Commentary: Is the Real Estate Industry Overdue for Disruption?

Technology is disrupting every industry, mostly in positive ways. Real estate is no different and the market is ready for more transparency and more consistency of service.

Commentary: Is the Real Estate Industry Overdue for Disruption?

Airbnb is making Motel owners broke all over the world.

Uber is driving taxi drivers crazy (excuse the pun).

Sites like Trademe in New Zealand made old printed classified publications like the 'trade and exchange' magazine obsolete almost overnight.

Will something similar happen in the real estate industry? Is it due for a shakeup?

Firstly, it's a question of trust.

One of the main functions of any company is to provide a level of trust for a consumer. Why do you pay more for Watties or Heinz baked beans than other brands? Because you trust that company to provide a certain quality of product, you trust them to provide a consistent service. You trust that you won't get sick if you eat their beans.

You trust your bank to take care of your money. You trust your mobile phone plan provider to always provide coverage and a service that is reliable. You trust your favourite airline to get you to your destination safely. The better the reputation of the brand and the more well known it is, the more trust you have in whatever service they are providing.

How has the 'disruption economy' changed this?

What Uber, Trademe, Airbnb and other similar companies have provided is a platform whereby you can feel confident trusting a complete stranger to fulfil a promise or provide a service in a reliable manner in exchange for your money, thereby removing the need for large, well known companies and the trust / goodwill they bring to the table.

How do they do this?

It's all based on the peer-review rating system. On Uber, Airbnb, Trademe etc you can see the track record of every supplier you are considering doing business with. You can decide whether you are prepared to trust them to provide you with accommodation, drive you home, or sell you their old unwanted ball gown based on a few online photos and a short description. The higher the seller's rating, the higher the level of trust you have in that person. You never meet them, you don't know what they look like, you don't even know where they live. But you are prepared to trust them with large amounts of your money purely based on what other complete strangers have said about them. Isn't that incredible?

These platforms remove the need for a 'middle man' in each industry. You no longer need a hotel name you can trust, or a taxi company you can rely on to turn up on time. You no longer need a big company taking a large cut on the way through to arrange the service. Just an online service taking a much smaller cut!

It's a wonderful, game changing idea which is changing lives and changing the way we do business all over the world. It's a more efficient system which should result in lower costs for the customer, more profit margin for the supplier, or both.

Can this be applied to real estate? Can the 'middle man' be removed?

Will homeowners of the future sell directly to buyers using a similar system, thereby removing the need for a real estate agent?

Key Issue No.1

The in-frequency of the transaction. Specifically how that in-frequency affects our ability to trust one another.

In my personal experience working in the Wellington (New Zealand) real estate market, people move house roughly every 7 years. For buyers and sellers, you simply can't create a track record of reliability, or a reputation of trust when you only do something every 7 years. People wouldn't be able to review your home-selling / home-buying track record and decide they are prepared to do business with you because for most people there would be nothing recent to review.

How do you solve this? One possible solution is for each person to have a single, unique peer-review 'consumer' rating that is shared across all services you use. Eg. Your Trademe account rating is the same as your Airbnb rating, which is the same as your Uber rating and they all effect each other. A 'human interaction' rating or public credit rating if you will.

This would provide a way for people to trust you for infrequent transactions, like selling a home but it would make the world a very, very scary place. Can you just imagine if everyone had a completely public credit rating and every time you made a financial transaction it could influence your public score? Imagine the power every supplier would have over you. Imagine the fake-niceness everyone would show to each other. It's a scary thought.

This idea was explored in the excellent 'Black Mirror' show on Netflix in Season 3, Episode 1. Check it out and get the fright of your life.

Key Issue No.2.

It's a complicated transaction. It's one thing to trust someone to give you a ride home, or give you a bed for a night but selling a property is not as simple. There are costly, legal ramifications of saying the wrong thing and losing or gaining a buyer could cost you huge amounts of money.

If an owner or an agent can create a competitive environment, through good marketing and good management whereby there are 5 buyers for a home rather than 1, it is going to have a massive influence on the final sale price.

But people sell cars to each other in-frequently? Why not houses?

It is true that sites like trademe have made it easier to sell a car yourself without the need to trudge along to a second hand dealer if you don't want to. There are some key differences between cars and real estate:

1. Cars are easier to price. You can look at the variables of odometer reading, age, condition and generally make an assumption about the price of a car if you know what other cars of that type are selling for. This info is usually easy to find online. With houses it's a heck of a lot harder to judge price. Properties vary hugely and there are so many factors to take into account that it is simply impossible to set an exact price for every home. I have often seen 2 valuations that are $80-100k apart on the same house and the variance gets even bigger as the houses become more expensive.

