In 2017, well over $1 trillion in U.S. residential real estate changed hands, as well as over $450 billion in commercial properties, according to the National Association of Realtors. Plus, the industry is data-rich, labor-intensive, and tradition-bound — just the sort of environment that tech investors and entrepreneurs love to shake up. So in 2017 they ploughed $3 billion into real estate tech companies, far more than the $468 million of 2013, according to research firm CB Insights.
So far, startups have mostly worked to empower consumers by unlocking previously hidden data, and equip professionals with a range of new productivity tools. But now aggressive and well-funded entrepreneurs are finally starting to really transform how we buy and sell homes. Some are building tech-focused brokerages that balance efficiency with hands-on assistance. Others are putting home flipping on steroids, using technology to offer sellers a fast and certain sale at a competitive price. Fueling the rise of these upstarts are new visualization tools and software that promise a faster, fully-digital transaction.
Empowering consumers — and agents
Over the last decade, Zillow Group, realtor.com and Redfin have changed the way people find and research properties by publishing listings, home value estimates and other real estate data online. Much industry innovation has also catered to agents. Listing sites sell ads to them, while transaction management software — provided by the likes of DocuSign, dotloop (owned by Zillow Group) and SkySlope (owned by Fidelity National Financial) — has made it easier for agents to oversee mounds of paperwork. Companies like Commissions Inc. (acquired by Fidelity National Title for $250 million in 2016), RealScout and BoomTown, meanwhile, have made it easier for professionals to market their services and manage contacts.
Innovation has wrested listing data from agents even as it has solidified their role as transaction sherpas. But it has not disrupted the traditional brokerage model or meaningfully impacted commission rates.
But a new generation of well-funded startups may transform the transaction process over the next decade, predicted Pete Flint, the former CEO of Zillow-owned Trulia, at a recent real estate tech conference called Inman Connect. He says most of the traditional brokerages will die slow deaths.
The rise of iBuyers
High-tech home flipping companies known as “iBuyers,” such as Opendoor and OfferPad, are showing one way models can shift. With pricing models powered by artificial intelligence, these homebuying machines let homeowners enter their address online, receive a quick offer, and, if they choose to accept it, sell their home in mere days.
Unlike a traditional home flipper, Opendoor claims to buy at market value, and charges an average service fee of 6.5 percent — roughly 1 percentage point more than a typical real estate commission. Drawing on more than $1 billion in equity and debt financing, it tries to buy and resell properties as quickly as possible. The company often makes only light repairs and applies tech wherever possible. For example, smart locks and motion sensors enable homebuyers to tour listings all day, seven days a week. The fast-expanding startup claims to be buying 500 homes a month in Phoenix, Dallas-Fort Worth, and four other markets. It has also added mortgage products, title services and a “trade-in” option, which allows homeowners to simultaneously sell their old home to Opendoor and buy a new one from it.
Atlanta-based Knock puts a different spin on the iBuyer model, aiming to reduce the complexity and brinksmanship consumers have to endure when navigating the transition between selling one home and buying another. It helps homeowners find a new home and then purchases the property on their behalf, often securing a discount by paying cash, explains CEO Sean Black. Knock will then move customers into the new home, and try to sell their old one. Once Knock sells their original home, customers take a preapproved mortgage lined up by Knock to purchase the new one they are already living in. Knock charges a 6 percent commission, plus the cost of upgrades it makes to both old and new homes.
Questions loom over whether iBuyers may end up costing sellers more than their advertised fees, and how these tech-powered homebuyers might cope in a down market. It’s too early to confidently generalize about the business model. But Zillow Group has validated it, launching a marketplace on its own site to help consumers request and evaluate offers from iBuyers.
New technologies could further streamline the transaction and alter the broker’s value proposition. Numerous home sellers and agents are installing smart locks, such as those provided by August Home ($75 million raised), to allow potential buyers to tour listings on their own. Meanwhile, digital 3-D home tours will “very likely shrink the number of homes that buyers need to visit because they’ll feel like they’ve seen it,” said Sam Debord, a Seattle real estate broker who has advised many real estate tech investors.
Meanwhile, a growing number of lenders and software providers, such as Blend, Better Mortgage, Quicken Loans and loanDepot, are bringing borrowers closer to all-digital mortgages. Timelines will shrink as federal mortgage guarantors embrace innovation and a “much more predictive, data-driven approach takes hold,” predicts Andy Taylor, co-founder of mortgage software maker Approved.
