A one-year-old, $1.5 billion company is quietly establishing a new way to commercialize the Coachella Valley’s residential real estate market.
Pacaso, a real estate investment and management company founded by former Zillow executives, is buying high-end Coachella Valley homes and selling shares in them to investors. The company says the fractional ownership approach makes second-home ownership achievable for a wider range of people, democratizing access to real estate investment and wealth-building.
The Coachella Valley is an important market for Pacaso, which has bought properties in Palm Springs, Palm Desert, Indian Wells and La Quinta, according to its local agent. It’s looking to expand further, possibly in those cities or other desert locations as the opportunities arise.
Experts say Pacaso’s approach is not entirely new, although some analogous offerings have faced trouble in the past. They point to two hurdles the business must overcome in order to survive long term: potential regulatory pushback and possible future difficulties for Pacaso buyers in selling their investments.
If Pacaso does succeed, experts say the company will likely be followed by others looking to cash-in on a lucrative new market for fractional home investments.
How does Pacaso work?
Pacaso was founded in October 2020 by Spencer Rascoff, co-founder of travel website Hotwire and online real estate marketplace Zillow, along with Austin Allison, an ex-Zillow executive who joined that company after his business was acquired by Zillow in 2015.
The concept proved exceedingly popular among investors, drawing hundreds of millions of dollars from major investment firms such as SoftBank Group and netting the company a $1.5 billion valuation by September.
Pacaso claims to be the fastest American company in history to achieve “unicorn” status, meaning a startup valued at $1 billion.
The company plans to use its latest $125 million cash infusion, which was announced last month, to fuel expansion domestically and abroad, including an expansion into Europe by the end of 2021. Pacaso raised $1 billion in debt financing earlier this year.
Its business model is, on the surface, relatively simple. Pacaso buys high-end real estate in popular vacation markets such as Napa Valley; Miami, Florida; Aspen, Colorado; Lake Tahoe, and the Coachella Valley. These are purchased under newly-created limited liability companies, or LLCs, which serve as the financial vehicles for the Pacaso transaction. Existing second-home owners can sell between 50% and 100% of their home to Pacaso and have their remaining interest converted into Pacaso home shares.
Pacaso targets luxury homes worth between two and four times the median cost of housing in an area, according to Ellen Haberle, the company’s director of government and community relations. In the Coachella Valley, Haberle said the average purchase price of a Pacaso home is $2.4 million.
The median home price in the Coachella Valley was $585,000 in September, according to a report by Greater Palm Springs Realtors, the California Desert Association of Realtors and Market Watch, putting Pacaso’s average local home values at the high end of the company’s target range.
After any renovations, remodeling and furnishing that Pacaso finds necessary, the company divides the LLCs that own its homes into one-eighth shares, which are marketed to potential investors by local real estate agents.
To calculate the value of these shares, Haberle said Pacaso adds the home preparation expenses at-cost to the original price of the home and divides it by eight. Pacaso then adds a 12% fee to each of these shares, which is how the company makes money on the initial transaction.
At one home in the Historic Tennis Club neighborhood in Palm Springs, which Pacaso has named “Amber” (the company names all of its properties), this has translated into one-eighth shares selling for $509,000 each, for a total of slightly over $4 million “whole home value.” This price includes roughly $480,000 in “Pacaso service fee(s).”
Property records show Pacaso purchased the home in February for $3.35 million.
Once all shares in a home are sold, Pacaso transitions to a property management role. It arranges service and maintenance on the property and coordinates co-owners’ use of the home through a digital scheduling platform. Pacaso charges a $99-per-share monthly fee for these services, which serves as a secondary source of revenue for the company.
Owners of Pacaso shares are allowed to book use of their homes up to 44 days per year, per share. Each share entitles owners to one “special date” per year, which includes peak-demand periods such as Christmas. Pacaso owners are not allowed to rent their homes for any length of time, although they can give their allotted time to family or friends.
No more than two people can chip-in to purchase a one-eighth share of a Pacaso property, according to a company representative, who said that those two individuals must be “life partners.” When asked for clarification on this requirement, the representative said the two buyers did not need to be legally married.
Brandi Pratt, a local real estate broker who has represented Pacaso’s properties in the Coachella Valley for the last year, said buyers have ranged in age from “super young” to elderly, and that they’ve come from all corners of the country. Most, she said, were primarily interested in buying Pacaso shares for use on vacations, although many also looked at the purchase as an investment. None of the buyers have been local, she added, but she’s had local clients inquire about Pacaso properties in other locations.
From a real estate broker’s perspective, Pratt said selling Pacaso shares is “the easiest deal you’ll (ever) do.”
“All (agents need to) do is they come in, show their client the property and, boom, Pacaso is doing the paperwork,” Pratt said. The broker noted that, unlike in a traditional real estate transaction, buyers could become Pacaso owners “within days.”
Pratt said Pacaso has fully sold out shares in three homes in the Coachella Valley over the last year, including one each in Palm Springs, Palm Desert and Indian Wells.
