Pacaso Faces Backlash To Selling Fractional Home Ownership : The Indicator from Planet Money A real estate startup says it's the fastest company in American history to achieve a billion-dollar valuation, but the neighbors aren't buying what they're selling: fractional home ownership.

The Unicorn Next Door

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SYLVIE DOUGLIS, BYLINE: NPR.

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GREG ROSALSKY, HOST:

On a sleepy cul-de-sac amid the bucolic vineyards and grassy hills of California's Sonoma Valley, a $4 million house has become the epicenter of a summer-long spat.

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UNIDENTIFIED PERSON: Pacaso is second home co-ownership. We help you find the second home of your dreams.

ROSALSKY: The house pits disgruntled neighbors against a new startup called Pacaso that's been buying up homes around the nation.

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UNIDENTIFIED PERSON: This is your Pacaso.

SALLY HERSHIPS, HOST:

So this is not Picasso like the artist. Pacaso the company was founded less than a year ago, and California's wine country was one of the first areas it began operations in. And things have not exactly gone smoothly with the neighbors, including this one.

BRAD DAY: We're waging a war by air, land and sea, it feels like. And everybody in this cul-de-sac is determined to not see Pacaso succeed.

ROSALSKY: This is THE INDICATOR FROM PLANET MONEY. I'm Greg Rosalsky.

HERSHIPS: I'm Sally Herships in for Stacey Vanek Smith.

ROSALSKY: On today's show, a new real estate startup says it's the fastest company in American history to achieve the unicorn status of a billion-dollar valuation.

HERSHIPS: Is Pacaso like a glorified timeshare? Or is the company really innovative? Either way, its fights with residents in wine country could foreshadow business troubles ahead.

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ROSALSKY: Brad Day and his wife Holly Kulak live on a cul-de-sac called Old Winery Court in California's Sonoma Valley. Brad says the troubles there began back in May, when they were having a romantic dinner in their backyard.

DAY: I mean, it was a nice time of night. It was sunset (laughter).

HERSHIPS: Brad and Holly were hanging out. They were relaxing. And then all of a sudden, they hear this buzzing sound.

DAY: And we just saw this drone coming up and over our backyard. And we were like, what? What is that?

HERSHIPS: Brad says this was the first of a few incidents where drones showed up and seemed to be filming the house across the street. And he and his wife got suspicious about what was going on. They began talking to neighbors, and one of them told Brad and Holly that she had just made a startling discovery. She was having lunch with a friend, and she learned that a new company called Pacaso was buying houses in the neighborhood.

DAY: And so she went home after lunch, went onto the Pacaso website, and there was the house.

ROSALSKY: So Pacaso had named this $4 million three-bedroom house on their cul-de-sac Chardonnay.

HERSHIPS: Do the other houses have names, like Prosecco? (Laughter) Like, what?

ROSALSKY: And it was selling investors the chance to buy a one-eighth share of it for $606,000.

DAY: So that's when all of a sudden, you know, the red flag goes up. And, you know, all the neighbors get together, and we start trying to figure this out.

ROSALSKY: For the record, Pacaso denies directing or paying a drone operator to film Brad's neighborhood, but its website does have drone photos of the house in question. It says it just bought the photos after the fact.

HERSHIPS: Like, this was a coincidence (laughter). Pacaso was founded by two former executives at Zillow, and they say their mission is to make second home ownership more accessible. And to do that, Pacaso uses a special model - fractional home ownership. They buy a house. They redo it, put in some jazzy new furniture, maybe some new paint. Then they create an LLC for the house. Here is Pacaso's chief legal officer David Willbrand, explaining how the process works in a promotional video.

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DAVID WILLBRAND: The LLC has a total of eight ownership interests or eight shares. Owners, buyers have the opportunity to buy one share, two shares, three shares.

ROSALSKY: Pacaso sells these shares on its website. And for people who buy them, it acts sort of like a property manager for the house. If you buy a share in a Pacaso house, you have to hold on to it for a year. After that, you can sell it and profit if it - you know, the home has gone up in value or, you know, potentially lose money if the home has gone down in value.

HERSHIPS: Owning a share in a Pacaso house entitles you to stay in the house 44 nights per year in stretches that can last more than a couple of weeks at a time.