The title transfer process, too, could undergo game-changing innovation. Startups including Propy, velox.RE and Ubiquity, are hoping to use blockchain technology to automate it. Says Moderne Ventures CEO Constance Freedman: “If you have a single source of truth for information, you don’t need things like title insurance.” But replacing or working around the current U.S. property records system — beset by fragmented databases and controlled by a strict legal framework — would be a monumental task.
Tech-powered “hybrid” brokerages emerge
All these innovations will help fuel a wave of tech-powered brokerages, known as “hybrid brokerages.” They leverage websites, digital communication and transaction systems and teams of specialists to offer lower fees. And they aim to bundle mortgage, title and other ancillary services into one seamless experience.
Redfin has been a trailblazer, using its popular listing site and tech-powered agents to offer discount rates for nearly a decade. It charges homesellers a roughly 3.5 percent commission, compared to the 5 percent or more that is otherwise typical. Clients who are buyers receive a portion of the commission Redfin is paid by a listing broker. Redfin, which assisted with 14,000 transactions in the third quarter of 2017, may have found the sweet spot between technological efficiency and hands-on service, though some long-time observers remain skeptical.
Zillow Group CEO Spencer Rascoff certainly takes the commission cutter seriously. He called Redfin “a threat to organized real estate,” in an August earnings call. Agents would have less money to buy advertising from Zillow if Redfin gobbled up market share and led other brokerages to cut commission rates to stay competitive. Redfin, meanwhile, is innovating furiously. Its latest projects include a showing-scheduling tool, an offer-generation app, iBuyer service, and a newly launched integrated mortgage service.
Hybrid brokerages Homie and Trelora may also have bright futures. Both combine an online platform and limited but efficient services to offer even lower rates than Redfin. They are under fierce attack from the industry, which sees a threat to prevailing commission rates. Incumbents accuse these startups of subpar service, and are reportedly fighting dirty. Says Trelora CEO Joshua Hunt: “We have plates stolen from our cars, letters sent to sellers, broken windows, egged cars, hate mail… and daily aggression from agents.” Nonetheless, Hunt claims his Denver-based brokerage closed more than 1,000 transactions there last year. Like the similar Salt Lake City-based Homie, Trelora has plans to expand nationwide. One way Trelora reduces costs is by encouraging agent-chaperoned communication between buyers and sellers using a proprietary messaging system on its listings site, blurring the lines between a for-sale-by-owner service and a brokerage.
This has also been a core feature of Purplebricks, a cut-rate brokerage that has become one of the largest brokerages in the UK since its start in 2014. Traded on the London Stock Exchange, Purplebricks has raised an extra $131 million in special funding to break into the U.S. It recently launched in California and says it will debut soon in the New York metro area. “We’re looking at every ancillary service we can integrate into our offering, so we can control the consumer experience and make it more efficient,” said Erik Eckardt, who heads up Purplebricks’ U.S. division. Homebuyers can make offers on Purplebricks listings online and view competing offers. This sort of online auction-like bidding could become increasingly common. Redfin is considering something similar.
Softbank Pumps up New York’s Compass
Compass is a curious case in real estate tech for the extraordinary financial support it has garnered from SoftBank and others. The Japanese tech investing colossus recently ploughed $450 million investment into Compass, bringing its total funding to $775 million. When the New York City-based brokerage (then known as “Urban Compass”) launched in 2013, it set out to disrupt brokerage for rental units and homes by using tech to improve home searches and pay agents based on customer satisfaction. But when it shifted from rentals to sales, Compass began charging typical commissions so it could attract top talent. Some Industry analysts speculate that Compass may use the Softbank money to finally design breakthrough technology. In any case, Compass will use its war chest to seize market share across the country and globally.
Some believe the new crop of tech-powered challengers could unseat incumbents like Realogy and Keller Williams Realty — which collectively oversee hundreds of thousands of agents. But Keller Williams is actively countering the threat. It recently set aside $1 billion to invest in technology and released an AI assistant for its agents. Meanwhile, Realogy is acquiring startups and hired a new tech-savvy CEO.
Keller Williams founder Gary Keller told agents at the company’s most recent annual conference that agents must find ways to counter tech companies. “We’re losing so slowly we think we’re winning,” he said. It’s smart to be scared. But all the innovation and competition guarantees that consumers, at least, are winning