The Shifting Value of Real Estate Agency. Part 2

Displaced Value Propositions, Redirection of Deal Flow, Outside Threats and Misalignments of Value.  

Expounding on threads from Kurt’s article...

Will real estate agents disappear?

Put simply- Technology will not replace real estate professionals, however, real estate professionals that leverage relevant technologies will replace those that don’t.

Consider that it hasn’t been 10 years since the housing bubble burst, which drove innovation out of necessity after years of having it deflected by entrenched incumbents who were not interested in creating unnecessary competition. Conflate those market conditions with the NAR’s antitrust settlement with the DOJ, that opened previously vaulted property listing data to the masses via Internet Data eXchange (IDX) as a policy. Access to timely listing data traditionally required a formal, direct relationship with a real estate professional; it was of essential value to the consumer and a pillar of value for buyers agents (agency). These seminal events altered the fundamental value chain of the real estate professional going forward.

The rapid advancement of consumer-focused data driven platforms have further forced the dissolution of legacy policies that produced fields of fragmented and fortified property data silos, subsequently creating and connecting data lakes where said information is being scrubbed, structured, commingled and analyzed in ways that have been historically impossible. Innovations like Automated Valuation Models, once damned by the industry, are now table stakes for real estate professionals competing for today’s consumers.  

These events have drawn the tangential qualitative talent (and money) that is transforming these data lakes of information into dependable and actionable insight. A good friend, who happens to be a tenured data scientist working in the real estate data sector, presciently opined: Consumers want two fundamental questions answered: “What’s my (the) home worth?” and “How’s the market?” The rest is logistics.The ability for a consumer to answer those questions with enough confidence to transact has increased dramatically over the past 5 years.

As technology erodes long standing industry barriers to enter and compete, the value propositions of real estate agency and the professionals who work within it are subject to substantial disruption. Yes, we’ve heard iterations of this since the internet was born. No, the extinction of the human real estate professional is not upon us. Multiple aspects of complicated and unique transactions will continue to require the insight and expertise only a human brain can rationalize.

However, as the data used to drive decisions around the transaction continues to improve both qualitatively and quantitatively, the outcome will be (continued) displacement of the traditional real estate professional service providers value proposition, replaced by a more robust value chain

The flat(tening) tail

 
flat tail.png
 

When the uninitiated approach the real estate industry as an addressable market of ‘a million++’ Realtors, they’re presented with some anecdotal version of Pareto’s Principle, where the super majority of sales volume comes from a super minority of agents. Reliable data(1) shows that between 2012 and 2016 the sales volume and sides generated by the top 100 brokerages increased by 56% and 33% respectively. It’s fair to say that a chunk of the long tail of business the industry generates is rolling up to well run brokerages, and the businesses within. The businesses within...

Kurt alluded to “Agent Teams” (Team) as a more efficient business model relative to traditional brokerage of the past 20+ years... and he is correct. As an archetype, they willingly adopt technology that improves efficiencies across their business, which is what a Team is- a business. A business that leverages the basic economic principle of comparative advantage, where all members of the business mutually benefit from cooperation, while focusing on the jobs they do best. This warrants defining because the real estate industry tends to struggle with how to define a Team amongst the traditional business definitions of brokerage, broker-in-charge, broker, agent, etc. It also warrants mentioning that the traditional real estate (large brand and) brokerage model employs a B2B2C strategy, where the brokerage's customer is the consumer by proxy of the agent. In contrast, the Agent Team model is a pure B2C play where their collective customer is directly the consumer.  Coupled with the right technology, successful Teams are also taking advantage of economies of scale; unrestricted by geography, they’re launching their proven business models into new markets across the country. 

Kurt pointed out the year over year increasing number of licensed Realtors and how that seems to run counter to the fact that technology is making the job of a Realtor more efficient, ergo, the number of Realtors should be declining. His follow up point, that consumers continue to hire a Realtor for the job of ensuring they don’t screw up the transaction, is on point. However, this doesn’t necessarily explain the YoY agent growth and runs counter to my belief that the long tail is shortening. I believe the Agent Team dynamic does.

