The business of buying and selling real estate is an ancient one. Ever since humanity began settling in organized societies, certain pieces of land were more valuable than others. In any society were individuals were allowed to own property, a market eventually emerged to buy, sell, manage, and finance the purchase of these properties. Once upon a time, bag of gold or a very large sword may have been enough to secure your dream home by the sea, but today, a far more complex environment exists to allow for real estate transactions. Today’s real estate ecosystem involves a wide set of stakeholders: commercial property owners, retail property owners, real estate brokers, lenders, building managers, regulatory agencies, and, in the age of digital disruption, tech entrepreneurs hoping to break the system.
The entire process of acquiring property is set for disruption. The first gap being addressed by digital technology in real estate is the information asymmetry between buyers, sellers, and brokers. Before the internet era, real estate agents, who followed local markets very closely, typically had the best information about the fair price of a property. Buyers and sellers often lacked the information to know the value of their property, and each relied on their own representative to effectively negotiate. As a reward for providing this service, real estate brokers received 6% of the final sale price of a property.
Today, all parties involved can access accurate pricing information with the touch of a button. Websites like Zillow.com provide pricing information down to the individual home level. Zillow uses historical sale data, recent sales of homes in a neighborhood, and economic forecasting to give nuanced and informed pricing information to the World Wide Web. Many believe that with buyers and sellers are no longer beholden to their agents because information is more accessible, agents could be disintermediated. Thus far, however, that theory has not proven to be true. Zillow has two primary revenue streams: ad-sales, and premium services to real estate agents, which makes up makes 73% of its revenue. Their data has proved to make agents better at their jobs, but has not been able to dislodge their firm hold on commissions.
It is worth exploring why real estate brokers are so firmly entrenched. First and foremost, the cost of a home is significant to the average buyer. If you think about how long it takes for your family to decide what to eat for dinner, think about how much harder it is to buy a new home. Agents helping buyers navigate a complex decision, one that even Zillow’s data can’t help the average consumer overcome.
But, what about the savvier retail investor? They know local markets well and are comfortable with the legal transaction process. A recent start-up, Open Listings, is targeting that exact segment of the market. They believe that with home values rising, the standard 6% commission rate is out of date. Instead, they charge a flat rate on all transactions, and allow well-informed buyers to save thousands of dollars on each transaction.
Instead of solving for transaction costs, other companies are trying to solve for transaction speed in the real estate market. OpenDoor believes that the real estate market moves too slowly, and by offering more liquidity in the housing market, they can create value for buyers and sellers. Many sellers have to wait months to sell their homes once they are placed on the market, which in turn delays their eventual purchase of a subsequent home. OpenDoor cuts the sales process down to as short as 3 days, making new housing stock available extremely quickly. They buy homes from sellers after a quick inspection, and take on the risk of reselling the home. They charge a fee to sellers for this convenience, then an additional profit margin on the final sale of the home. Technology allows them to research a fair price, and perform remote home tours via web-activated keyless entrance and security cameras. While this model is more of an online speculator than broker, it’s another example of the many attempts to disrupt the ancient real estate industry.
It may be too soon to tell how and if technology will truly alter the process of buying a home. Many companies are taking aim at brokers (Real), landlords (Cozy), and lenders (Point), but the industry has yet experience a dramatic shift. While consumers may be comfortable with online approaches to ride-sharing, retail and other forms of online commerce, the real estate industry will be slower to change. If you’re selling your home anytime soon, I’d still budget for that 6% broker commission.
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