The Shifting Value of Real Estate Agency. Part I.
Initial article in an op/ed series about technology and other factors that are disrupting the traditional value of residential real estate agency.
As a VC at a fund that invests in technology companies building products and services applicable to the real estate industry, I’m often asked about my thoughts on the future of residential real estate agents. It’s a somewhat polarizing question – those in the industry are convinced the agent will always be a crucial player in a transaction, and many argue the opposite. It’s not a simple answer, but to provide some perspective, I think it’s important to review the current role of the agent in the process, to discuss the capacity of technology to replace the agent, and apply some business theories to inform us on what the future may hold for the profession.
What is the agent’s current role in the process?
When a buyer or seller signs a real estate agent to represent them, they typically sign a contract that, for a certain percentage of the sale price, historically ~3% per side, indicates they will prepare and negotiate offers, market/show a property to a buyer, facilitate the purchase/sale and closing process, provide local market expertise, monitor the MLS, etc. In short, they quarterback the transaction process.
Those that wonder why a real estate agent is still prevalent in the process often ask: can’t technology do all of these things? Why do we pay top dollar to hire real estate agents when technology can do all of that for a fraction of the price? There are plenty of ways to price and locate properties, coordinate the parties involved in a transaction, and perform almost all of the tasks agents are contractually obligated to do. These are rational questions, but if a real estate agent is really hired to do something that technology currently has the capacity to replace, why do 92% of buyers use the internet during their search but still use an agent 88% (!) of the time? Why does the number of Realtors in the US look like this?
Maybe there’s more to it.
Clayton Christensen, a well-known business strategist and father of “disruptive innovation”, developed a theory that I believe can help explain this phenomenon. Christensen’s Jobs-to-be-done theory states that a “job” is essentially shorthand for what someone wants to accomplish in a given circumstance. We “hire” products and services to get whatever “job” we need done. As argued in a recent Harvard Business Review article, “the circumstances are more important than customer characteristics, product attributes, new technologies, or trends” as it relates to hiring the right product or service to get a job done. In my opinion, this is a critical element in explaining the job that a real estate agent is hired to do.
For many, a real estate purchase or sale is one of the largest – if not the largest – transaction a person will make in their life. They can’t afford to mess it up. Selling at a price that’s too low or buying at a price that’s too high can have a material impact on their financial livelihood. Making a legal misstep in the process carries the same potential for a financial nightmare. In my opinion, this is the largest driver for why people hire a real estate agent: they don’t want to mess it up.
Almost as important, consumers don’t want to feel like they messed it up. Hiring an agent largely feeds a confirmation bias and agents do a good job at providing peace of mind. Peace of mind and feeling good about what you did are very human elements, and providing those elements are jobs that technology has a very difficult time replacing. This is great news for real estate agents. What’s even better news is that it is nearly impossible for the buyer or seller that hired the agent to know whether they bought or sold at the best price. Properties are different, buyers and sellers are different, financing situations are different, etc. Ask an agent why their profession is still around and they’ll constantly tell you: “This is a people business!”, which describes the real job that they’re hired to do.
For now, they might be right, but as the customer changes, they could be in for a shakeup.
What does this imply about the future?
Just because a real estate agent is hired to do a job that technology has a difficult time replacing does not mean all is well for real estate agents. Agents are hired to perform a lot of jobs that can, and are, being replaced by technology. The ‘real estate tech’ space has attracted billions of investment dollars2 and produced companies that are building products that perform many jobs an agent is traditionally hired to do. From a buyer or seller’s standpoint, this implies that you’re likely paying the same ~3% per side – which hasn’t changed in decades - for an agent to do fewer ‘jobs’, as technology is ‘hired’ to do the rest. The problem is that this can actually feel good to a real estate agent: if they can leverage technology to do more of their job, they’ll be paid handsomely for fewer hours of work, freeing up time to devote to cultivating new relationships and buying/selling more homes. Then what happens? At some point, the tables turn. Technology will perform the majority of functions and drive the buyer or seller process, and an agent will support the technology by providing the support and ‘people’ side of the business. If (when) this happens, a likely consequence will be increased price pressure on an agent’s commissions, as a buyer or seller realizes that an agent is performing fewer of the jobs that they were previously paying the same amount for (the buyer agent in particular - but we’ll touch on that in later posts).
Can technology really replace the agent? What can agents do?
In my opinion, there will always be a role for a real estate agent for certain segments of the market. Some people don’t trust technology (and may never), some don’t want to have to deal with the technology solutions, some don’t want to spend much time at any stage of the process, some want the ‘white glove service’. However, the size of those segments will ultimately determine the outcome of the future of real estate agents. If millennials – the largest segment in the next wave of home buyers and sellers – do, in fact, trust technology and accept the perceived risk involved in leveraging technology to buy and sell their largest asset, far fewer agents may be needed.
In the near term, real estate agents can leverage technology to make their current jobs more efficient and productive and enable them to close more deals every year. The advent of the ‘team’ structure is a sign that this is already beginning, as teams leverage comparative advantages of agents to be more efficient.
In the longer run, I believe that the long tail of agents that represent a few sides a year will go away. It’s no secret in the industry that the barrier to becoming an agent is very low and that the average agent only does a few sides a year. With increased price pressure it likely won’t be worth it for them anymore. In this scenario, the agents who do stick around will be those focusing more narrowly on negotiations and providing personalized support to buyers and sellers. If this plays out as I expect, these agents should ultimately be capable of representing more sides each year (as each side will require fewer hours of work) at lower margins.
Technology is going to change the role of the real estate agent, but it doesn’t mean the end of the profession. Ultimately, the future of agents will be determined by the market’s trust in technology and acceptance of risk to drive the largest transaction in most people's’ lives. In the interim, agents should leverage technology to help them do their job better, and continually focus on providing the personalized support and guidance that technology has a difficult time competing with.