Proptech unicorn Pacaso’s meteoric rise — and fallout

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

Yael Bernier of Healdsburg, California, an idyllic outpost in Sonoma Valley, remembers one of the town’s first brushes with Pacaso, the startup that sells shares of upscale houses to aspirational second-home owners, last spring. One of the eight co-owners of a local Pacaso-sponsored property had just arrived from out of town, but the hot tub didn’t work.

“At midnight, they got someone to come all the way from San Jose and fix it,” she said — a nearly two-hour drive. “It’s funny, unless you live next door in this quiet community.”

Pacaso’s meteoric rise from concept to a $1.5 billion valuation in under a year has made the San Francisco-based startup, founded by former Zillow executives Spencer Rascoff and Austin Allison, one of proptech’s most successful stories. Its aim to increase access to second homeownership at a time when many can’t afford a first — and the fierceness with which it has pursued that mission — has also made it one of the most hated.

Pacaso’s detractors say its success comes at the expense of communities, removing precious housing stock from already tight real estate markets, and, in an echo of Zillow’s iBuying fiasco, dramatically overpaying to achieve its foothold, driving up property values and shutting out average buyers.

Pacaso says it is democratizing ownership and doing its part to boost sustainability by filling homes that would otherwise be empty much of the year. It is also helping to resolve the housing crisis by consolidating demand away from the median price tier, it says. Second homebuyers who would buy an average home can now access the luxury segment.

Bernier, like others who have opposed Pacaso’s arrival, was dismayed by the prospect of vacationers who would not pay occupancy taxes and who were, by all appearances, violating local zoning ordinances prohibiting timeshares on land designated for agriculture. Pacaso’s owners can gift their time at the properties to anyone.

It’s not just small-town locals who take issue with Pacaso and other platforms that facilitate short-term stays. Airbnb and VRBO, who pioneered the online vacation rental marketplace concept, have fought for years to maintain their presence in major metropolitan areas like New York and Paris, as government officials sought to limit illicit activity by opportunistic owners, like landlords converting apartment buildings into unregulated hotels. Pacaso’s platform, theoretically, could be similarly exploited.

Local protests against Pacaso that began this summer have continued into the fall, and Bernier and her neighbors have petitioned local leaders to stop the startup’s advance. Officials, she said, have hunkered down, fearing the company will sue the city just like it did nearby St. Helena.

In that case, which is ongoing, Pacaso’s lawyers maintain that its customers have all the rights of owners, and that the startup is in the co-ownership business, not the timeshare business.

It’s a distinction that even real estate professionals didn’t 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 joint ownership through an LLC. Together, the LLC’s members pay Pacaso to manage the property and facilitate access.

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

In September, the Real Estate Standards Organization established “co-ownership” as a distinct asset type. Pacaso played a key role in bringing the matter up for a vote, Sam DeBord, RESO’s CEO, said.

“The final vote was unanimous,” DeBord said.

Pacaso touted RESO’s decision as a win that will clear the way for more growth, but it’s unlikely to help its case in jurisdictions like St. Helena, where officials want to shut the company out, said Max Dilendorf, an attorney who specializes in real estate and technology.

“This is something that they will be litigating for years to come,” he said.

No rest for the litigious

Pacaso’s legal spat in California has not prevented it from expanding. In the last few weeks, the company has spread into Monterey Bay; three Colorado cities; Jackson Hole, Wyoming; and its first international market, Spain, cashing in on demand for second homes it says has been growing for decades. It is now in about 30 markets.

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

Allison framed the company’s co-ownership ethos as a part of the same sustainability movement that spawned the sharing economy and steered U.S. businesses away from SUVs and cattle farms toward greener solutions. At the same time, he touted the constitutional right to own property.

“By no means do we want to be in the litigation business, and it’s not something we take lightly,” he said. “But we’ve felt obligated to stick up for our owners.”

Pacaso has not ceased buying homes in the Sonoma and Napa Valley enclaves where it has encountered some of the strongest resistance. “It’s business as usual” there, he said.

Pacaso, notably, brought the suit against St. Helena in April before the city’s representatives filed an enforcement action, local lawmakers say.

To grow its business, Pacaso has relied heavily on local real estate agents, who are incentivized with a 3 percent referral commision on closed deals.

Since it participates in the multiple listing services, Pacaso can put listings from other brokerages on its website — but it has at times stretched convention to make its co-ownership model fit. David Appelbaum of Sonoma, who has organized local opposition to the company, found his house, which was for sale at the time, listed on Pacaso’s site, but with incorrect pricing and other information.

“It has all kinds of stuff that was incorrect,” he said. “And we said, ‘Get it down, or you’re going to be in a world of hurt.’  They got it down within an hour.”

Allison said Pacaso attributes all listings sourced from other agents, consistent with MLS rules, and displays the “whole home price prominently.”

“When a listing is of interest to our buyers, we then seek to go procure that listing on behalf of our owners and aggregate the co-ownership group to purchase it,” he said.

An imitator

Pacaso has already had enough success to spawn an imitator.

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

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

The company has so far brokered three property purchases in Mexico involving U.S. buyers, but wants to expand into Latin America and Europe. It also wants to help Latin Americans buy property in U.S. markets like Miami.

Cross-border transactions create more legal complexity, but Martin Schrimpff, Kocomo’s co-founder and CEO, hopes the startup’s orientation toward vacation markets — places with hotels and resorts, where year-round residents don’t have the same expectations for tranquility — will spare it Pacaso’s early frustrations.

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

For Pacaso, the headache may only be beginning. Los Angeles lawmakers are now exploring ways to thwart private equity firms, iBuyers and other proptechs from profiting off the housing boom at the expense of the middle class. That effort could have implications for novel platforms like Pacaso if officials come to see its business as similarly destructive.

And upstate, Sonoma County’s Board of Supervisors presented an aggressive, united front against Pacaso at a meeting in mid-November. No matter how it’s categorized, the startup has all the trappings of a hospitality business, supervisor James Gore said.

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