Are real estate agents a dying breed? (The short answer is “Yes!”)
An abbreviated version of this article originally appeared on Forbes
Think about it: You can go to any developed country in the world and buy the same cup of coffee at Starbucks for $4 or the same BigMac from McDonald’s for $5, but you cannot use the same real estate agent twice in two years to buy or sell a $300,000 house and have the same experience! Why? Because real estate agents are independent contractors doing their job…well, independently.
While agents are often affiliated with brands like Coldwell Banker, Century 21 or Keller Williams, they are NOT employees of those brands, so those brands cannot dictate how their agents do their job and therefore control the consumer experience. In fact, most of these brands aren’t even in the real estate business; they are in the franchise business. The franchisor’s customer is the real estate broker (aka the franchisee) and the broker’s customer is the real estate agent, not the consumer. Yes, the broker has a fiduciary responsibility to the consumer, but the consumer experience, relationship and transaction are owned by the agent. So basically, real estate agents have total discretion over how your home is bought and/or sold, and no two agents do their job the same, and most agents don’t do their job the same way twice. The median annual salary of a real estate agent is $45,990, so agents have little in the way of capital, technology or other resources required to make the purchase and sale of your home predictable, convenient, transparent or cost effective. Confused? You aren’t alone! This arcane, inefficient structure is the way residential real estate has been done for the past 50-plus years, but all of that has started to change in a big way.
We are in the early innings of what I call the “institutionalization of home buying and selling.” Unlike the last wave of real estate innovation pioneered by the likes of Zillow and Trulia (in full transparency, I was a founding team member of Trulia), this wave of transformation is not being powered by companies that have real estate agents as paying customers. Instead, this wave of transformation is being powered by technology companies cutting out middlemen to work directly with consumers in order to dramatically simplify and streamline some or all of the process of home buying and selling. Whether you are trading-in your old house for a new one with us at Knock.com or selling your house off-market to modern-day home flippers known as iBuyers, in five to 10 years consumers will likely be buying and selling homes to and from companies, not through agents. In just the last three to four years, the first wave of these disruptive companies have raised billions of dollars to build technology platforms that increasingly transform the complex and laborious functions of the home transaction performed by agents into a more seamless, certain and transparent experience.
To understand how this wave of innovation and its impact on real estate agents is different from the last, let’s take a quick history lesson on how the first few waves haven’t changed much of how things are done.
Real Estate Web 1.0
The first wave of real estate “innovation” began in 1996 and involved little more than moving home listings online from the MLS and newspapers. That year, the National Association of Realtors (NAR) licensed Realtor.com to private company HomeStore to launch a public website displaying property listings. In 1997, Realtor.com became the exclusive online real estate listing source for several consumer media outlets like USA Today and AOL, making it the largest website for real estate listings. But, as the name Realtor.com implies, NAR’s primary customer is the real estate agent, not the homebuyer or seller. In a failed attempt to appease its real estate agent customers and keep them relevant to the home buying and selling experience, NAR restricted Homestore from displaying critical information on Realtor.com, including past and recently sold homes used to determine home prices.
Real Estate Web 2.0
By 2005, tech investors started to stir again and it became obvious to a few of us entrepreneurs that the exorbitant fees and information thiefdoms plaguing the home buying and selling experience were exactly what the internet was supposed to fix.
Trulia launched in October 2005 as the first independent home search engine, basically “Google for Real Estate.” We went directly to brokers and agents to get their listings on Trulia.com to avoid the information restrictions NAR placed on Realtor.com. By doing so, we were able to democratize the information buyers need to make the biggest purchase of their lives, and traffic to Trulia.com soared. Not only did we show homes for sale and recently sold homes, but we also liberated tons of other information like crime statistics, school data and average commute times. We used maps to help people visualize local boundaries and heat maps to show price and search trends down to the neighborhood level.
In early 2006, Zillow launched the Zestimate, giving consumers home price estimates instantly without talking to a real estate agent for the first time ever, and traffic to Zillow also soared. A year or so later Zillow added homes for sale like Trulia.
In just a few short years, consumer traffic on Trulia and Zillow surpassed that of Realtor.com. In 2010, Zillow went public on NASDAQ and in 2012 Trulia went public on the NYSE. In 2014 Trulia and Zillow merged, valuing Trulia at $3.5 billion. That same year, Rupert Murdoch’s News Corporation bought Realtor.com for $950 million and turned it around into the second largest consumer real estate site, valued at $2.5 billion by Morgan Stanley in 2016. Today, homebuyers visit Trulia and Zillow a combined 216 million times a month and Realtor.com another 76 million times each month. This is astounding considering there are only six million homes bought in the US each year! In 2005, homebuyers were at the mercy of real estate agents for the most basic information. 13 years later, homebuyers are fully empowered with all the information they could ever want or need to make the biggest purchase of their lives.
Unfortunately, home sellers did NOT benefit from this last wave of innovation at all. The process of selling a home is every bit as expensive, laborious, opaque, stressful and uncertain now as it was then. In 2005, the typical 6% commission paid to agents by sellers totaled $60 billion annually. In 2018, that same 6% commission is well over $80 billion annually thanks to home price appreciation and a million more homes purchased every year. And yet, home sellers still endure the same three to four months of nail biting stress and uncertainty to sell their new home. The only thing that changed for sellers during Real Estate Web 2.0 is that buyers now find their home listings on Trulia and Zillow instead AOL or Yahoo! Real Estate. In fact, sellers are now at a disadvantage to buyers, since buyers have a great deal more information about and transparency into the buying process than sellers have about the home selling process.
