The Topic No One Will Touch with a Ten Foot Pole

The Topic No One Will Touch with a Ten Foot Pole

[Editor’s Note: Below is the full text of our 200th Weekly Transmission, originally delivered direct to inbox of more than 500 GEM members on January 27th, 2022. Some links included below are to members-only articles.]

For our 200th Transmission (wow…that’s a lot), I thought I’d reach for a blast from the past and modernize the most read article ever on Geek Estate Blog, written all the way back in 2014. It started with a simple, non-debated (yes, that’s sarcasm) sentiment:

Real estate agents are overpaid.

This was a refrain I heard for a decade by industry folk before I first broached this topic, and it’s just as true now, nine years later. There are countless entrepreneurs with this conviction as well, many of whom actually tried to change the game … because that’s what entrepreneurs do. Historically, there have been two camps to lowering the costs of buying and selling real estate: discount brokerages and marketplaces connecting buyers and sellers directly.

A few of the highs and lows from the past 20 years include:

Founded in the early 2000’s by Glenn Cohen of Rumson (NJ), Foxtons started life as YHD.com (Your Home Direct), peddling the model of a real estate broker that charged only a 2% commission, cutting out the buyer agent and keeping the commission for themselves. Salaried agents. Though a new brokerage model was born, the mistakes added up and the 2007 market meltdown tipped Foxtons off the cliff. The longer story can be had for historical buffs.

Redfin, which was originally incorporated as Appliance Computing in 2002 and rebranded in 2004, is a success story. Redfin was founded with customer service as its core tenant. After launching Redfin Direct in February of 2006, it hit $1 million in buyer refunds by October. Of course, though, it has long shifted back toward a more traditional agent model. That said, the company is still heavily advertising its 1% selling proposition. A timeline (and a few screenshots) of the early years of Redfin are here.

A decade after Redfin began, PayPal veteran Keith Rabois began working on Opendoor (originally dubbed “HomeRun”), modernizing the flipping business while still paying agents to bring them deals. According to Clever, Opendoor’s fee is “currently fixed at 5% of a home’s sale price, although historically it’s been as high as 14%.” It’s now publicly traded with a market cap of more than $5 billion. And in a strange twist, you can also buy homes on eBay.

ZipRealty, another early discount trailblazer, was absorbed by Realogy, the epitome of legacy real estate, for $166 million in 2014.

Meanwhile, Urban Compass raised $20M in 2013 to great fanfare, offering the prospect of a better—and cheaper—way to rent and buy. They’ve since retreated back to a traditional model.

Another intriguing, though short-lived, approach set on disrupting the industry includes GoldenKey (formerly SoloPro), which raised $1.75 million in 2017 with a model that involved paying an agent a flat fee for required services and getting a 3% rebate when transacting with the help of one of the company’s partner agents (though not all states allowed for this rebate). The company is now defunct, having all its assets acquired by Landis in 2018. Others that didn’t make the dent they intended? Canvas built a platform for buyers to advertise themselves to homeowners in their interested areas, prior to pivoting to a local brokerage in New Jersey (and now working for Compass). Keyzio, originally a technology-focused brokerage helping buyers and sellers connect directly, has come and gone. HomeVana was another that took a failed stab at it. Reali had similar ambitions in 2016, but is now a straight power-buyer advertising buy before you sell, cash offers, and loans. HomeBaySideDoorListingDoor, and Open Listings (acquired by Opendoor) all played a hand.

All of these companies have one thing in common: disrupting agents and unbundling the industry. Turns out, that doesn’t work so well. In the fight to reduce commissions, the graveyard and pivots grow by the year.

Disclosure: I consider this a thorough yet not comprehensive look at historical players.

NOT A QUESTION OF WORTH
The thing is, the most relevant question is overlooked. I don’t want to talk about  “Are agents worth 6%?” There are clearly many, many entrepreneurs who think the answer is no who are working on solutions to change the status quo. Many years and lots of money has been spent by some incredibly smart people trying to change the economics of real estate.

Yet commissions have not substantially changed from the commonly accepted 6%. A survey by Real Trends did find that “the average commission slid to 4.94 percent in 2020 from 4.96 percent in 2019 and 5.03 percent in 2018.” But, by and large, people still list with traditional agents.

The real question here is why none of those efforts have succeeded at scale?

Before diving in further, a disclosure that is more or less the same as my original one in 2014: I have no idea whether agents are worth 6% of a real estate transaction. I’ve (still) never bought or sold a (full) house (my portfolio includes shares of several homes via Arrived), so I don’t have an informed opinion to share on the topic.

DIFFERING DYNAMICS
Most people buy a home every seven to 15 years. That’s a long, long time between transactions. Compare that to paying your credit card monthly. Or buying a plane ticket every couple months. Sharing a photo or sending a daily text. Reading the morning news headlines. Writing a blog post a couple of times a week. Eating lunch and dinner everyday. Buying a new shirt every three months. You get the picture.

