Residential Real Estate Trends: Summer 2018

In the first half of 2018 the online real estate market has been radically reshaped with massive investments into new broker-less platforms, home-flipping proposals, and flat fee real estate agents. One of the main drivers behind this change is a pressing need for consumers to manage the new reality of excessive housing budgets. These trends have also been largely driven by venture investments with a clear focus on select companies and a promise of high returns due to rapid market share conquest. These developments, consequently, leave out the traditional representation model from the mix and beg the question: what can a traditional real estate agent do right now in order to adapt?

The answer is both a simple and a difficult one. The Internet, as a driving force, is unstoppable by numbers. There is no magic here, a highly effective tool with giant information aggregators such as Google guiding its users to find exactly what they ask for. Over the last ten years consumers are able to search for previously hidden, now up-to-date MLS information using highly-popular online aggregators such as Zillow and Trulia dominating the online landscape in an open information environment. Meanwhile, a new flat fees trend has been catching up with the online real estate that has been traditionally silent on real estate brokers’ fees. With savings platforms rapidly appealing to consumers, the simple part of the survival equation for a traditional real estate agent is to compete on better service and pricing while using the Internet to that advantage. Alas, such change is a major challenge for a traditional real estate agent accustomed to a 6% “standard” commission.

Flat Fees Model

VC-funded flat fees and other savings models, such as Reali, Open Listings, Door Homes, Trelora and others are armed with a ground-breaking financial bridge to lower the closing fees gap in their select real estate markets. These companies use low fees to market their services as “revolutionary” instead of being frowned upon as “discount.”

For a traditional local real estate agent, it is a tough opponent to beat on numbers alone, but it is possible to match these VC-funded players. In order to do so, it requires a number of adjustments to be made by the traditional real estate agent, including the shedding of wasteful lead-generation strategies. One of the first things a traditional real estate agent must do in order to remain competitive is to let go of the idea of paying 25–40% of their hard-earned commission in referral fees. Having to rely on sourced leads originated by middle-man brokers, greatly hampers an agent’s competitive capability because it removes an option to advertise competitive rates to others. “A lead is a lead is a lead” mentality may have worked with a “standard” 6% commission structure, but it greatly fails in the current competitively-driven market. It is a mistake to continue paying fees for referrals because the real estate consumer is now able to effectively bypass this practice by turning to flat fee brokers and other referral-free alternatives. Instead, competitive real estate agents may actively opt into to referral-free platforms.

The traditional real estate agent in the current market is not immune to the fate of a travel agent. On the other side, there is a big difference between these two industries — real estate transactions do not nearly equal to a hotel booking process. Unlike the demise of a travel agent, the consolidation in US residential market will be established with competitive agents winning the consumer majority because the next secret is out — buyers are able to get thousands in commission refunds in most States, while sellers can easily negotiate much lower rates everywhere. Under these market conditions the broker-to-broker referral fee process is only a matter of time to completely disappear, and so will the real estate agents who rely on such leads for their business. Traditional real estate agents willing and able to adapt to this reality will not only survive, but also secure a more effective real estate process to their benefit, their clients’ benefit, and overall health of the market.

OPEN Marketplace

Since early 2017, with help from early adopters practicing decisive savings models, HomeOpenly OPEN marketplace now delivers to consumers information valued in Billions in closing costs savings compared to 6% “standard” fees. Such savings can no longer be ignored. HomeOpenly is a revolutionary proposition for the online real estate market that delivers free leads to real estate agents, but it only works for those agents willing to compete based on price. The OPEN marketplace is still new, but it consistently gains traction to make ground against its main competitor — Redfin. In 2018 HomeOpenly OPEN marketplace is able to outperform Redfin across all States for buyer’s refunds and listing savings to consumers on an aggregate scale. This fact alone does not yet make HomeOpenly superior to Redfin in volume, but it does make it an alternative business model in an Internet environment able to take on the next challenge.

