The Realtors’ Last Hurrah
If you’ve ever bought or sold a home, you know the complexity and frustration—and the high fees—involved in this critical transaction. You probably used a professional Realtor throughout the process, who guided you through scores of listings and home tours and helped you put together specific offers.
At the end of a months-long process–if you’re lucky–you closed on a home and handed over 3% of the purchase price to the real-estate agent. It’s typically the biggest purchase you’ll ever make, and yet it’s opaque, unpredictable, and expensive. In short, it’s a headache. The process has basically remained the same for decades.
Now, that’s changing. Following the first wave of real-estate innovation ushered in 15 years ago by companies like Zillow, which displays real-estate information online and helps home buyers understand the market price of homes, a second wave of companies is emerging to compete more directly with legacy real-estate brokerages. These include companies that still charge a 3% commission but offer a more-seamless moving process for customers. A second group includes more value-focused outfits that handle the real-estate process more efficiently to save customers money and reduce the commission they pay.
A long time coming
It’s not surprising we got here. The Internet has, after all, been exceptional at disintermediating brokers across many other industries. The middlemen have mostly been cut out of travel, for example, with travel agents essentially having been replaced by Kayak, Airbnb and people booking their own flights on airline websites. In securities trading, most people now bypass expensive stockbrokers to buy and sell stocks more cheaply on E*Trade, Schwab, or Robinhood. And of course, who buys books and records in a store anymore when you can order them so easily on Amazon or Spotify?
This hasn’t yet happened to real estate, though agents and brokerages are certainly feeling the pressure. (Note: agents and brokers aren’t always the same person; agents are licensed real-estate agents who typically help you buy and sell your home. Agents work at brokerage houses such as Keller Williams or Century 21, whereas a licensed broker oversees the agents.) The increased transparency in both search and pricing created by online listings have made it more difficult for traditional real-estate agents to justify their high fees. Hence the rise of new real-estate services like Redfin, which is essentially a streamlined, lower-cost broker. But it’s still a broker.
Why haven’t agents and brokers been disintermediated? Buying a home is both an emotional and practical exercise. Home purchases are typically the biggest purchase a person will make in a decade, if not a lifetime. A real-estate agent can provide human support and advice through this process.
In addition, homes and neighborhoods are heterogenous, so local expertise is valuable. (Stocks are the same no matter where you buy or sell them.) There are other qualitative skills real-estate agents possess, which can be hard to duplicate online: helping home buyers match expectations with budgets, convincing clients to submit offers, and managing the negotiation process. There is also a mountain of paperwork associated with real-estate transactions, ranging from disclosure packets to escrow instructions.
The necessity of personal relationships and the complexity of real-estate transactions, among other factors, have provided legacy brokerages with a false sense of security. Indeed, incumbent brokers continue to do little to differentiate themselves from competition. Top agents regularly switch shops to earn a higher percentage of the overall commission, illustrating that broker brands have essentially become commoditized. Agents’ competitive advantage is their name and personal book of business, not the national brand on a lawn sign.
Opening the door to competition
This has all opened the door to a new type of real-estate startup that is finally breaking the traditional broker’s stranglehold on the home buying-and-selling process.
Open Door Labs, which does business as Opendoor, has been in the news for raising eye-popping amounts of money from investors. This company will make an instant offer on your current home and close in a matter of days, not months. Opendoor provides price certainty and a type of convenience that traditional brokers cannot.
OfferPad is also willing to make an all-cash offer on your home, even if you haven’t kept up with home maintenance. Instead of making costly repairs out-of-pocket, OfferPad will purchase the home and coordinate repairs using the company’s trusted contractors.
Another startup, Knock, will help you find a new home, place an all-cash offer on it on your behalf, and move you in – all before selling your old home. They’ll manage the sale of your old home once you’re settled, saving you the hassle of staging and tours.
Similarly, FlyHomes will buy a home with an all-cash offer on your behalf in order to provide an advantage in hot real estate markets, where sellers value buyers who don’t need to take time to arrange a mortgage. This is a great option if you’re a first-time home-buyer who doesn’t have an existing home to sell to Opendoor, OfferPad, or Knock.
Finally, the home search giant Zillow recently expanded its Instant Offers program, promising to use its brokerage network and capital to buy your home directly.
If you’d prefer to save on fees but can put up with the logistics of the old-school real-estate sale process, there are lots of start-ups waiting to help you. Redfin was the original low-cost broker, promising one to 1.5% fees for sellers. Now, Purplebricks, Openlistings, Reali and Homie have broken into the market. All of these companies rely on technological and execution efficiencies to undercut traditional brokerages on price, similar to the model employed by online stockbrokers. Homelight matches consumers with top real estate agents, furthering the idea that the best agents need only themselves to succeed.
The bottom line: In a $1.8 trillion market, there is room for plenty of winners. But the biggest winners will be consumers looking to buy or sell their homes more cheaply and efficiently using this next generation of real-estate startups.