Houses are worth different amounts to different people based on their likes / dislikes, needs, timeframes and budgets.

2. Cars are less complicated and the problems are cheaper to fix. If you un-knowingly buy a leaky home you are looking at tens of thousands if not hundreds of thousands to fix the problem. If you buy a car with a bung radiator you can fix it and it won't make you bankrupt.

But agents aren't trust worthy anyway! Why do we need them?

It is true that like any service industry, real estate has it's bad apples, maybe more than it's fair share even. However those aren't the agents that are selling 50 houses a year, getting admirable results for their clients. The bad apples are often the part time agents who sell 4-5 houses a year for people they barely know with little proficiency and limited market knowledge.

The vast majority of real estate agents care massively for their clients. They wouldn't be in this industry if they didn't like dealing with people. Many of them come from backgrounds like nursing, teaching, or working in the police force. You don't get into those careers without feeling empathy for your fellow humans. At the same time it's true that some agents are simply more proficient at their job than others and while the wrong agent might just be an order taker, the right agent can add 5-10% in value to your property when you sell.

Think I'm wrong? Ask any active buyer right now if they know of a house that sold for way more than they thought it would? That doesn't happen by accident and often the owner is the one who is most surprised in that situation. The real estate salesperson has a lot to do with the final outcome and a good agent is worth every cent you pay them.

In what other ways could the real estate industry be disrupted?

More Transparency

Imagine if you could look up the complete past sales record of every real estate agent in your area. Every sale price, exact number of days on the market, properties they didn't sell and reviews from past clients, controlled by a third party so it can't be sugar-coated.

What currently happens is the agent you interview comes to the appraisal meeting and tells you all the about the wonderful recent sales they had where 100 people turned up to the Auction or there were 15 offers in 3 weeks. They never mention the house that took 6 months to sell and had 5 offers crash on builders reports. Even though the tenacity and perseverance involved in those sales often means they are the most impressive!

Note: The closest thing to this is the facebook star rating seen on the agent's facebook business page. At the very least you should check this out before hiring someone. In my humble opinion, you shouln't bother listing your home with an agent that doesn't have a facebook business page, which is different from their personal profile. You can also google their name to check their web presence and to see if they have a disciplinary record.

Standard Due Diligence Providers

A nationwide building inspection company (ideally backed by local / central government) could provide buyers and sellers with more consistency of service and information. Increasing the trust in the inspection process would make buying and selling property much easier. AA reports have become the standard way of evaluating a vehicle for sale in New Zealand and everyone seems to respect these as being reliable, although I personally find them very vague. Ideally we need a similar system nationwide for real estate.

Monopoly's can be dangerous however and such a company would wield a scary level of influence.

Similarly, standard Council / LIM reports would help too. Right now the information you can get on a property from each Council around NZ (and around the world) is completely different in terms of quality and time frame depending in where you are looking. If there was a consistent standard and format of Council report it would make reading and digesting the information so much easier for buyers.

Online Auctions

If you are based in Sydney but want to buy a rental property in Melbourne, the first thing you would need to do is learn the market. It's one thing to look at properties online and compare asking prices but that doesn't actually tell you what houses are actually selling for, just what the owners are hoping to get.

Also, many houses aren't priced so you would have to drive there every weekend to attend open homes and drive there again on Auction days to watch houses sell under the hammer to try to learn the market and find out what houses are going for before you jump in.

Imagine if you could log on and watch houses being sold via online Auction instead. You could see exactly what they sell for, view all the photos, virtual walkthroughs and read through builders reports to see their condition. You could study any market from the comfort of your home. Armed with that info you could confidently bid on future Auctions without having to step into a public Auction room, which can be an intimidating situation, especially if it's your first time.

For sellers it would make it easer to attract out of town buyers and overseas bidders, while avoiding a lot of the stress and pressure of an Auction process. If no one shows up to your house for an Auction it's embarrassing. If no one bids on your online Auction it's far less stressful - you could simply choose to extend the Auction for another week or longer.

In Conclusion

Technology is disrupting every industry, mostly in positive ways. Amazon recently opened a cashier-free convenience store in Seattle for example.

Real estate is no different and the market is ready for more transparency and more consistency of service. Increased regulation has made advancements in this area by instituting high standards of continuing education and increased consequences for anyone not meeting the standard of service the public would expect. Some positive change has come about simply by raising the cost of holding a real estate license dramatically, thereby removing the number of 'part time' agents who don't take the job seriously.

There is more that can be done though, and smart people are working on positive disruptions as we speak so watch this space!

As always I would love to hear your thoughts below. If you have ideas on how the real estate industry could be improved through technology, please let us know...

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