appraisal is the other long pole in the tent in the closing.
Also, we’re starting to think about building specialty closing products. Is there a new policy that could exist for newly built homes? It’s no secret in the industry that title for newly built homes is somewhat redundant.
The ownership structure is right there!
And by the way, the homebuilder bought title insurance on the land they bought. They buy a big plot of land. They buy a policy that makes sure they can do what they want with the land. Now really what you’re insuring on a title policy – of which one needs to be generated for every single home on that that now gets built on that subdivided land – all you’re really paying for is the risk that the homebuilder didn’t pay their contractors, or have outstanding HOA liens, or code enforcement liens, or messed up an easement. Most homebuilders are in the business of building homes professionally. When there are errors, they make it right.
So the idea of generating new products in partnership with homebuilders is something we’ve discussed.
Do they [Lennar] give you insight into how they’re evolving as a company and what they’re taking on?
Yes. What they did with us was not an exception. It was part of several transactions that they’ve done in a calculated move to be able to focus on their core, which is building homes, and then partnering with the most innovative external companies in their ecosystem to do the other stuff. They did the same thing with Hippo, which is a homeowners insurance company. They sold to them a captive homeowners insurance brokerage, and then they partnered with Hippo to start creating new products they could push out through their mortgage arm. The same thing with [iBuying startup] Opendoor, where they made a very large investment in a really game-changing way. Lennar wants to make sure they manage their end-to-end customer life cycle, and they’ve got a lot of customers that are captive in their own homes.
Let’s get into the new money you’ve raised. $123 million, Greenspring led the round. You’ve raised $229 million so far, which is a nice chunk of money. What’s all this going into? How much can you invest in data science?
It’s mostly for R&D and building out a new bespoke solution delivery layer. Because we so dramatically changed the nature of underwriting and closing a transaction from a title perspective, we basically created new kinds of work. We now have a machine, instant underwriting on an algorithm, which means that the work around closing changes- you have to interpret what the machine spits out in different ways- it basically changes the nature of the work that people are doing, so they can be more focused on relationship management and communications, with loan officers, with realtors.
Long story short, a big chunk of this goes into R&D. Hiring more data scientists, more engineers, more product managers. But also, we’ve been staffing up pretty aggressively.
What about profitability? Is that on the horizon?
We have significant operating units under the broader company umbrella that are now profitable. The whole company is not. I’m fairly old-school- I raised outside money because I felt there was a more compelling return on equity that we could provide to our equity holders with what we’re doing, and a big component of that is being able to operate at sustained higher margins than others in the industry even with lower prices. For the time being, we’re investing, with an eye toward profitability.
You don’t have any projections on how long that is?
We have internal projections, but nothing it would make sense to put my foot in my mouth by disclosing in this interview.
What’s the head count like? When you did the Lennar transaction, you went from a few dozen people to suddenly being the head of a massive company. I wonder about the cultural challenges of that as an entrepreneur.
We’re about 1,100 people now, and we’ve hired close to 200 people in the last couple months. We went into this combination with eyes wide open and also excited to combine the best parts of these two businesses. There’s a lot of legacy title and closing knowledge and local market expertise that North American Title brought with it – it completely obliterated the learning curve that we would have had on our own.
When you talk about hiring relationship managers, I think about how the old guard has always talked about this being a relationship-driven business. But that came with a lot of schmoozing, inducements, a lot of wine and dine. Sounds like that’s not going to be your approach.
No. This is really one of the most unfortunate misconceptions about the title industry. It IS a relationship-driven business. I think a lot of the spotlight gets put on the people who are managing the relationships and customer acquisition. The unsung heroes are the escrow officers. These are the people who are behind the scenes making everything work. They’re getting calls from salespeople, from their clients, who are loan officers, or realtors, or property developers, saying “I’ve got a problem, can you fix this, can you change this fee.” And they’re basically doing 100 different things. Of those 100 things, 70 of them are the administrative, copy and pasting, sending an email…
Stuff you can automate.
Yea! They would rather spend 70 percent of their time on real relationship management. The way that great enterprise software companies do it, with customer success groups. Figuring how to make the solution better. That’s the transition we’re trying to make over the next year or two, with part of the investment. Other industries have done this too. Let’s look at the core of what we want our service to be. We want it to be like a concierge at the Four Seasons. Somebody’s who’s so customer-centric, and can be, because their brand and their systems and processes are running well in the background. It’s not about schmoozing, which by the way, in the state of California you can’t really do anyway.
Well, in the state of New York, you can’t really do it either. But it happens.
It still happens.
And a lot of the way that some of these people get compensated, a lot of them make their money in cash tips. In your world, a lot of that is going to go away, which is going to create a lot of angst and uncertainty.
This process of tipping in New York… Again, we don’t operate there yet, so I’m sure I’m speaking ignorantly, although I will say that I’ve been told often that I speak ignorantly in this industry and then it turns out the ignorant things I’m saying end up becoming more efficient ways of doing things.
I don’t understand on top of thousands in fees you pay to close a transaction, why you’d be expected to tip your closer… (throws hands up). That one’s baffling to me.
You’re going to have fun when you come to New York. But let’s move on. This pandemic has wiped out a lot of arcane laws – at least temporarily. But once it happens, I think people see the light and it’s not going to go back. My sense is digital notarization is here to stay even once we can meet in person. What other big shifts should we be mindful of from the law and policy side of things?
I’m hopeful digital notarization just leads to digital signature. With the amount of fraud-prevention tech and ID authentication tech we have, you’d like to think that we can get to a world where you can instantly sign docs.
I do think you’re going to see a lot of movement on instant appraisals that will be extremely beneficial. Right now, you’re seeing a lot of volatility in the secondary mortgage market. Resale volumes are picking back up again, but refi volumes aren’t going up as fast as they should given interest rates, because a lot of lenders have tightened their credit standards. What you’ll see is when that stuff gets smoothed out a bit, and once we get back to normal, the appraisal thing will be the next thing. Because when there’s a flood of demand, there just isn’t the appraisal capacity with our network of licensed appraisers.
Fannie and Freddie have an appraisal waiver program where if the property met certain characteristics – 70 percent LTV [loan-to-value], credit score of X or higher, etc. – it didn’t need an appraisal. It could go through an automated valuation model. And what that established was – Fannie and Freddie were pretty smart about this – that it is working. Now that it’s working, I would hope that you will see them start to widen the aperture on what qualifies. And you will see appraisal get way more efficient.
How do you stay excited, as a founder, as an entrepreneur, as a boss, when you’re dealing with such a product and a maze of regulations?
This is maybe a Draconian way that I would think many founders stay excited: the harder the problem is, the more excited I get. If you want to see me get excited about a problem and solve it, tell me it’s impossible.