Ironically, the very companies that empowered buyers with all the information they need to make their biggest purchase with less reliance on agents became increasingly dependent on those very real estate agents for survival. Real estate agents pay these sites billions of dollars every year to advertise themselves in and around home listings. You cannot change an industry selling stuff to its players that enables them to continue doing things the same old way and extracting the same high fees. Enter the third wave of innovation.
Real Estate Web 3.0
By aggregating hundreds of millions of homebuyers on just a few websites, the Web 2.0 innovators enabled the next generation of innovators to focus on revolutionizing the home selling process. But many among this wave of innovators are not just tech companies; they are also licensed as brokers performing some or all of the transaction, replacing or repurposing real estate agents in the process with data science, technology and access to billions of dollars in capital to create liquidity in residential real estate for consumers for the first time.
- Data Science — Web 2.0 company Zillow used data science to give consumers the Zestimate, a rough estimate of their home value based on public data like tax records, but ultimately its business model is to connect the consumer with a real estate agent for a more accurate list price and marketing strategy. Conversely, Web 3.0 companies are inspecting the inside of homes to more accurately price them by including renovations, upgrades and premium features like marble countertops. This enables Knock, for example, to more accurately determine how much it can sell its customer’s existing house for on the open market and, therefore, how much house it can buy its customer as part of the Knock Home Trade-In. It enables iBuyers to make “Instant Offers” on houses so the homeowners can focus on hiring an agent to help with their new home search without worrying about finding a buyer later or having a home sale contingency that would make them a less competitive buyer, even if they have to pay a premium to iBuyers for the luxury of selling “instantly” off the market.
- Technology — Since this wave of innovators are also licensed as brokers actually managing the transaction, they have insights into how to leverage tech to drive the automation of as much of the process as possible. For consumers doing a Home Trade-In with Knock, that means having complete visibility into every step of the process from contract to close. They can see the data used to determine the value of their old house, use our Knock Deals automated valuation model (AVM) to see which homes on the market are “Awesome Deals” and which are “Awful Deals,” authorize Knock to make a data-driven offer on their new home, watch the home prep process on their old house unfold virtually from the luxury of their new home, and review and sign all documents in the app, all while having a salaried, licensed “professionalized” agent to guide them through every step of the Trade-In. Oh, did I mention they can do all this from their smartphone?
- Liquidity — 61% of home sellers are also buying their next home at the same time. Most Americans need the equity out of their existing house for the down payment and mortgage on their new home. And so begins the proverbial chicken and egg game: “Do I sell my old house first and move in with the in-laws or do I make an offer on a new home and pray that my old house sells in time?” And during the three to four months it takes to sell a home, the homeowner has to hire, manage and pay contractors to get their house ready for the market, keep the house immaculate and leave on a moment’s notice when a real estate agent wants to bring a potential buyer to the house. The 3.0 innovators have access to billions of dollars in debt that allow you to skip some or all of this stress and uncertainty, but in different ways and at different costs. By buying your new house for you in all cash, the Knock Home Trade-In option not only solves your liquidity issue, but also gets you a 3% to 5% discount on your new house by eliminating your home sale and mortgage contingencies. It also helps you avoid paying for and managing contractors for repairs and living in the house while it is being fixed up or shown to potential buyers. You get all this convenience while still having your old house sold on the open market to get the best possible price so you know you didn’t leave any money on the table.
So what role, if any, does a real estate agent play in a world of tech companies offering on-demand certainty, convenience and transparency, and a stress-free Home Trade-In or Instant Offer? Well, the bad news is that it’s hard to imagine agents competing against the revolutionary value these companies bring to bear given agents’ limited resources as independent contractors. Unfortunately, the brands with which these agents are affiliated are no better positioned to compete with the newest wave of innovators. As discussed, most brands are in the franchise business, not the real estate business. They have no control over the user experience, given their customer is the broker, the broker’s customer is the agent and the agent’s customer is the homebuyer and seller. There are literally three degrees of separation between most real estate brands and the consumer. The reason Starbucks and McDonald’s can provide a predictable, repeatable experience and quality product is that they own every part of their value chain.
The good news for agents is that a real estate license is still legally required for some parts of the home buying and selling experience, like making and negotiating offers on homes. So real estate agents have the opportunity to be part of the next wave by becoming expert negotiators. Best of all, they have an opportunity to be paid a salary and benefits like any other professional, such as they do here at Knock, instead of living commission check to commission check. However, this opportunity will likely only be available to a small percent of the estimated two million licensed agents in the US; as Paul Boomsma, President of Leading Real Estate Companies of the World, said at Inman’s 2019 Disconnect event, “the number of agents in the U.S. will likely drop by at least a third in the future. At the upper end…agent ranks could be winnowed by as much as 70%.” So they had better hone their negotiation skills if they want to be one of the few to survive. It will likely take at least five years for the transition to be complete, so they have some time — or do they?
