Entrepreneurial

Startup faces tough odds in crowded New York rental market

October 9, 2009

Lee Lin had a full-time job, three rental properties and a problem: he had no time to find tenants to live in them. He tried advertising on free-listing websites like Craigslist, but found it too time consuming, so he created an alternative.

Lin and co-founder Lawrence Zhou, both former programmers, spent nine months and $20,000 in personal savings to build RentHop.com. The website showcases available apartments in New York, predominantly ones that don’t charge renters expensive broker fees.

“Landlords and property managers are very desperate now,” said Lin, who added that when the rental market tanked it forced landlords to absorb broker fees as a way to try to entice renters. These “no-fee” apartment listings have become extremely popular with New Yorkers. “The bottom line is the recession is driving landlords and brokers to work harder to find tenants and that makes room for a new site and a newer business model, such as RentHop to come along.” (Read full article here)

THE PITCH

The site is now averaging about 25,000 visitors a month, which Lin said puts it on par with the websites of established New York-based brick-and-mortar brokerages like Anchor Associates (www.anchornyc.com), Ardor (www.ardorny.com) and Bond New York (www.bondnewyork.com).

“I don’t want to suddenly start expanding to other cities without first locking down New York,” admitted Lin, whose primary goal is to establish RentHop as a “dominant player” in the New York rental market over the next 12-18 months. That means becoming an “indispensable tool for the property managers and brokers to use.”

Lin and Zhou are currently looking for angel investment of between $200,000-500,000 so they can hire a few people to help with sales and marketing and start scaling the business.

“What’s really going to make us stand out and prove to everyone that we have a lot of traction is when everyone thinks of RentHop as the place they go when they need to rent, find an apartment or lease out an apartment.”

TAKING IT TO THE EXPERTS

David Rose, the founder and chairman of New York Angels investment group, said the New York rental market that RentHop wants to crack is highly competitive with a lot of entrenched players and is worried that the founders’ lack of real-estate experience will make the challenge even more difficult.

“This is not a technology play, this is a real-estate play,” cautioned Rose, who has an MBA in real-estate finance from Columbia University and actually developed his own real-estate sales software more than 25 years ago. “They are not the first out of the 8 million people in New York City to think about a website for listed apartments, so the question that then comes up is: why hasn’t this worked before?”

Rose liked that Lin and Zhou developed a Web-based solution for renters and didn’t want to throw a “wet blanket” on RentHop’s aspirations as there are many positives with “fresh, young tech eyes coming into an existing market.” But he advised the co-founders to take a hard look at the business before getting in any deeper. Rose said fundamentally the founders should ask themselves: “has there been a significant enough sea change so that you can survive on a site with just listings from the major firms?”

Rose’s firm invests in startup tech companies looking for anywhere from $250,000-$750,000, but he said RentHop’s business model has “zero” barriers to entry and any angel would want to do some serious due diligence before investing. “This would be the kind of company that would be interesting enough for us to bring in for screening,” admitted Rose, who receives a handful of real-estate related pitches every year. “Do I think there’s a chance at this? Yes. Do I think it’s a slam dunk? No.”

Alicia Schwartz, a former broker and founder of rental resource website HowToRentInNYC.com, said the New York market has become inundated with listings websites since she started her business three years ago and that the key for RentHop is to advertise higher-quality apartments.

“When brokers list apartments they lie,” said Schwartz, confirming Lin’s assessment of the duplicitous nature of many Craigslist postings. “A lot of times they list an apartment which they know is going to go within an hour because it’s unusually priced and then when they get somebody to call they say well we did have this, but let me show you A, B, C, D, F and it just ends up being a bait-and-switch. If (Lin) is dealing directly with brokers that he feels are honest and are giving genuine leads of exclusive properties, that would separate him from the pack.”

Schwartz said RentHop’s model of charging both landlords and brokers is also unique, but wasn’t sure it would be sustainable when the economy improves. “Right now it’s a renter’s market because of the economy crashing, but New York City is always competitive and in 6-to-8 months landlords aren’t going to need to fight for people or give up fees. I don’t know how he will survive when it becomes a landlord’s market again.”

Ironically Schwartz said RentHop would likely have more success in any market other than New York, where vacancy rates on average are nearly twice as high. “If he’s tackling this market now and he’s having some success with it, I can definitely see it being duplicate in other cities,” said Schwartz, who originally hails from Washington, DC where she said there is virtually no service connecting quality landlords with quality applicants. “In New York the rental market is really transparent how to connect everybody, so in other places where it’s not as transparent you would need a service like this more.”

Peter Iannone, a managing director at national accounting firm CBIZ MHM who acts as an outsourced CFO for startups looking for funding, was very impressed with Lin’s pitch video and his ability to communicate the problem RentHop is trying to solve by appealing to people as a better alternative to Craigslist.

