The travel agent industry has been decimated over the past two decades due to the internet. Information asymmetry has effectively evaporated with online travel marketplaces. Airlines no longer need to give up 10% of their revenue to an intermediary to play matchmaker between travelers and flights. Airlines can now easily connect directly with their customers over the internet, driving down transaction costs, increasing transparency, and improving the customer experience without the need for a third party.

Arguably, any industry that used to create value through information access is now under threat. Information now flows uninhibited from buyers to sellers. Intermediaries trafficking in information scarcity have either gone the way of the dinosaur or are having to adapt to provide more service-based business models rather than simply charging for information access.

So what do these trends tell us about the future of real estate? Billions of dollars of venture capital have been flowing into the real estate industry over the last half decade under the heading of Prop Tech (property technology). The bet that these venture capitalists and entrepreneurs are making is that by aggregating information and automating the frictionless transfer of data between buyers and sellers, real estate transactions can move online at a lower cost and with greater efficiency. It has already occurred in many other industries, so it’s a logical bet.

Many transactions that used to require some type of third party – purchasing a book, booking a hotel room, making a restaurant reservation – are now done easily online. Self-serve web interfaces and powerful database software makes it more convenient and cost-effective for both buyer and seller to engage in these types of transactions using technology. This is largely true for airline tickets as well.

The reason that these transactions are more efficient when managed through automation and technology, is that the goods are commodities. There is effectively no difference between one airline ticket and the other, aside from the obvious details of flight and seat location. There are no contracts to negotiate and no complicated extras to consider. This is true for any commodity which is interchangeable and where the purchase process is purely transactional.

Purchasing a house is far from simple or transactional.

Purchasing a house, however, is far from simple or transactional. The first thing to note is the size of the purchase. Buying property is the largest single investment that most people make in their lifetime. A home may represent up to 90% of a family’s entire net worth. This is a big deal and should be taken very seriously.

And along with any large, generally financed, purchase comes complex contracts. Purchase agreements, mortgage insurance, how to hold title, creation of trusts, escrow, insurance, warranties, and more. Navigating the complexities of the legal and financial landscape when purchasing a house is not something that should be taken lightly. Poor decisions or bad advice can result in huge financial losses or potentially bankruptcy. 

Then there is the fact that most homes are not commodities. If you live in or expect to purchase in a planned community where all the houses are built from a model and are effectively interchangeable, then there is lower risk in terms of gathering comparable sales data and contingency risks. But in many urban areas, which often represent the hottest real estate markets, housing stock may be very heterogeneous. This makes finding comparables difficult and requires greater attention to detail regarding earthquake, liquefaction, or flood zones, property age and condition, walkability, public school quality, access to public transportation and many other important lifestyle factors.

Finally, there are many players involved in a given real estate transaction. Mortgage brokers, loan and escrow officers, underwriters, property inspectors, and various types of vendors. Clearly purchasing a home is a complex process and rarely can it be treated as a commodity sale. 

This is why the real estate industry continues to rely on experienced agents to help buyers and sellers effectively manage this complex process. Not only do quality agents understand the contracts in detail and can help advise you on the nuances of the purchase or sales process, but they also bring a set of important relationships to the table. They understand who the other star agents are and how to negotiate the best terms for their clients. They know where to source financing and how to get the best rates and terms that will yield a high quality offer. They have a list of reliable vendors to perform repairs, stage a property, or ace an inspection. They know how to price a property to sell given the various market conditions, and they understand the best places to market the sale to drive the greatest amount of interest and the highest sales price.

Simply connecting a buyer and seller in a digital marketplace cannot address the many challenges and complexities of the real estate sales process.

Simply connecting a buyer and seller in a digital marketplace cannot address the many challenges and complexities of the real estate sales process. Services such as Zillow and RedFin have created increased transparency around home prices and available inventory. These technologies have created increased efficiencies throughout the process and empower buyers and sellers in ways that were impossible before the internet. Yet it is not an accident that the vast majority of transactions still involve an experienced agent. The process complexities and network of relationships required to drive successful outcomes for all parties remains highly dependent on specialists.

While it’s likely we will see continued advancements in technology as it relates to the real estate industry, the idea of disintermediation of agents and brokers still sounds like a science fiction tale from the distant future.

 , , , , ,