Real Estate at a Crossroads

by Gregory Charlop

  The new kids on the block—non-traditional real estate firms

  You knew it would happen. The internet is transforming all other sectors of the American economy, and it was just a matter of time before it took aim at the traditional real estate brokerage model. Thanks to an explosion of investment and technology, a lot of smart people are working to transform how we buy and sell homes.

  According to Forbes, investment in real estate technology skyrocketed from a meager $33 million in 2010 to $5 billion in 2017![18] That’s a lot of money in a very short time.

  Let’s take a look at some of the leading tech-driven real estate companies: Redfin, eXp, Opendoor, Real, and Purplebricks. Whether you’re an agent, broker, or executive, it’s important to understand these companies because they’re sure to transform the real estate marketplace in the coming years. Each of them takes a somewhat different approach to reduce costs and to accelerate and automate the sales process. All of them are a departure from the traditional brick and mortar brokerage model.

  As you know, technology and business are constantly changing. You should investigate and confirm everything for yourself, as these businesses are likely to be different by the time you read this book. Contact them with questions; they all have great customer support.

  Redfin was founded in 2004 and is an online brokerage with a remarkable web portal. A lot of folks enjoy Redfin’s site even if they aren’t using the brokerage since it’s easy to use and has lots of great neighborhood, pricing, and home information. Redfin appeals to consumers with its discounted fee structure and innovative website.

  As an aside, I had a great experience with Redfin’s web portal. For some reason, they seem to have new listings a few hours before some other sites. One day, a property which was part of an estate sale popped up in an email notification from Redfin. It was dramatically underpriced. The listing agent was out of town and didn’t have a good feel for local market conditions. I contacted my traditional agent (Redfin didn’t actually service this property), and we put in an immediate below-asking offer on the house sight-unseen! The seller accepted. I made a sweet deal that day!

  Redfin’s agents work collectively, particularly when you buy. You can book home tours online and they’ll assign you to an available associate. That allows Redfin a nimbler response to tour requests, but buyers have to be comfortable working with multiple agents. I didn’t mind that since I enjoyed the different perspectives, but I can see how some folks might find that unsettling.

  A key Redfin feature is that agents are paid a salary (with benefits) rather than a commission per sale. They get bonuses for high customer satisfaction, but not for moving each individual home. I like that model for buyers since each agent is encouraged to be more of a consultant rather than a salesperson. I walked into a property with a Redfin agent who said: “Forget it! You don’t want this place. Here’s why.” I appreciated that.

  Here’s what Bridget Frey, the brilliant Chief Technology Officer (CTO) of Redfin had to say about the company: “Redfin is unusual in that our agents are employees of the company. They receive a salary and a bonus based on how satisfied a customer is at the end of our transaction.” She continued, “We invested in technology to enable our agents to handle three times as many happy customers as the traditional real estate agent. They're just far more productive, and that means that we can offer our service at a lower cost. We charge 1 percent in most markets to list your home versus the traditional commission of 2.5 to 3 percent.” The full interview with Frey appears here.

  On the seller side, I think the lack of a commission is a bit more problematic. As a home seller, you might worry that your commission-free agent might be a little less hungry to pull out all the stops and sell your home.

  Redfin is also experimenting with the iBuyer process, which we’ll discuss more below.

  Currently, Redfin has limited use of part-time associates. While I’m glad they’re making use of part-time employees, I hope they’ll expand the practice. To me, the Redfin model is ideal for stay at home parents or folks working other jobs but who would like to work in real estate for a set schedule each week to supplement their income. By expanding the use of part-time employees, Redfin will recruit many fantastic agents that are squeezed out of the hyper-competitive commission-driven real estate world.

  Next up is Opendoor. Opendoor is sure to be a disruptive player in the market and is one of the initial iBuyers. They recently raised an eye-popping $300 million from investors and are now worth over $3.8 billion![19]

  Opendoor streamlines the process of buying or selling homes. According to their website, Opendoor will make you an offer with the press of a button. A home seller jumps on their site, enters some information about the property, and Opendoor’s computer algorithm generates an offer price. If the seller accepts, the company sends someone to inspect and confirm the property. Sellers even have the option of leaving the repairs to Opendoor.

  The process is so fast, the home can close in just a few days! No staging, no repairs, no advertising, no wait, and no need for a real estate agent.

  Buyers can use Opendoor too. Opendoor owns hundreds of homes in each of the markets they service. Buyers can let themselves into the homes using the Opendoor app without an agent. They call it the All Day Open House. Prices are transparent, and the homes close quickly. Buyers acquire the homes directly from Opendoor. Opendoor knows the properties and they provide the buyers all the inspection reports. In addition, each home comes with a 30-day guarantee.

  Opendoor makes money on fees. In exchange for an ultra-fast and hassle-free process, they charge sellers fees ranging from 6-13 percent, with an average of 6.5 percent. According to Opendoor, sellers on their site will typically pocket more money since they’re avoiding real estate commissions and the costs of staging and holding multiple properties. Opendoor claims that they pay a fair market price for homes, but some agents dispute this. The trouble, of course, is that there’s no way to know what the home would have scored on the open market.