A housing transaction can be bad—it may be terrible or even horrendous—but it won’t substantially change the fact that people are still going to do it. The reality is, buyers don’t know what they don’t know. And they won’t be needing to go through the process for another decade. By then, that past stress and anxiety won’t seem so bad.

There is a fairly low bar for me to try a new website or app in search of an affordable plane ticket. I ask no one before I make that decision, because the consequences of a poor experience are small. If it doesn’t go well, who really cares because it just cost me an extra 20 minutes, or $50. It’s not the end of the world.

A house, however, is the single biggest financial transaction most people ever make. People don’t make that transaction without talking to their friends, families, and professionals for advice. Those conversations take place over the course of months and years, the vast majority of which include iterations of “who is your real estate agent?,” “you need an agent to represent your interests,” “my agent did X,” and “you shouldn’t/can’t sell FSBO.”

Why? Because those people are just recounting their experiences, all of which included an agent. Point being, there is an incredibly strong social pressure to use an agent, since everyone else has—and you don’t want to be the sucker who tried to do it on your own, and got screwed out of $50,000 or $200,000 (or some other high $$ amount).

DISCOUNT BROKERAGE MODELS
You can not sell a house with only one side of the transaction accounted for, meaning cooperation from the opposing representation is required to finish a deal. The whole industry will battle you tooth and nail, the minute you start rebating commissions. Just ask Redfin, which has 18 years of battle scars to prove it. And, of course, NAR is one of the largest and most influential trade associations in existence. With traditional agents far outnumbering agents employed by discount brokerages—they ALL talk nonstop with consumers (that’s what agents do, after all) … not much of which is favorable to discount brokers winning over buyers and sellers.

Can discount brokerages digitize the whole transaction, and cut costs to buy and sell at scale in the process? Redfin is making strides, but it’s still a long, long road to changing consumer behaviors. Prevu is rebating buyers 2%. Then there’s Trelora, perhaps the shining light of a discount model, still hawking full-service for thousands less as a value proposition more than a decade after its founding. Meanwhile, REX is no stranger to legal controversy (the latest is NAR’s countersuit).

BUYER-SELLER MARKETPLACES
Access to a large audience of engaged buyers and sellers is table stakes. And easier said than done. Potential sellers need to be able to post their house in a private and trusted environment and receive serious buyer inquiries. Otherwise, it’s a gimmick. The chicken and egg problem is massive, particularly given the infrequency of people buying or selling. How on earth do you target and find home owners? You either need to get VERY, very geographically focused—i.e. convince every homeowner in a specific ZIP code to sign up, or you need massive, massive distribution (i.e. Zillow, Redfin, CoStar, or Realtor.com scale). Having taken the SPAC, NextDoor’s massive audience—and a business model not primarily reliant on agents—leads me to still believe the social network is a sleeper for connecting buyers and sellers directly (real estate is already a focal area for them).

Zillow’s Make Me Move was an early indicator that someone might sell. How do you differentiate beyond that? Sure, many people don’t want to publicly state they are thinking about selling, but where can they post privately where buyers will actually see it? This gets us into the whole pocket listings opportunity. Though the company shut down Make Me Move, I still believe the feature will be brought back as part of a vastly superior offers experience, enabling every home in America to be available for auction—anytime, anyplace. Perhaps, with prices only visible to pre-approved buyers. Its exit from iBuying makes this possibility even more likely.

Speaking to founders working on tackling this approach, I’ve yet to get past the “will this work at all?” question, let alone figuring out how to make money doing it (aside from pivoting back to being a brokerage).

DOWNWARD WE GO
Coming back to prior efforts that haven’t succeeded at scale, there are a few new angles to consider on this topic, given a decade has passed…

  • The DOJ forcing the divorcing of commissions would be the single greatest commission lever we’ve ever seen, putting the impetus on buyer’s brokers to collect their commission directly. Should that happen, you can bet we’ll see a noticeable and quick downward tick on commissions. Jeff Corbett wrote a thorough analysis of this topic for those wishing to dive deeper.
  • Redfin is “publishing the buyer’s agent commission for over 700,000 home listings in regions where this data is available.” Chalk up a win for transparency.
  • Mandatory commission compensation might disappear if Realogy has anything to say about it, “publicly calling for the National Association of Realtors to end a requirement that listing brokers offer commissions to buyer brokers in order to submit listings to Realtor-affiliated multiple listing services.”
  • We’re clearly in a sellers marketATTOM data shows sellers “realized a profit of $94,092 on the typical sale in 2021, up 45 percent from $64,931 in 2020”–which some believe will usher in the end of buyer agency *without* government action. Jim Klinge and Robert Hahn discussed this topic in-depth just this week on a podcast.

All that said, an Offers product is the end game. Full stop. Once a common standard to submit bids/offers achieves scale, commissions will be able to fluctuate up and down much more rapidly than in today’s word-of-mouth driven black box. Now is the time for innovators to push forward with products and services that enable commissions compression to take hold, given the favorable environment of stacked conditions. Once the market turns, and it will, you’ll be back to pushing a barrel up a steep incline laced with boulders.


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