Innovation or disruption? The real state of the market

by Maris Callahan

In an industry where traditional, face-to-face relationships are paramount above all else, disruption is a hot topic. As digital innovation continually changes the way people live, work and communicate, how will that impact real estate professionals?

While companies like Zillow, Opendoor and Offerpad have made headlines with their iBuying services, other firms such as Compass and Purplebricks have made waves with venture capital models. In addition, lawsuits, tech vendors and shifts in consumer behavior all threaten to displace real estate agents from the traditional transaction as we have come to know it.

Though the term “disruption” has become somewhat cliche in real estate, experts say that it’s still a real phenomenon — one that many agents can prepare for and adapt to.

“When I think of disruption, I think of a fundamental shift in how real estate is experienced by consumers,” said Brian Boero, CEO of 1000watt, a creative branding and consulting agency for the real estate industry. “It’s about how consumers pay for real estate services and how real estate professionals either do or do not get paid for delivering these services.”

While plenty of companies have emerged on the scene poised to shake up the real estate industry, it’s important to make a distinction between disruption and innovation.

“When someone new comes to the market, it is called disruption, but then you have the stalwarts of the industry, which in Chicago is a handful of brokerages holding market share, and anything new that we lay out is called initiative,” said Tripti Kasal, senior vice president of residential sales at Baird & Warner. “Although not necessarily ‘disruptors,’ the market is constantly changing and there will always be new things. History has told us what the client is looking for, and we have stuck to that.”

Glenn Sanford, founder of eXp Realty and CEO of eXp World Holdings, agreed. “A lot of companies that are considered disruptors are really marketers or innovators. Some of them package up the same thing with different marketing and call it disruption,” he said.

While the landscape is continually shifting, here’s a look at a handful of trends that could eventually lead to a real shift in the real estate industry.

Are iBuyers the true disruptors?

Though they’re not yet a major factor in Chicagoland, real estate tech strategist Mike DelPrete calls iBuyers “one of the most revolutionary changes to occur in real estate.”

Instant Buyers, or iBuyers, purchase properties directly from owners, complete any needed maintenance or repairs, and relist the homes for sale. iBuyers have recently gained both traction and market share across the country as they aim to transform how consumers both buy and sell homes.

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According to DelPrete, the two largest iBuyer companies are Opendoor, which he said has a business model that revolves around buying and selling as many homes as possible, and Zillow Offers, which is based on a model that aims to maximize seller lead generation. The two companies combined account for roughly 86% of iBuyer transaction volume, according to DelPrete’s research.

Some of the other more recognizable iBuyer brands alongside these two are Redfin, Perch, Knock and Keller Offers. Most iBuyer companies use automated valuation model technology to determine home values and make instant cash offers to sellers.

“iBuying is emerging as an entirely different way for people to sell a house,” said Boero. “People get paid differently, and some of the people who were at the table aren’t there anymore.”

Some brokerages are getting into the act as a way to compete with these new players. At eXp Realty, agents can offer sellers a solution called Express Offers. Express Offers is an eXp World Holdings company that provides home sellers with an instant offer platform that allows multiple cash offers on a property.

“When companies refer to themselves as disruptors, it means they are trying to fundamentally change the core of the business model, like how Netflix disrupted Blockbuster,” said Sanford. “iBuyers are one of the biggest changes in the industry and most disruptive … truly creating innovation around the brokerage model and brokerage experience.”

While some in the industry believe that iBuying threatens to replace real estate agents, others are optimistic about their eventual arrival in Chicagoland.

“We don’t see iBuyers as a replacement for the agent, but rather as an addition,” said Kasal. “iBuyers will never completely take over a market, but they may become part of the process. They will work for some people and not others, so our agents will be prepared to advise if it is right for their seller.”

At a time where many economists are predicting that a COVID-19-fueled recession has already begun, it’s important to note that iBuying business models carry a significant amount of risk in the event of a pullback in the housing market. Earlier this month, both Opendoor and Redfin announced temporary suspensions of iBuyer programs amid the current market turmoil.

