Real Estate and A Loaf of Bread
2019 is shaping up to be a banner year for real estate-related technology startups. Investments are projected to reach over $10 billion in the U.S. alone. This innovation is much needed as the real estate industry has been historically slow to change, and certain consumer segments have long been underserved. But the idea of disrupting the industry, and the traditional players' fear of this disruption, is vastly misdirected.
Much of what we read about prop-tech would have us believe that real estate transactions will soon be as easy as buying a loaf of bread, and consumers will buy and sell homes with a tap of their mobile app. I'm not going to say that it won't happen at all, but it won't disintermediate the true real estate professional.
Personally, I love technology. Having worked in real estate tech for almost a decade, I am constantly looking for new tools to improve the experience for my clients. But! I also know the stress and angst people experience navigating the murky, high-risk world of complex negotiations, legal contracts, and processes. Technology is great at automating repeatable processes, and after 20 years in real estate, I've never seen two deals exactly alike.
The fear of extinction stems from the rapid growth of a few prop-tech titans, such as Zillow, Redfin, and Opendoor. But rather than disrupt an industry, what these companies have done extremely well is simply to identify an underserved segment, and develop an offering that meets its needs. Just like a $1.88 loaf of Wonderbread serves some consumers just fine, while others see real value in paying $4.99 and more for semifreddis, or the local artisan bakery. While these new players are having a broad impact on the industry, I'd argue it's only the Wonderbread segment that's truly being disrupted.
Let's look at Redfin, the leading loaf of Wonderbread - uh, I mean discount brokerage. Launched in 2004 Redfin has been growing fast. Q2 2019 revenue of $197M was a 39% increase over the previous year. While impressive, its total market share is only 0.94%, and it's never made a profit. This may seem surprising considering it's done an amazing job establishing itself as a leading platform for house hunters (along with Zillow.)
But when it comes to actually buying or selling, the vast majority of consumers recognize that the slightly discounted fees come with significantly reduced service levels. Without dedicated, professional representation you statistically lose more in the transaction than you make up for with a discounted fee - a net loss for consumers. On an average U.S. transaction, the difference may be negligible. But in our million dollars plus Bay Area markets those net losses could easily be in the tens of thousands or more.
Now let's look at Opendoor, the leading iBuyer today. What it does very well is to provide convenience and certainty to a home seller, but at the cost of higher fees and a lower sale price. By contrast, a good real estate professional is geared to maximize your home's value with the least amount of stress possible, but can't promise to buy your home at a guaranteed price or date. Guess what? There is a market for both. If a seller values certainty over price, an iBuyer program might be a great option. But is it a true threat to the industry? I think not.
IBuyers exploded onto the scene in the past few years. In Phoenix, Opendoor has captured a 10% market share. Truly impressive. Moreover, 50% of sellers in the Phoenix area entertained an Opendoor offer before selling. Huge, right? Yes, but what this actually tells us is that 80% of sellers that considered an iBuyer offer opted for working with a traditional real estate professional instead. Similarly, Redfin admitted that of 127 offers extended in its own nascent ibuyer program, only 5 were accepted, a 3.94% acceptance rate.
Don't mistake my perspective for complacency. These new competitors will continue to grow, and the traditional industry needs to change, and fast. My own brokerage, Compass, is tackling this change by developing cutting edge tools and innovative client programs to empower the real estate professional. Given its own meteoric rise in the industry, it may be on to something.
Consumers are more informed and discerning today than ever before, and the real estate industry must evolve to meet their demands. The idea that this is a part-time job for the bored housewife is utter fantasy. This is by far the largest transaction most people will ever be involved in. It is highly complex, fraught with legal and financial risks, and requires highly skilled professional representation. Clients today demand better, deserve better!
It is this real estate professional's opinion that one of the best things we could do as an industry is to significantly raise the bar to entry. The requirements for acquiring and maintaining a real estate license should be far more rigorous than they are today; at least on par with getting a Series 7 securities license. This may not be a popular perspective with my colleagues or the NAR that makes its money from dues-paying members. But in reality, our clients and our industry would be better served with about half the number of real estate agents, holding them to a higher professional standard than ever before.
So I say keep the prop-tech and mortgage-tech investments coming. Let the innovators keep innovating and pushing the industry to up its game. The real estate professionals that adapt, evolve and grow with this innovation and the changing client demands will not only survive; they will thrive. So whether you like Wonderbread or your local Whole Wheat Walnut levain, you will have the product that meets your needs.
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