Will the Internet eliminate real estate agents?
The rapid advancement of technology has impacted nearly every facet of our lives. As every child of the 80's knows, video killed the radio star. The music industry has seen much disruption since that song was released in 1979, from MTV to Napster to the iPod and now streaming services like Pandora and Spotify, the industry will never be the same. The internet has caused similar disruption in the travel and financial services industries, allowing consumers to shop and purchase travel tickets and securities without travel agents and stock brokers. So why hasn't the internet caused similar disruption in the residential real estate industry?
Well, it's not for lack of trying. Many companies have started with that intention, only to find that it's more difficult than they expected. Two of the largest companies that could be considered to be in that category are Trulia and Zillow. Many thought they would derail the traditional real estate agent - client relationship. Perhaps they themselves thought that at the early stages of their companies. If buyers and sellers simply had free access to information, they wouldn't need agents, would they? Well, it appears that in real estate, access to information is not the panacea that some may have thought. Zillow now compares itself to WebMD. Zillow CEO Spencer Rascoff recently said;
“You have as much information sometimes as the doctor, but you are still seeing the doctor because they are the expert.”
Now it's clear that, far from eliminating agents, their primary business is actually selling advertising and other services to real estate agents. As Rascoff recently said about Zillow, “We sell ads, not houses.” Basically, they tell agents who are seeking clients, 'Hey, we have all these prospective home buyers visiting our site, how 'bout paying us to put your ad in front of them?' In other words, the consumers who visit their websites are not their customers, they are the product. Real estate agents are their customers. Recently another company started up with the sole intention of eliminating real estate agents. In May of last year, ReasLo / Reesio founder Mark Thomas confidently stated,
"We just launched ReasLo a month ago, playing in the same space. Except we're planning on replacing real estate agents altogether by going directly after sellers and automating the entire process from beginning to end for a flat $1,000. And not just the paperwork -- EVERYTHING (crowdsourcing of photography, open houses, etc. with licensed agents). The industry is prime for disruption!"
Just over a year later, he was singing quite a different tune:
Ok, I've had several people ask me to talk about the roadblocks that Reesio faced when it originally set out to do a FSBO product back in Summer 2012. As such, I'm just going to post the answer right here in the comments for everyone to see. So here are some of takeaways and learnings that we had from trying to do a FSBO model: - FSBO's represent 9% of the market, and that number has held steady for years, and is not expected to go up anytime soon. And there's a reason for this. When you're talking about buying/selling real estate, you're talking about the biggest single purchase in many people's lives (for buyers). So if that holds true, and buyers insist on using an agent to buy a home (which most do), that means at a minimum the least amount a seller will be able to get away with paying is 2.5%-3% for the Buyer's Agent commission portion. Now throw in the fact that sellers are scared shitless of falling into legal traps and other nuisances with selling a home (not to mention the negotiation part), you are therefore asking for a HUGE shift in behavior. No matter how great the technology is, trying to change behavior that dramatically is always a tough thing to do. - Ok, so let's assume you've somehow found a way to convince 25% of sellers to change behavior and go FSBO. As the technology platform, which documents will you provide sellers with to conduct their transactions? Not only does every state have its own rules and regulations regarding disclosures, what need to be signed, etc., but each county does as well. So you're looking at putting together a minimum of 900 sets of documents (there are currently 900 MLS's across the country). Assume a generous $20K in legal fees for each set of documents, and you're looking at $18M in legal fees on creating documents alone (and don't even think of trying to license documents from the state and local association of realtors, who hold a monopoly and copyright on their docs -- we actually received a C&D letter from CAR when we tried using their docs). Maybe if you're lucky you can find a natioinal law firm that will do all of your docs nationwide for a flat fee of $5M. - So you're in for $5M on just legal docs alone (good luck getting funding for that). And once those docs are created, I'm assuming that you'll be able to create a beautiful, clean workflow and step-by-step instructions for managing those documents. But now what about all of the offline stuff that needs to happen for the seller? Such as BPO's (Broker Price Opinions), Open Houses, Broker Tours, etc.? We tried crowdsourcing that to a network of brokers and it was a huge PITA. And you can't skip those steps -- both Sellers and Buyers care about them. So you'll either have to pay a reasonable amount of money for those services, or try to build out a huge network of agents to do these for a low flat fee (a pain). - And don't forget about the call center of real estate agents that you'll probably need to employ anyways to answer the myriad of questions that sellers have about every little tiny thing that comes up, from whether to disclose the leak in the kitchen faucet to whether they should counter the top 2 offers or the top 5 offers. Trust me -- all of the sellers that used our FSBO product wanted a Mercedes at a Toyota price, so they will hound you for questions at all times, day or night. And no matter what cheap/flat-fee price you're charging, you'll be expected to answer the questions and provide full service. After question #18, it becomes a profit-buster. - By the way, how are you going to find all of these sellers to list with you? Predicting when someone is ready to sell a home is about one of the hardest things in the world to do. I know that there are products like SmartZip, but it's still super hard, and your CAC's to acquire sellers will most likely be through the roof. All in all, you're looking at a minimum of $10M for 18 months of runway to get this off the ground, and more likely $15M-$20M. Which investor is going to fund that without any proof of traction? And to get that traction, you need big $$$ (for the reasons stated above).
Now, realizing the complexity of the home purchase and sale transaction, Thomas has morphed his company into one that offers transaction management software for real estate agents. Going from the stated intention of eliminating real estate agents to now soliciting them as customers is quite a pivot. He'll need much luck to succeed with that model if agents retain any memory of his initial goals. So, it seems as though the transaction of purchasing a home is fundamentally different than buying a plane ticket or a stock. Though we have a free market, and nobody is forced to use an agent to buy or sell a home, most choose to use an agent. According to NAR, only 9% of home sales in 2012 were accomplished without an agent. Despite the proliferation of the internet, that number is actually down from 13% in 2008. Perhaps ironically, it may have been Zillow CEO Rascoff who stated it most succinctly;
“For most people, buying a home is very infrequent, very expensive, very emotional and highly complex, so they typically need a real estate practitioner, a professional, to help them through the transaction.”
Of course that's just one man's opinion, what do you think?
Photo credit: ntr23 on Flickr. CC license.