“iBuyers are pouring lots of money into buying, repairing and renovating homes to resell. They will be stuck with a lot of inventory in the event that the market slows down, in which case we might see a huge diminishing in the iBuyer arena in very short order,” Sanford said.

Learning from industry lawsuits

The topic of how real estate agents get paid is a colorful one. Buyer’s agents often tout their services as free to the buyer, saying that both buyer’s and seller’s agents’ commissions come out of the sale price.

But now, with two separate lawsuits poised to change the future of the real estate industry, the traditional commission split may not be the way forward.

One lawsuit, filed in federal district court in Chicago, challenges a rule it says was instituted by the National Association of Realtors to require all brokers to offer compensation to the buyer’s agent whenever they list a property for sale on a multiple listing system.

The lawyers for the plaintiffs argue that this drives up home prices for sellers and stifles competition because the compensation is nonnegotiable. The suit alleges that “most buyer brokers will not show homes to their clients where the seller is offering a lower buyer broker commission, or will show homes with higher commission offers first.”

Originally filed on behalf of Minnesota home seller Christopher Moehrl, the lawsuit is now a class-action suit against NAR, RE/MAX, Realogy, Keller Williams and HomeServices of America. It claims to represent anyone who sold property and paid a broker commission in the last four years in specific geographic areas covered by 20 different regional MLSs.

A similar suit has been filed by Sawbill Strategies Inc., also against NAR, RE/MAX, Realogy, Keller Williams and HomeServices of America. While it’s difficult to predict how these suits will play out, they have undoubtedly shed light on an ongoing issue in the real estate industry.

“We can’t speculate on what may or may not happen. What we can tell you is how confident we are in our position about the clear, pro-competitive, pro-consumer benefits of the MLS system,” said Katie Johnson, general counsel and chief member experience officer at NAR. “The MLS has been around for well over 100 years and has contributed to an orderly and efficient marketplace. We are going to aggressively defend the MLS system, along with the rights of home buyers and sellers to continue to have access to a cooperative market that benefits both.”

While NAR believes that competition in real estate is stronger than ever, the association is also resolute in its argument that technology plays a vital role in fostering a pro-consumer marketplace.

“Technology has positively enhanced the ability for our members to deliver a superior consumer experience,” said Johnson. “Technology makes it easier to do almost everything. Interestingly, even though 93% of buyers said they searched for a property online in 2019, 89% still used a real estate agent. That is a testament to the knowledge, expertise and value our members bring to consumers facing the largest, most complex transaction of their lives.”

While technology empowers consumers with information and makes it much easier for them to search for properties, they still need brokers to help navigate it all, walk them through the process and look out for their best interests, according to Johnson.

The rise of the sharing economy

As the internet, mobile technology and social media have evolved into what some call “the sharing economy,” numerous industries have experienced a massive shift in consumer behavior.

One of the most prominent examples is Uber, which had a major impact on the taxi and transportation industries and quickly became a household name for any mobile enterprise. “Real estate agents are, to some extent, akin to Uber drivers,” Sanford said. “They are micro-entrepreneurs, and they have the opportunity to build businesses.”

Moving this trend closer to real estate is Airbnb, which was founded in 2007 and proceeded to disrupt the hospitality industry by offering up on-demand short-term rental properties through its mobile app. Although many place them more clearly in the hospitality or travel industry, they are fundamentally a real estate company, according to Boero.

“I have always viewed Airbnb as a company that we in the real estate business need to keep an eye on,” he said. “We are not yet done seeing how that will impact the business of providing people with shelter.”

One way that Airbnb has already impacted the real estate industry is that agents are increasingly adding short-term rentals to their portfolio and pitching them to clients as investment properties. But does this fall under the umbrella of disruption, or innovation?

“Right now only a small percentage of agents are involved in Airbnb, but that number will continue to grow,” said Kasal, who is active in the short-term rental business. “Agents should get more familiar, because those who are have a good opportunity to help their clients who want to purchase a property specifically to be a short-term rental.”

What’s the focus: Brokerage vs. tech company

There are a number of real estate technology companies that operate as brokerages, including Redfin, Purplebricks and dozens of smaller players. DelPrete noted that these are not just brokerages with lots of tech tools. Rather, a real estate technology company should have the following three attributes: technologists on staff, a higher-than-average operational efficiency and the ability to scale in a nonlinear manner.

Funds play a role here, too. In recent years, Compass has emerged as a formidable player, backed by venture capital and staffed with executive and marketing talent from some of the world’s most prestigious global brands. According to DelPrete, the defining characteristic of these companies is how technology can provide an efficient platform to scale at rates much faster and at lower cost than traditional brokerages.

Despite the recent surge in competition, DelPrete notes in his “Inside Compass — Part 2: Brokerage or Tech Company?” report that it’s brands such as Redfin and Zillow that truly lead the way. But are they disrupting the industry, or are they simply paving the way for more innovation?

“Since agents began putting listings on the internet, billions of dollars have been thrown into this industry,” said Boero. “We have had really impressive innovations, like Zillow’s map-based search functionalities and mobile real estate apps. But fundamentally, how real estate agents and brokers get paid, and the players at the table in any transaction, did not change.”

However, Boero noted that all of that is beginning to change. “Companies are putting stress on the traditional brokerage model,” he said. “Real estate agents [and] brokers will not vanish overnight, but we may have finally reached a Darwinian moment in real estate. The environment is changing; some simply will not adapt, and new entrants and ways of doing business will pressure those who are already here. Those that do not adapt will go away, and those that remain will get stronger.”

So how do traditional brokerages stay ahead of increased competition in a rapidly changing environment? Some companies are responding by eliminating the physical office and instead investing in technology to compete. “The rise of the virtual brokerage is a rational response,” said Boero. “We can’t progress unless there’s change. And change involves new things, and it involves some things going away.”

One company that’s taken this tack is eXp Realty. Thousands of eXp clients utilize the brokerage’s internet marketing and cloud technology to find, buy or sell homes without the overhead costs of a physical office.

“We have been doing telework since 2009. All of our agents and staff go to work each day using virtual offices for business,” said Sanford. “I expect that the industry will begin to see even more traction now around businesses with no physical brick-and-mortar location.”

But it’s not just working from home; eXp provides both agents and their clients with 24/7 access to collaborative tools, training and socialization through a 3D, fully immersive, virtual office environment. They use Workplace by Facebook for internal communications and eXp 360 Tours powered by EyeSpy360 for virtual home showings. IntroLend First Cloud is eXp Realty’s national mortgage partner for online mortgages, and VirBELA Team Suites offers the sensation and experience of having an in-person meeting or conversation for agents seeking to meet with clients virtually.

Still, most traditional brokerages continue to allocate significant resources to physical offices, and may look to generate income through ancillary services to cover such expenses. “Brokerages that can be nimble and pivot quickly will also succeed,” Boero said. “If you’re finding it hard to make money off real estate brokerage, you can do things like originate mortgages [and] sell title insurance, home insurance and home warranties. It’s a way to remain viable.”

With both mortgage and title insurance companies in its portfolio of brands, Baird & Warner is a local example of this trend. “Thirty years ago, we had the foresight to build our own mortgage and title companies so we could offer comprehensive real estate services. In the last couple of years, our vision was validated as research showed that having all of these services under one roof creates an improved client experience,” said Kasal.

“Furthermore, with three revenue streams, we can give each company the tools and support it needs to grow, as well as provide a way to keep the entire organization financially strong when the market shifts.”

While Baird & Warner operates 28 physical real estate offices in the Chicagoland area, Kasal noted that the company is also fully functional in situations that call for telecommuting, such as the recent COVID-19 outbreak that shuttered businesses in all industries across Chicagoland.

“We can take our entire company remote and not miss a beat,” Kasal said. “We are able to do exactly what we do without having a single office open, and that technology has really helped us stay ahead in the industry.”

One shared element between disruptors and innovators is a commitment to change and adapt to evolving consumer needs. “True structural change always stresses the existing system,” said Boero. “Some adapt and get stronger, and some go away. That is the epitome of progress.”

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