Disruption Is Not Coming to Real Estate

The basic tenets of home buying and selling have remained unchanged for over a century. However, new models are emerging that redefine the role of the agent, offer alternative buyers to sellers, and provide new channels for both consumers and professionals to interact.

"Disruption" is a trending word throughout the industry,  but how disruptive are these new business models? I'll cover two well known challengers—discount/fixed-fee brokerages and For Sale By Owner ("FSBO")—dissect a trending third, the iBuyer movement, and enter a fourth, platforms, into the competition.

The Incumbents

Discount and fixed-fee brokerages

I am going to lump these two business models together as they're both offering an alternative to a commission-based compensation model that rely on generating quantity (and not necessarily in a trade-off with quality, more below). The basic premise, of course, is that a fixed-fee structure aligns well with consumers, as buying or selling a more expensive home does not cost the consumer any more.

Given this, it is a bit surprising this model has not taken off as the de facto standard within the industry. A decade or two ago, the financial advising industry underwent a change as the internet ushered in opportunities for clients to do online trading and take a more active role in their financial management, creating fee compression. During the same time, regulators pushed successfully to realign commission structures with the client that resulted in more fixed-fee and fee-based (as opposed to commission-based) advisors. Why has this not happened in the real estate industry?

The challenge is dislodging the natural inclination to associate discount with low quality. Given the real estate transaction is infrequent (as opposed to money management, which is a continuous relationship), the compensation is tied to a single, definable event, and there is little upside in taking more risk, unlike in the markets in the form of more risky investments. While there will always be a portion of consumers who value saving a buck over all else, the business model naturally tends toward a 'quantity over quality' approach, a la Redfin. During what is commonly the largest financial decision of one's life, commissions (should) incentivize agents to work harder for their clients, much to their appreciation and willingness to pay. Given these players work along the low-to-mid price point spectrum (where cost savings matter more), they're unlikely to be disruptive.

FSBO

The FSBO trade-off is a familiar one to those in real estate: save some money by doing it yourself. Market leaders in the US include FSBO.com, HomeBay and HomeLister. These companies are a truly lean-cut in that they do not do much beyond providing advice and a conduit to listing your home (either in or outside of the MLS, the latter of which costs a fee).

One reason FSBO can grow is through technology. Historically, brokers held the keys to the MLS, and with the emergence of online portals and technology, FSBO offerings now provide a path into the ocean of home buyers, and as their technology offering continues to mature, there's even less friction in listing and managing the sale without an agent. Not to mention as more players emerge, competition should drive down the pricing.

An interesting irony of this model is the fact that these companies are therefore forced to replace boots on the ground in the form of agents with in-house developers, customer service representatives, and marketing spend, so the overall footprint remains somewhat intact. This positions FSBOs as technology enablers, as opposed to agent-enabling technology, a big theme these days in the industry, and a phrase often used by Gary Keller.

Given the ability to continue developing consumer-friendly technology and consumer-friendly pricing, the use of FSBO is going to continue to grow. However, its growth curve will look similar to discount brokerages in that they will always play to a niche audience who value saving a buck over using a professional, and are therefore unlikely to be truly disruptive.

The iBuyers

This is where things start to get interesting. It's only possible you have not heard of iBuyers if you've been living under a rock the last year. If that's the case, here's a quick primer on the iBuyer movement.

Companies like Opendoor and Zillow are rolling out programs in specific markets across the country where the company buys homes to then resell them at a profit. A common misconception is that iBuyers and flippers are the same thing. That's not the case. Flippers generally look for distressed properties, bank-owned units, and foreclosures, hoping to profit on the differential between purchase price and sale price after investing in rehabbing the property. iBuyers, on the other hand, make their profits by buying homes at a discount in exchange for convenience and assurance.

Both models have inherent risk of not knowing their exit price and maintaining inventory as prices fluctuate, but iBuyers act as liquidity providers to the market and a compelling option for those who both want to skip the hassle of selling their home and displacing the agent.

Or so we thought.

Zillow's Instant Offers, the blue behemoth's iBuying arm, has from the start engaged with local agents within the transaction, ensuring they're not completely cannibalizing their revenue source. This keeps Zillow on the agents' side while simultaneously moving them closer to the transaction. OpenDoor historically has pushed aside agents, listing properties through their own channels, but has recently changed course by launching a new preferred agent partnership program where it is co-listing for-sale properties with partner agents.

Here again, as with discount brokers, the agent is still featured within the transaction, an important theme when considering the future of the industry. However, viewing iBuyers through the 'agent or no agent' lens is a shortcoming of many critics. How much of the transaction's frictions actually arise from the use of agents? From financing? Maintaining and staging? Inspections and attorney review? iBuyers offer an alternative to the entire process — agent and beyond, so the important variable when considering an iBuyer is: Are you willing to work with an agent and some frictions and pay 6 percent commission, or skirt the hassles for a 12–20 percent reduction (my estimates at a discount to fair value plus fee)?

At true costs of that magnitude, the iBuyers are definitely playing in niche territory, and as competition increases, those discounts will likely shrink, as will their margins, so quantity and velocity (how rapidly they can buy and then sell a home) become extremely important. In order to grow, it may be that iBuyers have to lessen their discounts to draw a larger audience, a potential challenging task. If it costs me 6 percent of my home sales price to use an agent and technology continues to develop to make that process suck less, would I be willing to use an iBuyer to shave off another 3–4 percent of my take-home? With that in mind, how large can the market grow?