  As of this writing, Opendoor actively transacts residential properties in 20 major cities, including Dallas, Las Vegas, Portland, Los Angeles, and Atlanta. With their new infusion of cash, they’re sure to be coming soon to a city near you.

  If you sell with Opendoor, you really don’t need an agent at all. Their website and customer support team handle everything.

  While you can buy with Opendoor without an agent, the buyer must be willing to select from the company’s still rather limited inventory. Opendoor does work with agents on the buy side when agents introduce their clients to Opendoor’s homes. In that case, the agent does make some commission. In a sense, it would be similar to a buyer’s agent showing their client a home from Redfin.

  What does all this mean for the real estate marketplace? Well, in the short-term, the impact of Opendoor is still limited. They’re only active in 20 markets and each one only has a few hundred homes. But, they’re sure to grow. They have lots of money and powerful investors. I wouldn’t be surprised if they reshape the market. Particularly with folks accustomed to immediate online purchases like the Millennials, the rapid and transparent Opendoor process will hold a lot of appeal. They’ll wonder why they shouldn’t be able to buy and sell a home immediately, just like they can with everything else. The traditional process will seem so SLOW.

  When that shift happens, agents and real estate firms will be displaced. Selling agents will be hardest hit. Many homeowners will prefer the speed and simplicity of selling with Opendoor rather than the whole rigmarole of preparing a home for sale.

  On the buy side, Opendoor’s impact will be more muted. My sense is that they will always want to entice buyer’s agents to show their properties, so they will probably cut good deals for salespeople in the foreseeable future.

  Ultimately, Opendoor is just another example of how times and technology are changing. Savvy real estate agents will need to reinvent themselves and continue to prove that they add value as a trustworth
y consultant. You need to show prospects that their experience will be better with your human touch rather than an algorithm.

  Hopefully, Opendoor will give the real estate community the kick in the pants it needs to speed up, simplify, and streamline the transaction process. Over the years, it has become too complex and far too opaque. Many companies are now working on this worthy goal, and I applaud their efforts.

  By the way, Opendoor is not alone in the world of iBuyers. Other companies joining this emerging industry include Offerpad and Zillow Offers. Even traditional real estate brokerages like Keller Williams and Coldwell Banker are experimenting with iBuyer offerings. All have slightly different rules and approaches to how they partner with real estate agents.

  Experienced CEO and angel investor Nav Athwal JD believes that some iBuyers like Opendoor may be “trying to eliminate the role of the agent in the deal. A seller can come to them and say, ‘I want to sell my property,’ and within 48 hours, Opendoor will have an offer for them, and they can close the deal without agent involvement, without a showing/staging, without any of the hassles that usually come with the sale of a single-family home. Opendoor essentially becomes the buyer of that property, which means that they have to have a substantial balance sheet. Whether or not they're going to be able to scale that to every market we'll have to wait and see. That model involves tremendous risk. If the housing market corrects, Opendoor is left holding the bag.”

  Athwal is still bullish on the need for real estate agents. He said, “Real estate agents are so integrated into the sales and purchase process for real estate that I think it's going to be hard to displace them completely. If they are ever displaced, I think it's going to be 20 years down the line.”

  Another player, Purplebricks, is a big hit in Europe and is making waves in the United States. As of this writing, they will sell a home for a flat fee depending on your location. They manage these savings while using local real estate agents whom they call Local Real Estate Experts. Buyers using Purplebricks earn cash back at closing.

  Currently, there are reports that Purplebricks might be transitioning to a more traditional commission model,[20] and only time will tell where they settle. However, it is clear that innovative companies with new real estate models will continue to appear and likely flourish.

  As with all real estate firms, Purplebricks shows listings on all the major portals, including the MLS and Zillow. The company tends to attract DIY-type clients who still want help from a human real estate agent. As Purplebricks grows, it will be a potent competitor to Redfin and Opendoor. It’s not a startup. Purplebricks will draw on their European experience to race across the country. Expect to see them soon in a market near you!

  eXp is the big new kid on the block. They’re an online brokerage with a really cool virtual world! They make it fun to “come to work.” If you haven’t seen some demos of their virtual office, hop online and check it out.

  eXp’s costs are very low as they don’t maintain offices and employ minimal staff. That allows the company to focus on technology and charge their agents less. In fact, there are no desk, royalty, or franchise fees. Their website claims that agents keep 80-100 percent of their commissions. eXp has a pathway to allow agents to become company shareholders. They have a great leadership team, agents love working with them, and the company is expanding all over the country.

  Suzy Truax, a member of the board of directors of eXp World Holdings, described the company this way: “eXp Realty is a 3-D cloud immersive national real estate brokerage.” She explains, “eXp World encompasses all the services you would expect at a real estate brokerage (legal, marketing, broker assistance, education, payment processing) but without the inefficiencies and without the costly overhead.” You can read the full interview here.