Redfin Model

The Redfin model is a wild card in 2018 — it is not entirely clear how and if it will be able to complete against flat fee real estate savings models. The major flaw of a Redfin model is that it is a stopgap savings broker solution. Redfin is well-represented in urban areas where the company is able to hire agents to work full time who can deliver sizable savings to consumers, however, most of the Redfin coverage is provided using their Partner Agents. Redfin Partner Agents are independent local agents who choose to take leads from Redfin at a 30% referral fee. This process only works as long as there are no competing services locally able to offer better savings without the burden of such fees. Referral fees are a huge gap in consumer savings, specifically when flat fee real estate agents are able to offer much greater savings, to begin with. A traditional real estate agent can easily opt into the Redfin model, but this process yields little benefit in the long-run. As a result, Redfin consistently delivers lesser savings and will continue to suffer in the years to come under a barrage of flat fee model alternatives.

MLS Aggregators

One of the toughest challenges for the US real estate consumer, other than finding a new home, is to select a single real estate agent to represent them out of many. The same is true for both sellers and buyers of real estate. There is a large number of real estate agents out there and all of them seem to promise the best service with little risk. All of this information is objective, ultimately leaving the real estate consumers to make their final decision in the dark. This fact has been an important revenue generation factor largely exploited by MLS aggregators such as Zillow and Trulia. With the arrival of online MLS-sourced databases of real estate properties across the United States, something else came hand-in-hand — best real estate agent suggestions. Today, most consumers looking to buy or sell real estate begin their search on the Internet. This is a logical first step that can help identify similar properties, pricing budget and other questions that will ultimately help the consumer to make the correct decision about buying or selling real estate. Zillow, as the largest MLS aggregator, analyzes property values, aggregates data, and displays results that make sense to seasoned real estate professionals as well as new buyers and sellers. Zillow and Trulia both had opened up the MLS databases to the public over ten years ago and were able to provide a piece of unique and relatively accurate information regarding a significant number of addresses in the US. Both Zillow and Trulia, as it stands, have also been dominating the market with an Achilles’ heel and its beginning to catch up with them in 2018. While Zillow provides great MLS data, it clearly generates revenue by tempting consumers with its traditional real estate agent recommendations. It would seem that such recommendations are compiled and sorted just as well as the aggregate property data, but are they? Zillow would like consumers to think that its real estate agent recommendations are unbiased, after all, these are based on user reviews and recent listings. However, with little doubt, such results are not impartial. Zillow does not immediately identify how real estate agent search results are compiled in its Terms of Service, but it states on its web site that real estate agents that sign-up for their Premier Agent program “get in front of buyers and sellers in the largest online real estate network.” This fact ultimately means that recommendations provided to US consumers by Zillow are biased because those agencies that pay them to show up first in their recommended results. Thus, an agent shown at the top may or may not be the best, yet Zillow implies to its users that they are. More importantly, these recommendations completely disregard the pricing and services offerings provided by the agent, leading to “the cat in the bag” search results. While successfully aggregating MLS data, Zillow has done so at the general expense of a consumer conditioned into a “standard” 6% commission structure. Consumer savings trends do not allow for this revenue source to sustain at the same rate, making both Zillow and Trulia highly vulnerable to the current developments in the real estate market. It is no secret that in 2018 Zillow is rapidly looking for a way out.