ROSALSKY: And if you think that sounds a lot like a timeshare, you're not the only one. Whether Pacaso houses are in fact timeshares is at the center of a vigorous debate about its business model.

HERSHIPS: I mean, timeshares do have kind of a bad rap. They are still a popular way to go on vacation, but research shows that their costs and fees tend to make them money-losers rather than profitable investments. But potentially even more damaging to Pacaso's ambitions - timeshares are banned in many vacation communities around the nation.

ROSALSKY: Pacaso insists it's not a timeshare. They say if you buy a Pacaso house, you're not buying time. You're buying an ownership stake in real estate. Plus, it's got an app, and it's building an international platform that makes it different from earlier business models. We spoke with Pacaso's chief of marketing, Whitney Curry.

WHITNEY CURRY: With Pacaso, your home is your home. You are the owner. You own the underlying real estate. In contrast with timeshares, people purchase the right to use a hotel room or condo for a set period of time.

ROSALSKY: But the town of St. Helena in Napa Valley disagrees. In April, city officials said a local ordinance banning timeshares meant that Pacaso could not operate in their community. As a result, Pacaso is suing the city in federal court.

HERSHIPS: And when Brad and his neighbors learned about the lawsuit in St. Helena, they were troubled by the company's legal strategy.

ROSALSKY: Brad says his neighborhood doesn't explicitly have a ban on timeshares. But he says it has been designated an exclusion zone, which bans Airbnb-style, you know, short-term rentals to preserve the residential character of the community.

DAY: Do you want to become an adult Disneyland, where it just caters to people on vacation? Or do you also want it to cater to people who want to live here and contribute to what makes Sonoma special?

ROSALSKY: Pacaso, of course, says regulations against short-term rentals and timeshares don't apply to them, nor do the typical taxes on short-term rentals and timeshares. Pacaso owners, they say, co-own their home, so they should be treated like normal homeowners.

DAY: Yeah. I mean, some people say that a hamburger isn't a sandwich. But ultimately, a hamburger is a sandwich. I mean, it's the same thing as a timeshare.

HERSHIPS: To fight the company, Brad and his neighbors formed Sonomans Together Opposing Pacaso. They've created an anti-Pacaso website and circulated an online petition. They flooded the local newspaper with Op-Eds and letters to the editor. There are all these protest signs up in the neighborhood on, you know, fences and inside cars.

DAY: I think my favorite one is the Pacaso house is the big one on the right with no soul. I think that one was quite cunning (laughter).

HERSHIPS: That has got to be awkward for potential home buyers entering this community.

ROSALSKY: So actually, Sally, it turns out that Chardonnay does have at least one fractional owner. His name is Alfred Miller. He's a risk management consultant based in Los Angeles, and he actually didn't see those signs until after he bought a share in Chardonnay. That's because he bought the house sight unseen.

ALFRED MILLER: So imagine me as the new owner driving up. And I get to the corner of Old Winery Court - I mean, there's a full-on, like, professionally printed sign that says no Pacaso. So then I turn right on Old Winery Court, and Mr. Day has three vehicles in front of his house. And each vehicle has an anti-Pacaso sign on it. I pull into what is my driveway. There are two signs on either side of the property that basically say, no Pacaso. We don't want you here. We don't like this type of ownership. It was not what I would call very welcoming.

HERSHIPS: Oh, no. Poor Alfred Miller.

ROSALSKY: Pacaso has found other locals in wine country just as opposed to their business model. The company bought a million-dollar house in Napa that caused a community uproar. Pacaso claims it even had to file a police report after a local wrote to the company and said, I will burn down any home you buy in Napa. This is no joke.

HERSHIPS: I mean, that is not a joke. In June, Pacaso agreed to sell the Napa home to one home buyer rather than to convert it into an LLC and to sell it to multiple people. The company also pledged not to buy any houses worth under $2 million in the area.

ROSALSKY: Pacaso says it plans to expand across North America and Europe. Given the company's billion-dollar valuation, investors seem to believe that, you know, a lot of people will find this model attractive. But local residents will likely continue to fight the unicorn stampeding into their towns.

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HERSHIPS: This episode of THE INDICATOR was produced by Julia Ritchey with help from Isaac Rodrigues. It was fact-checked by Kaitlyn Nicholas. The show is edited by Kate Concannon and is a production of NPR.

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