Pacaso does not publicly disclose the number of properties that it owns or manages but, taken together with the four Palm Springs properties and one La Quinta home currently listed for sale on the company’s website, this would suggest that Pacaso owns or manages at least eight properties in the Coachella Valley.
That number is likely to grow as Pacaso looks to accommodate additional buyers with different tastes and prices ranges in mind, according to Pratt.
“We’ve started adding more to our book of business so that we have more inventory for (prospective buyers) to become a Pacaso owner,” she said. “When you have one, they would come in and go, well this location or this (feature) specifically isn’t for me; I would love to be in this (other) area.”
The timeshare controversy
While Pacaso’s approach is relatively novel, real estate experts say it’s not without precedent.
Timothy McQuade, a professor with Berkeley’s Haas business school who studies real estate finance and innovation, said the Pacaso model has parallels to several other “shared ownership structures” that have been around for years.
He pointed to “shared appreciation mortgages” and a company, Point Digital Finance, which operates under a related business model. Broadly speaking, both shared appreciation mortgages and Point allow homeowners to effectively sell equity positions in their homes to lenders that are later compensated, in whole or in part, through a portion of the home’s appreciated value at the time of sale.
Pacaso differs significantly from either of these models in that the company only temporarily holds shares in its homes while they are being sold to investors and does not directly benefit from the appreciation in homeowners’ shares.
McQuade said another, much more controversial, parallel was the timeshare model.
Timeshare arrangements can vary significantly, but the basic concept is that a buyer is purchasing the right to use a vacation property for a specific length of time and frequency. While still popular in many vacation destinations, they have become notorious for hidden fees and predatory sales practices, which leave owners financially drained over time from what they mistakenly thought was a real estate investment.
In their best form, “deeded timeshares” give owners the right to a specific vacation rental unit for a specific week each year. In an article under the heading “Timeshares, Vacation Clubs, and Related Scams,” the Federal Trade Commission notes that these deeded timeshares are legally “considered real property that your heirs may inherit.”
Timeshares are banned or heavily restricted in many areas, including much of the Coachella Valley.
Pacaso categorically rejects the notion that it is a timeshare business and says that its homes’ shareholders are buying shares in real property, not usage rights during a particular time window.
“Pacaso’s role is really as a property manager; we’re a service provider,” said Haberle. “We don’t maintain any interest in the home. We’re employed by the owners that we serve to create a seamless experience for them.”
Haberle said Pacaso’s terms allow a home’s shareholders to collectively vote to terminate their relationship with Pacaso, after which point they would “still continue to own 100% of that property.” This, she indicated, was one key distinction that separates Pacaso’s model from a timeshare.
Others, most notably the city of St. Helena in the Napa Valley, have said those differences are immaterial and that Pacaso is essentially a timeshare business with new branding. St. Helena banned Pacaso earlier this year under a local ordinance prohibiting timeshares. Pacaso sued the city for the move in federal court, kicking off an as-yet undecided case that could be pivotal to the company’s future.
If the ruling suggests that Pacaso is, in fact, a timeshare business, the company would not be allowed in most of the Coachella Valley cities where it currently operates.
Palm Springs has a ban on timeshares in single-family residential zones. Indian Wells prohibits timeshares, with limited exceptions, while Palm Desert municipal code requires that timeshares “be developed in conjunction with a resort hotel having 500 or more rooms and an 18-hole golf course of not less than 6,400 yards.”
La Quinta is the only local city with a Pacaso presence that could conceivably allow the company to continue to operate if it were legally considered to be a timeshare. La Quinta municipal code allows timeshares in all residential zones with a minor use permit, although such operations must have an on-site manager and must pay transient occupancy tax — both of which would entail significant departures from Pacao’s current business model.
Representatives from most of those Coachella Valley cities said they currently have limited or no awareness of Pacaso’s operations in their jurisdiction.
Palm Springs City Manager Justin Clifton said “the city only recently became aware of Pacaso and their presence in Palm Springs.” He noted that city “staff is conducting an evaluation currently to determine whether or not Pacaso meets the city’s definition of a timeshare and will engage (Palm Springs) City Council to seek input on any other policy considerations.”
Palm Desert spokesperson Thomas Soule said the city was “not aware of any Pacaso operation within city limits at this time.” He said that the city is “actively monitoring the situation in Palm Desert and other cities, while working with legal counsel to ensure that the Palm Desert municipal code is adhered to by all parties.”
Property records show a Palm Desert address listed as “sold” on Pacaso’s website under the ownership of an LLC organized by Pacaso’s CEO, Allison.
La Quinta City spokesperson Marcie Graham said that city was also “not aware of any activity or transactions” relating to Pacaso in its jurisdiction. She said the city would look further into the company if a situation arose that merited the use of city resources for that purpose, such as “a permit application, resident complaints or alleged code violation.”
Pacaso currently has shares listed for sale in one La Quinta home on its website, which property records show is registered to an LLC organized by Allison.
Indian Wells expressed the most active interest in Pacaso’s operations among Coachella Valley cities.
“The city is aware of Pacaso’s interest in acquiring properties within the community and is keeping track of the City of St. Helena’s case to determine what action, if any, will be required in the future,” said Indian Wells City Manager Christopher Freeland in an email.
“The city wants to assure the community that we are closely monitoring the situation and will take further action if necessary,” Freeland said.
Challenges coordinating and selling
Whether or not Pacaso is found to be a timeshare operation in the St. Helena case, real estate experts including McQuade and UCLA real estate and accounting professor Eric Sussman said the company and its owners could face several major challenges in the years ahead.
“Stop and think about everything from acquisition, ownership, management, disposition, financing, the sort of lifecycle of transactions and events that happen over time with a real estate asset,” Sussman said. “Think about all of the issues and challenges that can happen in each of them — and that is when you have a single owner.”
Sussman, who is also a career real estate investor, said coordinating these issues among eight different parties at each Pacaso property could prove difficult over time for the company and for Pacaso owners. He compared the relationship to a more complex form of a homeowners association, with similar challenges in enforcing alignment between members.
“As we fast-forward five years, there will be examples, invariably, of things that may have gone south,” he said. “Let’s just say there was some serious environmental issue or structural issue with the asset that was missed … it could be a mold issue (for example) … and it isn’t anyone’s fault.
“Then, who is responsible, who is going to pay, how are you going to deal with insurance financing and the rest of it?” Sussman said.
If there’s a large deductible, he continued, one of the co-owners could easily say they don’t have the money to cover it, leaving everyone in a pinch.
“Maybe it’s my nature and, having been in this business for too long and having a few wrinkles and grey hairs, I’ve seen my share of challenges and issues that happen in any kind of joint venture,” he added. “I would think anyone who is thinking about (buying Pacaso shares) better have their eyes wide open.”
Pacaso said its operating agreements, signed by all Pacaso share owners, have clear stipulations that require co-owners to pay for all necessary repair costs, which are divided equally among shareholders.
Comparing the Pacaso contracts to homeownership association agreements, a Pacaso representative said any owners who fail to meet their responsibilities as outlined in the company’s code of conduct would be subject to fines or removal from the LLC.
“In those unfortunate instances, Pacaso acts as a guarantor on the property’s mortgage to protect other co-owners and insulates them from some of the risks associated with DIY co-ownership,” wrote the Pacaso representative in an email.
Another potential challenge raised by both Sussman and McQuade centered on the liquidity of Pacaso shares. Liquidity, which refers to the ease with which an asset can be converted into cash, can have a significant impact on the value of an investment. Broadly speaking, assets that are difficult to sell are often considered less desirable by investors than those with a ready market of buyers.
“The question — and this is where I think there are some questions about the model going forward — is are you going to get a secondary market for the (Pacaso) shares where there will be sufficient liquidity,” said McQuade.
The professor said it was unclear at this point whether there would be enough buyers interested in purchasing secondhand Pacaso shares in the future to allow Pacaso owners to cash out if they chose to do so.
He said this potential issue was one of the most consequential parallels between Pacaso’s model and a timeshare operation.
Timeshares are notoriously difficult to sell due to a weak market of secondary buyers. This can leave owners trapped paying ongoing — and often growing — expenses for an asset they no longer want.
McQuade said that, while he believes there are meaningful structural differences between Pacaso’s business model and that of a timeshare business, a potentially limited market of secondary buyers could result in a similar end experience for Pacaso shareholders.
A Pacaso representative said there are no signs of these liquidity issues yet, and that the company has found it is relatively easy for share owners to exit their investments.
“In our experience to date, resales happen quickly; on average within two weeks after an owner has indicated that they’d like to sell their share,” wrote the spokesperson in an email. “Other owners have the first right of refusal, and most shares sell before even being listed on the (multiple listing service) because of our strong pipeline.”
Is it the first of many?
If Pacaso overcomes these challenges, McQuade and Sussman said other new businesses focused on fractional and shared ownership are likely to follow in its wake. They described the company as part of a broader trend toward commercialization of residential real estate, driven by booming housing prices and the success of major innovators such as Airbnb.
“That’s economics 101,” Sussman said. “If you have a market with a new entrant and they are earning excessive margins, that brings competition.”
Sussman pointed to examples of this trend including “iBuyers,” such as Opendoor and Zillow, which use computer algorithms to buy and sell homes quickly, as well as built-to-rent neighborhoods, which — backed by major institutional investors — are cropping up around the country offering entire suburbs managed like apartment buildings.
“I have no doubt that (related companies entering the market) will happen because — even if Pacaso’s model isn’t particularly sustainable or excessively profitable right now — there is so much capital on the sidelines to spawn new businesses,” he said.
The UCLA professor said that, from a consumer perspective, some of these new offerings were being driven by a broader recognition that property is becoming unaffordable for many Americans as well as increasing desires for flexibility amid a changing, more location-independent, job market. Much of Pacaso’s messaging aligns with these trends, emphasizing the potential of its model to lower barriers to second home ownership for average Americans.
“I think Pacaso is just another sign of the changing times when it comes to single family homes,” Sussman said. “The only constant is change.”
James B. Cutchin covers business in the Coachella Valley. Reach him at [email protected]