Digital Tools for Real Estate

The residential real estate investment industry has been among the most consistently fragmented in the U.S. With little consolidation and minimal economies of scale, the value chain has been loaded with multiple players and intermediaries providing a wide variety of tasks at a huge variance of price points. More fragmentation leads to higher arbitrage attracting more players into the industry. As just a small example, I went to four different brokerage firms and property management companies in Boston to receive quotes for sourcing tenants, managing a two bedroom condo in Allston, MA, and general handyman tasks. Broker fee options included a fixed price for the broker paid by the tenant in the form of an additional one month of rent, a 50/50 split of the broker fee paid by the tenant and landlord, and a percentage of first month’s rent. Property management companies (when separate from brokers) offered prices ranging from a percentage of monthly rent (two firms provided 4% and 9%, respectively), as well as fixed monthly prices at $100 or $200 per unit. The lack of cost transparency in the market, as well as the fragmented owner-base with different financing implications lead to the variance in these prices. A landlord that owns a property and has largely paid down the mortgage may not price their unit according to market demand, while developers will often factor in various forms of debt financing. Fixing this problem using secure digital solutions will remove a significant amount of intermediaries in the value chain and increase transparency in the market.

It would seem solving the tenant and landlord sides of the equation is just a matching problem. Landlords want someone who will consistently pay rent, has proof of income, a decent background and credit check, but in particular, one that offers no headaches during the tenancy and requires little management. There are tenants who can very comfortably check all these boxes, but are not matched with the right units because of the supply channels they are limited to. Tenants want a landlord who does not nickle-and-dime them, is responsive and transparent, and who generally leaves them alone but provides an acceptable standard of living at the agreed upon price point. There have been hundreds of startups that have tried to solve this matching problem and play a digital intermediary between rental units and tenants with little success (2). They struggle to take off, I believe, because of two fundamental problems. 1) both sides of the platform do not trust the other side, so placing a digital platform in between does not in itself build trust. 2) Acquisition costs for both sides of the platform are very expensive and there are low barriers to multi-homing. Additionally, once a pair is matched, the utility of the platform disappears, making network effects very low. I do believe there are digital solutions however, that we have discussed in class that have the potential to solve for some of these problems. A distributed permissioned ledger, smart contract protocols, escrow accounts, as well as automated verification tools could provide the kind of digital infrastructure needed for landlords to trust a tenant who is being connected with them, and that the expectations for both sides are properly set. It is very possible a platform like Airbnb could extend its offering to include rental units, similarly relying on reviews and verification practices. To compete, brokers and managers will need to rely on building strong relationships with owners and investors. Additionally, dispute management has routinely been an issue for digital solutions, including Airbnb, as the variance of issues requires hands on problem solving, raising the management costs of the platform and removing the digital economies of scale. Over time, some disputes will be predictive enough to be solved digitally, relying on less human capital.

To stay competitive, I recommend that brokers and property managers get into forming longer term contracts, relying on building strong client relationships, and possibly sacrificing some arbitrage opportunities later on in exchange for predictable cashflows. A flat $100/unit/month fee, increasing $10/year, in exchange for committing to using an exclusive property management company for five years on investments would be a mutually beneficial contract. I think investors would like knowing that their costs are stable regardless of market volatility, allowing them to sacrifice less upside if conditions are good. It is already critical for managers or landlords to be using digital tools to help achieve any benefits of scale. For example, a Boston based startup called ‘Z-Rent’ (https://www.zrent.net/) offers rent collection and digital management tools for managers so tenants can pay and divide their rent using credit card, check, or direct deposit. They can also set up auto-pay. Property managers can manage several units in one platform and see which tenants have paid, when, and whether they have elected to auto-pay. Technology developments are going to be integral to keeping management costs low, and relying on relationships in the real estate industry to compete against other potential digital disruptors. Z-Rent has partnered with four community retail banks in Massachusetts and New England; if landlords open a retail account at one of those banks, the z-rent service is free. For paying customers, the going rate starts at $3.99/month for one unit, and scales to $1.99/unit if you have 10+ units. This type of cost savings allow landlords to either entirely cut out a property manager and more easily manage themselves, or for a property manager to augment their current offered services, as well as maximize their time.

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As the industry shifts towards tenants seeking more transparency; managers, brokers, and landlords that have embraced new digital solutions will gain a significant cost advantage and client access advantage over incumbents operating in the ad-hoc craigslist broker dominated real estate world. The ability to more quickly vet and trust a tenant will unlock a bottleneck, and remove an intermediary, that currently taxes both sides of the market.

1. https://medium.com/block-gemini/digitizing-the-real-estate-investment-sector-with-blockchain-67a9b823258a
2. https://www.disruptordaily.com/8-real-estate-startups-crashed-burned-simply-sputtered/
3. https://www.zrent.net/