“Ultimately if somebody doesn’t get it, they don’t want to invest in it,” said Iannone, who added that a lot of the entrepreneurs he helps are unable to succinctly convey to potential investors what their product or technology does. “This is something that you can easily paint the picture and someone can look at it and say, ‘I understand, this is not that complicated.’”

Iannone said he immediately connected with Lin on how frustrating Craigslist can be to quickly find what you need and felt it gave a clearer idea of RentHop’s value proposition to renters and landlords. “I look at Craigslist as the equivalent of scraps of paper stuffed in my pocket: my chances of pulling out the right piece of paper and getting the information I need out of all those scraps are minimal,” said Iannone, who added that RentHop should try to broaden its appeal beyond those who are disappointed with Craigslist.

“To just say we’re better than Craigslist is great if Craigslist is the only competition,” said Iannone, “but if NewYorkRenter.com (hypothetical) says we’re better than Craigslist and we’re better than RentHop too, then they’ve missed seeing the competition and therefore have set themselves up to be trumped by it if the other guy has better intelligence.”

Do you agree with our experts? What do you think of RentHop’s business model and co-founder Lee Lin’s goal to make the company a dominant player in the New York rental market? Will they make it? Post your comments below:

Comments
7 comments so far | RSS Comments RSS

“why hasn’t this worked before?”

That is a ridiculous question. It does work already.

RDNY.com (rent-direct.com) has been around for years and has extensive human-verified verified listings of no-broker-fee apartments.

Posted by bryan | Report as abusive
 

There are several red flags with this business model. I would say that the pitch is well edited, but I don’t think the business itself is that well thought out.

It’s extremely New York-centric, not many other cities have rental markets with this model.

Also, the statements about programming being the biggest cost is backwards, marketing and sales will far larger, particularly with their model. It will likely take several million and at least five years for them to gain scale outside of NYC.

Finally, I’m wondering what the actual TAM is, since the average rental price hovers around $1000-$1200/month in most cities (http://rentbits.com/blog/free-rental-ra tes-tool/average-rental-rates-in-top-us- cities). Never mind the fact that in most US cities, rentals are seen as something that caters to lower incomes. I think this model would generally stand a better chance in Europe, which has a much higher percentage of people renting.

Bottom line for me (and I’ve done strategy for around 60 startups, mostly on behalf of boards/investors), I would like to see a more robust understanding of the market mechanics outside of NYC and if there is actually a TAM that would justify the expense of marketing the service in other geos.

 

The reason this website wont work is because of websites like NYbits.co and http://www.urbansherpany.com – These websites do exactly what renthop.com hope to accomplish except go a step further.

Renthop is basically a broker working for no fee owners but only taking half the fee. UrbanSherpaNY.com & Renthop.com do the same thing for an owner except collect the owner has no fee to pay to the broker.

In terms of brokers posting on renthop.com and giving up 20% of their fee, no broker in their right mind would do this. they have to do just as much work and for a $2,000 apartment they have to split it with their company and then give a cut to renthop. These fees are not large enough to split three ways.

I would just suggest using urbansherpany.com or nybits.com if you want to rent an apartment without a broker & without getting scammed on Craigslist.

Posted by Alvin | Report as abusive
 

I agree with Alvin. Besides Renthop already having to compete with popular websites Craigslist, http://www.SkipBrokers.com and http://www.Streeteasy.com, this business model will be tough to replicate across the country. I also read that the founders of this no broker fee apartment website (Renthop.com) are actually brokers. That alone makes them lose credibility right off the bat.

Posted by Benito | Report as abusive
 

I created http://HowToRentInNYC.com to specifically connect renters directly to landlords and for the NYC renter community at large to be able to share their experiences with each other regarding what past landlords have been like. I think renthop would go over better in other cities where it is difficult to connect the landlord to the renter. It will work in NYC to a degree as well but it is getting more and more transparent with free sites where landlords don’t have to pay a fee to get an apartment rented.

Posted by AliciaS | Report as abusive
 

I agree with Alicia and think HowtoRent is a great site. Another site that has only owner listings is called http://www.urbanedgeny.com, its free.

Posted by nyclove | Report as abusive
 

I always find it surprising when someone with limited real estate experience “develops” another website to solve the multitude of problems found on Craigslist. I agree with everyone here who has said: “This is not a new idea.” I, too, developed and created several websites to help renters connect directly with landlords. The most popular has been http://www.LandlordLinks.Net . We charge the apartment seeker a small amount of money (approximately $35) to purchase landlord data. The information is sent to them in the form of an eBook with links to landlord and management company apartment listings. Additionally, as a real estate broker with over 20 years experience, I include my inside tips (which gives Landlord Links users a HUGE advantage against other renters. Not paying a broker fee is as important, I believe, as getting real access to real listings. You can’t do that on Craigslist anymore. And if you rely on website like Streeteasy, you’re going to pay either more for your “no fee” (really translates into “hidden fee”) apartment; or you will pay a broker fee. -Kirby Sommers, CEO & Founder Landlord Links

Posted by LandlordLinks | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •