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The Realtors will Die

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There is no place for real estate agents in the digital future

The spirited class session on Zillow, with its three-way war between Zillow, the Power brokers and the students prompted me to reflect on why I felt so strongly that the brokers were wrong in their defensiveness of their profession as-is.

I do not think all professionals will be replaced by the internet. And I don’t think the question is “Will Zillow replace brokers?” because at least Zillow’s current business model is dependent on real estate agents for revenue.

The question, to me, then is “Will the online economy replace the model of a home buyer or seller making an exclusive relationship with a local real estate agent to buy/sell their home, and continue to pay a very significant fee for that service?” I think it is clear that the real estate broker model as we know it today will be obsolete in ten years (hopefully sooner!).

Rather than simply rant, we can look at the defenses the brokers raised and compare them to other businesses up-ended by the digital revolution / online economy.

We know how to set the price

This is the part that Zillow is relevant too. The brokers protested that Zestimates are often wrong. I suspect that this is partially true, partially in their interest and partially the result of both brokers working at the very top end of the market where things are difficult to value due to lack of comparison sales and wealthy emotion-driven buyers. It is difficult to imagine that a few years from now an algorithm with tons of data inputs on every comp sale other relevant data (school enrollments, changes in local government, transit delays, etc.) would be worse at predicting the clearing price of a home than a error-proan human broker with a “feel” for the market. If Watson can beat the best chess and Jeopardy! players in the world, I bet it can figure out how much a four-bedroom split level in Malden should go for.

We know how to negotiate

After helping set the price via their magic 8 balls, agents claim that only they have the expertise to either a) make sure you pay as little as possible; or, b) ensure the other guy pays as much as possible. Beyond the uncomfortable jujitsu this implies between being a buyers or a sellers agent, the fact that this negotiation has to take place at all is a flaw in the current real estate market that the internet has a precedent of correcting. We have to go way back in digital history to find what is still likely our best precedent – eBay. Used goods and single family homes aren’t much different in the opaqueness of what they are worth. Let people bid on every house in an open process. This was cumbersome in the past – you had to show up in person to bid against your competitors. Clearly this is not the case anymore. The fear of auctions of course is that you might bid much too high and feel like a schmuck. Here, Google AdWords has popularized the second price auction – the winner pays the the price of the second highest bidder. At first blush it may sound like a bad deal to the seller, but in fact it may do a better job bringing in buyer’s true and higher bids. Finally, beyond avoiding an labyrinthic negoation an auction has the added benefit that if the winner drops out the transaction can easily proceed down the next available bidders.

We give tours!

While brokers sell hard on their local and irreplaceable knowledge and skills, the reality is that they spend most of their time forgetting to pick up the right keys for the right house and fumbling with locks in attempt to show you your next dream home. It is hardly worth mentioning that this is not worth anywhere near 3% of the sale price of a six or seven digital sale. The example of our age, Uber, has shown us that you can get simple, repetitive tasks down efficiently and reliably with a zero-overhead variable price model via 1099 labor. If I find a house I want to tour on the internet, I should tap a button, the occupant should be automatically notified, I should received a confirmed viewing time and someone should show up with a key, unlock the door, and leave me be to imagine myself eating a pop tart at the breakfast bar.

We find good listings

Implicit in the last point was the fact that everyone already finds their own listings. The internet and the MLS system have already provided access to almost every home on the market. The full details of that home can be viewed comfortably through Google Chrome without the upsell of a broker trying to show you something that’s “just a bit” out of your price range but “definitely fabulous.” Zillow, Redfin, Realtor.com and Craigslist (!) have already solved this problem.

The brokers make the point that many of their transactions take place when they notify clients of properties that aren’t yet on the market. This again is a result at being at the tip-top of the market. It is also another reason why brokers should go — why would we consumers, even the wealthy among us, want to perpetuate a system where you have to “know a guy” to get access to some property and a system that, given that nature, likely creates undue pressure to act quickly and therefore overpayment?

Its such a big purchase people are happy to pay for the certainty 

Finally, the brokers demur by saying that this price tag is so huge that people are happy to pay them tens of thousands of dollars to hold their hand and whisper in their ear that its going to be okay. I do not deny at all that buying a home is a major life decision and event and should be thoughtfully considered – even considered with the help of professions. The professionals that add value, though, I think are the inspector who tells me if the home is safe and sound; the appraiser who tells me how my price relates to fair market value; the banker who arranges my financing; the lawyer who ensures all of the documents are correct and that I am protected. Those professionals add a ton of value. What’s left for the broker? They could claim to coordinate all of that which might be valuable but they don’t – brokers usually are not involved in financing, the bank finds the appraiser, the buyer finds the inspector, etc. And if the job was a coordinating one, I’d rather outsource that via a Silicon Valley app anyway.

 

Capitalism, they say, must embrace creative destruction. The real estate agents should prepare for the wrecking ball.

2 thoughts on “The Realtors will Die

  1. You make a good point that the other professionals such as inspectors are a lot more valuable. There’s also the fact that all agents aren’t necessarily good especially for property within the range the average buyer can afford. And there aren’t many reliable ways other than word-of-mouth to know if a realtor is actually worth it.

  2. This article is interesting – while I agree with the overall notion that brokers (particularly bad ones) do not add as much value as they claim, I do think that a significant portion of the U.S. population will continue to value established relationships with conventional real estate brokers. Addressing a few specific points mentioned:
    1) Zestimate can certainly improve over time – however; one specific element that might be difficult to capture is renovations that increase home value. To the extent these are not filed with local municipalities, the pure statistical model may undervalue homes in which significant interior designs have occurred – leading people to think houses with lower Zestimates are in financial striking distance when in reality their market value is higher
    2) One valuable role of good, hardworking brokers is to check out open houses in advance without the buyer so as to minimize time wasted by the buyer (pictures don’t always tell the full story)
    3) I think home prices ARE more opaque than used goods given the significant illiquidity of a house. Price discovery is usually more difficult than a random used good in someone’s garage. In addition, the significantly higher dollar expenditure warrants more precaution. Importantly, home ownership is a significant source of intergenerational wealth creation. Whereas used goods typically have well-defined useful lives and are often rendered obsolete with new technology, home prices typically increase rather decrease over time – hence negotiation and more expertise on price can drive real value over time
    4) I don’t find the Uber comparison particularly compelling. Driving from point A to point B is a MUCH more commoditized service than buying a house given the complexities in the entire process
    5) I disagree with the notion that the value brokers provide via intelligence on properties not yet listed is limited to the “tip-top”. I think less expensive houses are just as likely to be off-market and this is more an indication of a forced seller who values certainty regarding price upfront for fear of risking a normal listing having underwhelming interest leading to price haircuts. This frequently results in attractive purchase prices
    6) Regarding the point that brokers don’t do much in the value chain – I agree this is true for the bad brokers, but not always the good, more professional ones. Good ones often can provide introductions to banks and relevant third party advisors. The fundamental, systemic issue is the low barriers to entry to be a broker which gives license to too many bad brokers out there.
    So – while I agree in spirit with your assertion that the value brokers capture sometimes feels unreasonable, I contend that home buyers will continue to seek brokers out for long-term, personalized relationships.

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