Real (estate) disruption: how technology may change the housing market
Tech entrepreneurs are trying to disrupt the real estate market, but are consumers ready to trust a website with such a big purchase? read on to find out.
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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Cutler, Kim-Mai. “YC-Backed Open Listings Enables Home Buyers To Purchase Houses Without Real Estate Agents.” TechCrunch. N.p., 26 Feb. 2015. Web. 17 Nov. 2016. <https://techcrunch.com/2015/02/26/openlistings/>.
DePillis, Lydia. “Here’s Zillow’s Strategy for Dominating Online Real Estate.” Washington Post. The Washington Post, 30 Oct. 2013. Web. 17 Nov. 2016. <https://www.washingtonpost.com/news/wonk/wp/2013/10/29/heres-zillows-strategy-for-dominating-online-real-estate/>.
Fontinelle, Amy. “How Can Zillow Afford to Be Free?” Investopedia. N.p., 06 Nov. 2015. Web. 17 Nov. 2016. <http://www.investopedia.com/articles/personal-finance/110615/why-zillow-free-and-how-it-makes-money.asp?lgl=b>.
Lawler, Ryan. “Opendoor Gets Another $20 Million To Simplify The Process Of Selling Your Home.” TechCrunch. N.p., 26 Feb. 2015. Web. 17 Nov. 2016. <https://techcrunch.com/2015/02/26/opendoor-20-million/>.
Stone, Brad. “Why Redfin, Zillow, and Trulia Haven’t Killed Off Real Estate Brokers.” Bloomberg.com. Bloomberg, n.d. Web. 17 Nov. 2016. <http://www.bloomberg.com/news/articles/2013-03-07/why-redfin-zillow-and-trulia-havent-killed-off-real-estate-brokers>.
Student comments on Real (estate) disruption: how technology may change the housing market
Interesting blog! I have often wondered how these seemingly disruptive real estate ventures have been impacting the industry. Specifically, what real estate agent/broker value add still exists to warrant a 6% fee? If I am able to see recent comps, property statistics, and virtual tours online for free, what is my 6% getting me? I imagine the only thing left is playing the role of a middleman in negotiations and the physical presence of showing potential buyers properties by providing access to the listed property. Concerning their role in negotiations, I believe their incentives are completely misaligned because they undoubtedly earn more money on a higher transaction cost and selling price in favor of the seller. As far as the physical access to view the property, I believe this act to be completely necessary. Even with the advancements of virtual touring, I am uncertain of a potential buyer’s willingness to pay without first visiting the actual property. So does the act of unlocking and locking a house warrant 6% payment of typically already high numbers? Or, should their cut be adjusted to reflect their remaining value add?
Great post, MrNMS! I’ve always wondered how brokers could continue to justify their 6% commission, particularly in markets like New York City, where a 1-bedroom apartment could sell for $2 million or more (compared to the median national value of $150k – http://www.zillow.com/home-values/) and require a similar amount of time and effort to sell. Craigslist has made a significant impact on the rental market, but as Garet points out, having a physical person mediate the act of touring a home has a significant role for both safety and confidence. I wonder if brokers will ever be forced to switch to a flat-fee metric, or if the physical presence aspect will be disintermediated by a digital service like TaskRabbit.
Great post Mr. NMS, thanks for sharing! I agree that the 6% commission rate has been pretty stubborn over time, despite much less value creation from brokers as technology has increasingly served the information and communication functions that brokers used to provide. You cite some interesting examples of how certain companies are dis-intermediating brokers in certain niches of the real estate market… what do you think it will take (from technology innovation, or otherwise) before there begins to be compression in broker commissions en masse? Are they simply impervious to such compression, or is it just that technology has not improved far enough in this area yet? Curious to get your thoughts. Overall, great post and thanks for sharing!
Great post! super interesting how different company’s are trying to cut out the “middle man”. Another trend in the real estate sector is figuring out how to cut out the Broker in a rental transaction. Whoever experienced the “one month” broker fee when moving in to a new apartment knows exactly what I’m talking about. As information is more accurate and available to customers, I actually believe the middle man will be cut out of these transactions. In my mind the question is not if but when. Charging a percentage base fee for the same time and work is just unjustified. I am certain that this market is about to change sooner than most think.
Thanks for sharing!
Great post! It is interesting to read about how technology is disrupting the real estate brokerage market by addressing information asymmetries between buyers and sellers. While I’m sure that websites such as Zillow will continue to pressure the commission brokers are able to charge for their services, I’m not sure if the broker role will ever be eliminated entirely. Like you point out in your post, given buying a home is such a large investment, I’m not sure buyers will be willing to forgo the services and knowledge of an experienced real estate broker. While it is nice to have reference points, I believe that you can’t replace the information gained from touring a home in person. It will be interesting to see how the online real estate market evolves going forward.