Referral Fee Model

It is important to state that any referral fee real estate agent search is, by default, always biased. Zillow has been pushing biased real estate agent results on US real estate consumers very successfully since its IPO in 2011, but it is not the only company to do so. The trend of promoting select agencies based on fees and referrals is wide-spread within the real estate online tech industry because it is incredibly lucrative. One example, a recently funded company led by Google Ventures called HomeLight, proposes a method to help consumers to find their best real estate agent recommendations. On paper HomeLight provides its users with a free list of “most effective” real estate agents that they have analyzed across the board, meaning real estate agents who facilitate better offers for sellers and better terms for buyers. HomeLight states that “our service is 100% free, with no catch. Agents don’t pay us to be listed, so you get the best match.” In reality, HomeLight is a California middle-man real estate broker that collects a 25% referral fee from all of the real estate agents that would like to participate, hardly a free service for anyone. More importantly, HomeLight applies this referral bias towards all of its results, hence only real estate agents that have agreed to pay a referral fee are displayed in search results. Such services cannot exist in competitive environments and are at a very high risk of being phased out as the market moves toward transparency.

One of the few mainstream services that actually provide unbiased referral-free results to users is Yelp that is able to do so because it is a general review web site, and does not receive mandatory fees. Over the years Yelp has developed a reputation for integrity, allowing businesses to advertise at will instead of “pay to play”. The reason for its success is simple — Yelp clearly identifies businesses that decide to advertise. When it comes to recommendations, this platform has one main problem — Yelp is not a real estate platform and does not specifically provide the best overall data for real estate consumers. Of course, many consumers rely on Yelp for reviews, but it still lacks the pricing and service offering comparison options provided by dedicated real estate platforms.

Home-flipping Model

One of the loudest 2018 real estate trends is a VC-funded home-flipping model. The direct buyer, as it likes to be known, buys and holds property for a very short time in order to place it back on the market with an added mark-up. Zillow Offers, Perch, and Opendoor are the main players in this game. This process is disguised to deliver genuine benefit to consumers by making the real estate transaction process easier. Unfortunately, this trend is one of the tell-tales of an overly hot market and is largely dependent on the real estate market to continue its upward trend. The massive amounts of data collected over the years by Zillow make it possible to effectively identify weak points among consumers willing to sell their home below market and targeting them on a great scale. While home-flipping companies claim to “re-invent” the real estate process by buying homes directly, it is clearly evident that such companies are highly selective about what markets they work in and what homes they actually buy and flip. If the deal doesn’t make sense to a home-flipper, they will simply move on to the next one, making this a fragmented solution, if any. The scale of investment into this process is an alarming side effect of an over-exposed real estate market. This latest home-flipping trend further damages consumer trust and undeniably leads to a loss of equity for both real estate buyers and sellers.

Restoring Consumer Trust

The US real estate consumer is one of the sharpest in the World. With the emergence of closing cost savings trends in 2018, suddenly, the “standard” transactional fees of 50,000 USD are magically lowered to 5,000 USD, for what was essentially the same transaction just a few years back. It is becoming increasingly clear that this trend factors in a breach of trust between real estate agents and US consumers. Consumers are now becoming largely aware that they have been paying an excessive 6% “standard” commissions for decades: buyers are now able to get sizeable cash refunds from any number of competitive real estate agents when buying a home and sellers can easily find competitive agents willing to sell homes on a flat fee basis. This comes both as a shock and a relief to a large segment of US consumers, now actively looking for ways to gain back equity in their homes. This breach of trust has been further accelerated with propositions of direct buyer programs and now requires a complete overhaul. The solution to repairing this trust comes in the form of transparency. Granted, there are great benefits to services such as Zillow that work tirelessly to assemble real estate property MLS data, but that alone does not transfer to their ability to help the consumer to make correct decisions about finding their best choice for a real estate agent. In 2018 industry leaders, have either forgotten or choose to turn a blind eye on the fact that the best user experience is only possible with unbiased results. It is why ideas such as OPEN marketplace are here to help save the real estate representation process and to repair damaged trust of the US real estate consumer. Real estate trends in 2018 are a perfect storm of alternative real estate models landing on the heels of a traditional approach. Without any doubt, flat fee savings and OPEN marketplace models are now among the most beneficial alternatives available for the US real estate consumers.

Author: Litesand

Antitrust, real estate, e-commerce, fintech, proptech, bigtech

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