  Truax finds eXp to be “more collaborative than a physical office because, with an office, you're limited to the people who show up. I can go into the cloud campus today and attend a class with someone who was the number one agent in all of Coldwell Banker teaching how to do a listing presentation. Bricks and mortars can't scale this kind of collaboration.”

  Real is an Internet-based brokerage which leverages a powerful platform and low overhead to save their agents money and time. The company has no offices but uses human agents to transact houses the traditional way—in person. They allow their associates to earn equity in the company, which is a real selling point for many agents. As of this writing, Real is available in 22 states and growing. Click here to read my full interview with Poleg, the CEO of Real.

  Home Bay is an internet-powered brokerage. Their real estate agents help buyers and sellers remotely, which allows the company to pass huge savings on to the client. Although relatively new, Home Bay is catching on fast! As of this writing, they’ve already transacted over 1,000 properties and sold over $330 million in real estate.

  Home Bay works by empowering homeowners to sell their own houses. Home Bay’s team of experienced agents is available for remote consultation to guide sellers through the entire sales process. Homeowners hold their own broker's tour, open houses, and showings. Buyers can book house tours through Home Bay, and their agents handle the offers and negotiations.

  This model may not appeal to all clients since it requires a high level of motivation and drive. But, for the right people, Home Bay is an innovative way to make the system more efficient and save significant transaction costs. Why would buyers who already know what they want to incur the expense of a traditional real estate firm rather than go to Home Bay?

  It’s easy to see how a company like Home Bay can capture entire segments of the market: knowledgeable buyers and driven sellers of standard properties. For these folks, the value proposition of paying a traditional agent a 6 percent commission just isn’t there.

  I asked Home Bay’s executive chairman Ken Potashner what impact the public’s easy access to data and the MLS will have on real estate brokerages. He said, “There's tremendous transparency now in terms of data flow. Zillow provides a great deal of data. People go in now with a preconception of what their house is worth. They're able to see comparables in a way that they weren't able to years ago. We're in a data information-rich environment. In the distant past, you would have had to rely on your broker and trust your broker to steer you through valuation. Therefore, given the existence of the information, the brokerage needs to define differently what value add they're providing to the equation. They need to either look for different ways to add more value or change their value proposition from a cost perspective to align with how much data is flowing freely to the consumer.”

  The ubiquitous and transparent MLS makes it easy for folks to research homes on their own. Zillow, and startups like Neighborhood Scout, take most of the guesswork out of choosing homes and locations. It’s just a matter of time before most people find homes on their own and just need a real estate agent for consultation and negotiation. Home Bay shows us how this model can work.

  Top real estate coach and author Tom Ferry believes that, regardless of technology, real estate agents will remain essential. He said, “Century 21 was the first real estate franchise. And the second one? It was a discount broker that was basically looking to get rid of real estate professionals.

  The reason I bring that up is this: the only people who are nervous about this are agents who should leave the industry anyway. Good agents will never be replaced by technology. Good agents always have that fiduciary responsibility to walk you through the process, make sure you make the right decision and feel good about the decision, and that you have someone to talk to through the range of emotions that take place inside a real estate transaction.”

  Ferry continued, “So, do I think real estate agents will be here in five years? I would bet everything I own times a thousand that they will be. Then I would go out 10 years, 20 years, 100 years, and I’d say the same exact thing.

  Now, what might change is model and compensation. There is plenty of room for new models and chang
es in how agents are compensated, but somebody's still going to be there guiding and directing. Did WebMD get rid of doctors?”

  It is also worth noting that technology itself might ultimately reduce the power of all brokerages. I asked blockchain and Bitcoin expert Ragnar Lifthrasir how digital currency and a distributed ledger might impact brokers. He said, “The power is going to be much more in the hands of the owners of the real estate because the owners will be able to eventually create a digital deed for themselves. They (agents and brokers) are going to have to realize that their role as middlemen is going to diminish over time, so I would say it's prudent to start being in front of that.”

  Equip your agents with technology

  “Technology is not about replacing people; it's about making people more efficient. And the scarcest thing we have in this world isn't money, it is actually time. Every second that goes by is a second that's lost, that you can never get back. So, if you can leverage technology to be more efficient with your time, you're going to be far more productive, and you're going to be able to do more of what you want to do,” said leading venture capitalist and real estate industry expert Matt Murphy.

  How do you get cutting edge technology in the hands of your real estate agents? Murphy continued, “One successful example is Climb, a real estate brokerage based in San Francisco that was recently purchased by NRT. Climb has a very interesting approach. Mark Choey, one of the founders and the chief technology officer, fully embraces technology. He doesn't fully build it; he creates an ecosystem around his brokerage where he brings these technologies to his agents. Then he speaks at events and showcases the technologies on the agents’ behalf as an advocate. That's a phenomenal way of putting yourself at the center of innovation, as well as improving your brokerage.”

  “A home is the biggest thing that you purchase in your lifetime. The average person buys maybe two, three homes over the course of their life. By comparison, the next biggest thing is probably a college education, then a car. Because of that, you still want someone guiding you through the transaction of this largest asset.”