Raw data from Real Trends Real Estate Team’s Playbook shows that most agent teams have 6 defined roles. Often times there are multiple people for multiple roles. Anecdotally, it’s becoming a requirement for most, if not all Team members to be licensed Realtors for regulatory and educational reasons. Whereas in the past you may have had one Realtor handling sales and five unlicensed ‘administrative assistants’ closing 10-20 transactions per year, today you have a tech enabled Team with six licensed Realtors (with one or two that handle sales) closing 100+ transactions per year. More Realtors closing disproportionately more transactions, and the redirection of traditional deal flow equates to a flattening of the short tail while the long tail gets rolled up. It’s difficult to see this dynamic using traditional reporting as the Team leader, or CEO of the business, typically receives credit for the closed transaction. Since the other Team members do not receive the same credit, there is a skewed perception of less Realtors closing more transactions.

Do teams threaten the traditional broker model who emphasizes the value propositions of brand awareness, coaching, training, technology, and support, since they often offer their own versions of such? 

Does the team model threaten the independent contractor status for real estate agents as a class?

Threat of new entrants

 
 It's getting hot in herre...

It's getting hot in herre...

 

Understanding that the breadth and depth of data available around the real estate markets is exponentially better compared to just five years ago, coupled with the influx of human and machine driven talent to process such data into actionable insights, the landscape is fertile for new entrants that threaten conventional real estate agency roles.

Compass launched in 2013 in the greater NYC market. In 2016 the brokerage claimed 30 offices across 10 regions, ~1,400 agents with revenues of $180M+ on ~$7.1B in sales volume. $0 - $7.1B in 3 years is unprecedented, I think. Compass has achieved this with a tech/data forward approach and an ‘aggressive’ recruiting strategy. Their tech forward approach puts intuitive and accurate, market and property data at a consumer's fingertips, and access to a professional who knows how to navigate a very non-linear process, giving them increased confidence to transact.    

OpenDoor is buying homes almost(2) completely outside of the traditional real estate industry, only engaging a buyer's agent when selling a property they’ve acquired by offering the obligatory ~3% via the local MLS’s for the market exposure to sell the property. They’re focused on mature markets with homogenized housing supply, use a sophisticated algorithm with local human expertise to establish property values, and have access to copious amounts of capital to close on qualified transactions within 3 days. OpenDoor charges a premium to the consumer for the privilege of not having to go through logistical maneuvers in the dark that is most traditional real estate transaction processes.  

While not a ‘new entrant’, Redfin is widely considered to be the pioneer of ‘tech enabled brokerage’, although their initial go-to-market positioning around rebating a portion of revenues generated from gross commission income got them attention they weren’t entirely prepared for. Running into the real estate industry screaming ‘Disintermediation!’ makes success unnecessarily tough on even the most well funded, intelligent, and resilient businesses. As their market positioning embraced an industry centric approach and the landscape continued to evolve, they’re no longer burdened with the stigma of being a ‘discount broker’, rather, a brokerage that competes on service and price. They’ve arguably spawned brokerage models like Virgent Realty and Redefy, who focus on streamlining the logistics of selling a home and passing the savings along to consumers. Brokerages like FlyHomes are innovating around the buyer qualification process to improve transaction efficiencies. They're arguably competing against OpenDoor more so than the traditional brokerage... which is pretty fascinating.

Zillow is also testing the idea that consumers find a lot of value in a very streamlined closing process. No, Zillow is not becoming a traditional real estate brokerage by definition; they don’t want or need what comes along with all of that. 'Instant Offers' is a measured response to OpenDoor (and like models) rather than some oddly perceived broken promise to the real estate industry. The program effectively delivers 'seller leads' to qualified buyers who can close a transaction in a fraction of the time, for a premium. A premium that certain consumers are fine paying. Some in the industry argue that consumers are in jeopardy of being ripped off or some such. 'Instant Offers' and other initiatives that are disruptive to the conventional real estate business model and processes are just that. They're not going to eliminate the real estate professional, however, consumers are clearly stating that they place a premium on efficiency and certainty around the 'contract to closing' (and other) stages of the greater transaction cycle. Zillow and others will continue to expose this type of latent opportunity. There is an abundance of it, and they're not going away.  

In many respects, Zillow and others are also 'flattening the tail' by establishing competitive standards. 

“...we will continue to encourage lower performing agents to leave and resell their inventory to agents with higher ROI. This will reduce our number of advertisers and connect more home shoppers with better agents, and we expect this will reduce our sales and support costs over time as well.”

~Spencer Rascoff, CEO Zillow

Does this not- 'Raise The Bar'?

The company internally estimates that they "delivered nearly 17 million leads to our Premier Agent advertisers, which we believe enabled approximately 5% of transaction sides, and roughly $4.4 billion in commissions."

