In the tightest housing market in memory, it’s hard to wrap one’s mind around the fact that thousands of very desirable second homes sit empty most of the year. That inventory isn’t rented or listed, which seems a pity considering how nice — and empty — these homes are.
That’s an opportunity waiting for the right entrepreneur, not unlike what Airbnb did in 2008, in theory anyway. The reality of putting shares of luxury second homes on the market is less a “rent this lake cottage” pitch and more of a “live in this community” proposition.
He said “One is to build more houses so that you have more supply to absorb the demand, or two, make better use of existing supply. That’s where we fit in, because most second homes sit vacant 90% of the time. We’re essentially consolidating demand into fewer homes.”
In this way, what happened with fractional ownership of private jets is (sort of) is coming to high-end second homes as Pacaso beats the drum on its “co-ownership” model, saying “what carpooling is to traffic, co-ownership is that to the housing affordability problem.”
As supply shortages and sky-high prices put an entire generation at risk of renting their entire lives, Pacaso is putting a piece of the home ownership dream in reach, selling one-eighth shares of second homes to up to eight buyers, or multiple shares to individual buyers.
It arose from his own experiences trying to afford a first home in the Bay Area — Allison said he and his wife had to rent theirs on Airbnb a few times to make the mortgage — and that lit the fire under a passion to unlock the value of largely unused second homes.
He told Webster that unused second homes hurt local communities as it “starves local businesses when they’re not supported year-round,” and it also deprives would-be owners of the experience of “buying a second community, a second group of friends, a second life in many ways. I wanted to find a way to make that possible for more people.”
Saying the pandemic provided headwinds and tailwinds in getting the concept off the ground, he said the biggest impact is the new mobility. “More people have [work] flexibility now than they had before, and that empowers more people to use the second home.”
That he started the business as the pandemic began isn’t pertinent, as Pacaso’s “most important core value as a company is to embrace an infinite mindset, which means we’re certainly not thinking short term, we’re not even thinking long term, we’re thinking infinitely.”
“We’re thinking about building a business that lasts generations and empowers millions of people to live better lives. What happens this year or next year or the year after that doesn’t really matter if you’re thinking long term.”
Second Homes as a First Chance
In simple terms, Pacaso either manages second homes for owners or purchases luxury homes outright. Either way, an LLC is formed, and it sells eight shares in each home. It’s not a timeshare. It’s not an Airbnb. Pacaso clients become co-owners of a private home, sans the care and maintenance responsibilities that most fulltime homeowners contend with.
With roughly six million visits to its site last year, Pacaso says it’s now operating in 40 destinations and has sold 800 units to date — 400 in the first half of 2022 alone.
“The way that we think about our markets is we look for places where people want to own second homes. It’s very demand driven,” Allison told Webster. In other words, the places people ask about most are the markets that Pacaso has focused on in its first two years.
Launched in California it’s still weighted towards the west, slowing moving east, Allison said imagine buying a house with several friends. “It sounded like a good idea…” is how those stories end in the DIY world, but Pacaso has created a process and approach to handle it.
“Each home has its own property specific LLC, which is a very common ownership structure that’s been around for decades,” he said. “Pacaso has created the management service that makes it easy for people to co-own the home without any of the headaches or hassles, because we’re dealing with the design, the furnishing, the bill pay, the maintenance coordination.”
The company charges for its property management and maintenance services, which involves “setting up the co-ownership structure to start where we’re creating the LLC, we’re sourcing the properties, we’re aggregating the co-owners, we’re carrying the home for a period of time on our balance sheet as we’re selling it down, and we charge a service fee of 12% for that.”
Pacaso also provides financing, used by roughly 75% of its clients. “We make a little bit of money on that,” he said. “The third way that we don’t make money today, but at scale we will make money, is property management.”
It tends to be families coming to Pacaso, Allison said. “We’re also seeing a broad range of buyer profiles ranging from younger families who maybe are buying their first-ever second home through Pacaso. They’ve been priced out of home ownership in San Francisco, LA, New York, Seattle, wherever they live, and therefore they rent their primary apartment and they’re buying their first-ever home through Pacaso.”
The New-New Digital Nomads
As second homes, Pacaso’s inventory is decidedly high-end, but often just outside major population centers and suburbs that have gone berserk price wise in the last two years, and catering to the pandemic era work from anywhere lifestyle that’s taken root.
“I guess the way that I would summarize that is around kind of what we call ‘freedom of place’ at Pacaso. Following the work from home trend, a lot of families now have more freedom to basically live more nomadically, and many people are taking advantage of that.”
Allison now lives in Napa, and said, “I would’ve never been able to live in Napa valley had I needed to commute to the office every day of the week, which I used to. I used to work in San Francisco, and it would’ve been impossible for me to drive three hours each way with traffic to get into the city. Now I can work from anywhere. There’s a lot of people with that flexibility.”
Some high-profile NIMBY complaints are outmaneuvered by Pacaso’s vetting process and owner code of conduct, which is about community living and not partying home share style.
He said “everybody signs that and really embraces it culturally as what it means to be an owner through Pacaso. It’s beyond the fact that we require it as part of our model. These people are owners. They’re not renting a home for the weekend. Rentals are prohibited. These are owners who are committing a significant amount of capital for the upfront purchase as well as the ongoing operating expenses from taxes to insurance to utilities.”
Supporting that thesis, he said a recent study conducted by Pacaso found that “the Pacaso homes generate about 10 times as much economic activity for the local community and tax revenue as a normal second home. These people are in the home, in the community, shopping at the markets, frequenting the local restaurants. They’re all in. As much as they’re buying a home, they’re buying the community that the home sits within.”
The Pacaso platform also does “selldowns” where the owner of the second home sells it to the company while retaining a share for their own use. It was their second home in the first place.
Of the 10 million or so second homes in the U.S., “the vast majority” sit vacant 80% of the time or more. “There’s never really been an option for those who own 100% of their home but only use it 10% of the time until now. Pacaso provides people with an opportunity to sell part of your home, retain the amount that you were using anyway, and hand off the burden of management to a company who does this for a living.”
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