Lot’s of people* insist that real estate is due for disruption. They point to common markers – tell-tale signs that an industry is not serving its customers in an efficient or cost effective way. And because of that, just one person or company can appear on the scene and change the way things are done.
Just what are those markers – and how do they apply to real estate? Read on…
The existence of an intermediary (the agent “middleman”) is a primary marker for industry disruption since they serve as a barrier between the consumer and the service. In CRE’s case, the service is information which is required to make an informed decision. They point to companies like Zillow or Redfin as providers of this information – for free, no less.
Only problem is that none of these companies have cracked the last mile of the transaction, i.e., the purchasing process, without agent involvement. Buyers may be able to qualify for a mortgage online and in some states, electronically sign purchase offers or letters of intent that are valid and even move money around. But user adoption, much less a smooth, integrated interface, isn’t there.
Still, fully automated transactions are the only way to remove the middleman. The trick will be persuading consumers that they can make good choices by reading, searching and studying the “process.” In other words, the consumer will have to agree to take full responsibility for their decisions.
Disintermediation Part 2
There’s usually another middleman in the real estate equation: the brokerage that takes a cut of the agent’s commission. In return, agents are provided with support staff, resources and an office. Do agents really need a brokerage to provide that anymore?
What if there were a Zillow-like portal for commercial agents where they could grab and service the leads that a brand like Zillow can supply?
The big question is whether there’s enough activity to support a virtual commercial brokerage. Compared to residential, the volume of commercial transactions is much smaller. Plus there are issues like liability and licensing to iron out.
But someone thinks the virtual brokerage model has legs. Redfin just rasied a boatload of cash for a nationwide expansion. And Realogy Holdings recently acquired ZipRealty to add to its traditional brokerage firm portfolio.
Regulations tend to protect existing business models and bar new entrants. And industry lobbyists work to keep it that way, like those in the taxi industry who are pressuring localities to ban services like Uber or Lyft.
But anyone can transfer real estate or contract a lease without being an agent. Licensing is only required if someone plans to represent another party in a real estate transaction. And unlike other industries, the barriers to becoming a real estate agent are low in all but a handful of states.
So regulation isn’t really an impetus for disruption for the real estate industry. As it is, most small commercial transactions don’t involve brokerages anyway. And there are plenty of outlets for consumers to sell/lease space or solicit tenants on their own. FSBO websites, eBay, Craig’s List. As with disintermediation, it’s a matter of consumers wanting to manage the transaction without assistance.
How do commission rates still remain relatively the same when technology has supposedly lowered the cost of a transaction to the brokerage? The federal government has even investigated the seemingly inflexibility of commission rates in the residential sector. But nothing much came out of the investigations. It seems that the standard commission is what the market continues to bear.
However, competition from virtual brokerages could result in more commission variation – good for the consumer but not the agent or traditional brokerages which operate on low margins already. To compete, brokerages would need to lower overhead through more efficient operations. That likely means investment in technology/automation.
Perceived Lack of Value
Most industry critics believe what was once the primary role of the agent – information gatekeeper – is now obsolete. It’s certainly true for the residential sector where listings and even comparables are easy to find.
With data unleashed, just what does the agent contribute to a transaction? Any agent will run through a list of things – local knowledge, negotiation skills, process oversight and at the very least, saving the consumer the time of doing or learning all these things. But when some types of real estate agents are described as “… the coin slot on the pay toilet…” you have to wonder if consumers consider any of that “value” worth the commission.
When dissatisfaction reaches a certain mass, industry alternatives are most likely to be embraced – which has residential worried since alternatives abound. On the commercial front, the consumer has few alternatives so at least CRE has longer to re-work their value proposition to the customer. It’s just a matter if the industry takes the lead in their own disruption – or they let someone else do it.
* Lots of people…