  • At a 2.6% effective commission rate; that equates to ~$170B in sales volume.  
  • 2016 revenues from Premier Agent reported at ~$600M; that equates to ~13.5% of their ~$4.4B in reported commissions.  

At what point is their lead quality good enough to command the equivalent, or close to, the value of a typical referral (~35% of GCI)? $4.4B x .35 = $1.54B. What does Zillow have to do (or partner with/ buy) to get to those numbers via their market driven lead monetization model? Who helps advance these initiatives and still keeps them outside of the transaction?

Zillow doesn't need to become a brokerage to collect revenues like one. There is still plenty of room for growth without tying revenue directly to a transaction.

As an aside, the breadth and depth of vitriol directed at Zillow by many industry practitioners is misplaced. These folks either overestimate their value, or underestimate the consumer and their increasing confidence to make transactional decisions based on qualitative data (not available or accurate enough just 5 years ago) that continues to get better. Rather than focusing on simply remaining in the middle of a transaction, better to focus on how to more efficiently facilitate such and do the jobs that the consumer needs... because there is money moving into that.     

While none of these new (and pending) disruptive entrants to the industry portends to displace an incumbent market leader by themselves, in the aggregate, they can (and will) siphon off talent that embraces change as well as the market share that follows them. 

Does 'traditional brokerage' begin to adopt even aspects these alternative models into their greater offerings? Can they?

Misalignment of values

At a quick glance these ‘alternative models’ look like an assault on 'the industry' as a whole. Look closer, under the big guys, they're iteratively improving the consumer experience, by the consumers definition, within brokerage and agency; they are not FSBO's. While iterations of alt-model brokerages have been tried for as long as the industry has been regulated, their recent success is arguably attributable to access to more/ better/ cheaper data, storage, and technology. Most of the 'alt-brokerage' models have focused on delivering more value for less cost to the listing side of the transaction; the far more complex and internally expensive side. Traditional buy-side brokerage has remained relatively insulated from having to compete on cost vs service value, based primarily on lack of consumer knowledge. These conditions can not last.    

Compass puts clear and actionable information in the buyer’s hand that gives them the confidence to transact, something buyers agents have traditionally provided. OpenDoor and Zillow are effectively delivering qualified buyers who are ‘clear to close’ in days, not months. Redfin et. al. offer buyer side commissions out of necessity. That said, the idea that sellers pay for the commission around the real estate transaction is... confused. Buyers understandably agree to pay a buyer’s agent, typically the commission being offered by the sellers agent (hence the confusion), who must offer said (substantial) commissions to ensure buyer’s agents are incentivized to promote their clients homes. If a seller’s agent offers less buy side commission than market norms (~3%), it comes at an increased risk of not selling the property as fast or favorably as it may otherwise could. 

How much longer until consumers and agents on both sides understand that negotiating buyers agency fee’s down is in their collective best interest in order to compete? 

Buyer’s agency as a business model where gross compensation is driven by traditional market forces that require an expensive carrot be dangled to interest a service provider, and not the end buyer, in a property for sale is overly ripe for continued disruption. This is not an argument of absolutes. I’m not saying there is no value in a buyer’s agent, rather, the cost of services is often not aligned with the services provided.

Don’t take my word for it, look at the data and follow the money:

 
Team Member Role vs Income.png
 

Real Trends Real Estate Team’s Playbook data shows average income by team role. The agents whose role is that of Buyer’s Agent makes less than half of their listing counterparts, and less than the role of lead management. Team's from the study employ the role of Buyer's Agent twice as much as any other role, including that of listing agent. Twice the supply for half the value signals commoditization of that role, in line with the data that has traditionally supported the value of such role.

The proliferation of online leads being sold and resold (and resold) across the industry has created a new market segment from a role typically performed by buyers agents; that of lead manager or Inside Sales Agent (ISA). This is problematic for traditional buyers agency because it strips away even more of that role's value.    

Finally, whether you call them alternative business/ brokerage models, or Teams; real estate professionals are adapting to consumer needs by adopting untraditional means, to deliver happier endings. 

Next 

We'll take a look at some of the not so obvious technologies that are being adopted by the real estate industry and further disrupting it at the same time. 

Would love to hear your opinion in the comments below. 

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  1. Real Trends Real Facts.
  2. OpenDoor offers a .75% referral fee to anyone who delivers an unrepresented home seller.