The fact that OpenDoor is, ahem, opening its doors to agents again should not be just a footnote in this analysis. It points to a real challenge in going 'sans-agent' in this space. When dealing with low frequency, high value/high risk situations like buying or selling your house (or retirement decisions, family estate planning, complex legal matters), it can pay to have a professional advisor. I entirely expect the iBuyer share of the market to grow significantly, but as a true disruptor of the industry workflow, its current trajectory is more supportive than disruptive.

Platforms

Much less sexy, entirely non-disruptive, but embarrassingly absent from the real estate industry are platforms. What are platforms? As opposed to pipelines, which are single-feature, modular, and non-interactive, platforms curate connections between users (LinkedIn, Facebook, Uber), develop communities based on professional profiles (Angie's List), and grow in value as more users come aboard (Twitter, Instagram).

Platforms are starting to slowly emerge in real estate and stand to provide immense benefits as they provide value to consumers and agents simultaneously, something many incumbents in the real estate technology space cannot claim.

Social-like networks

The best example of a platform is Facebook, and whether you love it or hate it, that blue thumb is making inroads into real estate via the rental market and its partnership with that blue Z.

First, Zillow expanded its Marketplace to include rentals, and importantly, is partnering with ApartmentList and Zumper in doing so. There is a subtle detail that is incredibly important here: Facebook is identifying strategic partners to act as a conduit to leads. Note that Facebook is not reinventing itself as a real estate company, but instead leveraging its massive user base. These are the types of value-add that platforms can deliver over pipelines (your agent website is very much a pipeline). This affords agents the ability to leverage their existing Facebook network to promote their listings, generate new referrals, share additional content, and create much more value than any sum of the individual parts.

Facebook is now partnering with Zillow to create Dynamic Ads, where Zillow listings can be co-branded and advertised through Facebook. While these appear to generate high ROI leads, it's still a cumbersome process that requires manual uploading of listings, optimizing the marketing channel, and nurturing leads through other channels and tools.

The benefits here are obvious: agents tap into a deep user pool in a more targeted manner than before. The downsides focus on adoption: will Facebook users willingly adopt it as a trusted medium? Can Facebook profiles support a professional reputation? Should agents trust Facebook to put their needs first?

With the proliferation of social media platforms, especially picture-based Instagram, agents are able to advertise, generate leads, and share content more easily than ever before. A challenge is targeting the right audience and moving, for example, leads through the funnel, which require yet another tool, and then another.

What would a platform that encompasses the best of social media, leverages existing peer networks, provides value to both agents and consumers and is designed specifically for the real estate industry look like?

Real estate marketplace networks

A challenge that exists for lead-generating tools, even those like Facebook, is conversion. Outside of generating leads, how can agents better engage with leads to convert them into clients? A platform that can move leads seamlessly into a transaction tool would bring immense value to agents — and consumers. Tools such as RealScout and Homesnap are attempting to do this by creating a collaborative home search tool for agents and clients. What's required, however, is an entity that facilitates connections and acts as a medium for a transaction: a marketplace network.

The closest example to a marketplace network is RealScout's Buyer Graph, which is a coalition of brokerages (in NYC and SF) that have banded together to share referrals, resources and more, and then leverage RealScout's technology to interact with clients throughout the home search. Inman recently announced a partial solution, the The Inman Luxury Referral Network, an interactive directory of "the best and brightest in luxury (real estate)" that's designed to connect agents to other agents to generate additional business opportunities, advice, partnerships, and recommendations.

This is why Zillow is smart to partner with agents. For platforms to work, there needs to be an equilibrium between supply and demand. Facebook provides demand (leads/buyers) while Zillow matches with supply (agents/listings). Agent matching sites such as Abode and Homelight similarly offer the ability to match supply (agents) to demand (buyers/sellers) while referral networks like Radius Agent facilitate in a different way with agents (demand) and lead referrals (supply). What's really going on here is taking what's done over text and email threads among peers within the real estate community and bringing it online to a single place.

At Homebloq, we're focused on connections at two levels — between buyer and agent through our collaborative search technology, and agent to agent by allowing listing agents to connect directly with buyer's agents to close more deals faster. We intend to leverage peer networks and develop tools to complete the transaction through a single place.

Perhaps an understated benefit for platforms is they play well into a change in perception about using discount brokerages or iBuyers. Not unlike how consumers adopted buying cars or getting dates online, if consumers become more willing to transact over a technology, platforms such as this will be in the best position.

Is Disruptive Good?

Investors gravitate toward disruption. It's easy when companies such as Uber and AirBnB have grown to success few can only dream about. But is disruption good? Is it necessary? Is it in the best interest of the industry?

It depends on how it's defined. Should we define disruption as the displacement of previously critical players (Uber and AirBnB) or a new and better way to do business (...Uber and AirBnB)? Clearly, in many instances it's hard to differentiate the two. In real estate—a low frequency, high-risk business—often times supporting key players is a more fortuitous route than displacing.

To view the original article, visit the Homebloq blog.