AgentBrokerage

Who faces disruption in the real estate industry?

Why it's wise to look both ways before crossing a street -- figuratively and literally

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Los Angeles drivers often look left before turning right at an intersection and miss the danger of pedestrians crossing on the right.

One of my engineering friends put it this way, “A good software developer looks both ways before crossing a one-way street.”

The real estate industry may be looking in the wrong direction when driving down the road of disruption.

Let’s start with Zillow. Powerful, yes; disrupter, no.

Former Market Leader CEO Ian Morris recently observed, ”Zillow is the first consumer real estate brand ever.”

People not only recognize the Zillow brand, they use it, just as the public reads The Wall Street Journal, searches Google, visits Wal-Mart and eats at McDonald’s. They all are brand habits.

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The public knows Zillow and visits the site when curious about real estate. A habit.

The public is aware of Century 21 and Coldwell Banker, but these industry brands are not real estate habits. One hundred million people a month do not waddle around C21 or CB websites.

The growing clout of the Zillow brand is what galls some agents and brokers — or worse, its reach messes with their business. Top producer Sue Adler describes the work it takes to clean up mistakes with inaccurate Zillow information.

She was recently working with a buyer who said that she had represented a house had hardwood floors, even though neither Adler’s website, the MLS nor marketing information promised hardwood floors. But “Zillow said so,” claimed the buyer. The house did not have hardwood floors.

“Zillow hurts our client experience, and we are sick of dealing with it,” said Adler.

But this story reveals something more important: The public trusts the Zillow brand more than an experienced, honest and hard-working agent like Adler.

Powerful, but not a disrupter

The power of the brand also spawns Zillow haters, which can spiral into conspiracy theories. Zillow has become the old guard’s boogeyman. The feared disrupter, even though it is not.

Dominant real estate advertising power is not new. Internet advertising did disrupt newspapers, but not the real estate industry.

Agents have always purchased ads in newspapers, billboards, radio, TV and bus stops. Back in the day, advertising was a way of appeasing home sellers who wanted to see that their property is being marketed in brands like the New York Times, Chicago Tribune and Los Angeles Times.

The MLS is what sells the house, and advertising often plays a small role, but the consumer expects it, so the industry pays for it. Now, home sellers are asking if their house is listed on Zillow. Brand power at work.

Zillow does not sell real estate, it sells ads to real estate agents like the oldest newspaper in the country, The Hartford Courant, has done for 230 years. The first real estate advertisement was President George Washington’s ad in the Courant to lease part of his Mount Vernon land.

Who was the biggest disrupter?

NAR was the biggest disrupter in the history of real estate. It started realtor.com, which was the first significant move to take away a core part of the agent’s value proposition — consumer MLS data access.

Prior to 1996, this was how it worked. “Want to see houses available on the market? Come to me because I have an MLS book. Sit with me in my office and we can flip through it together.” If a consumer wanted to see a listing, they had no choice but to call a Realtor. The most you might get was a few Xerox copies of listings.

Realtor.com changed all of that, and hence began the process of agents slowly losing their vaulted position at the center of the transaction.

Displaying listings on the Internet is not a bad thing — just the opposite — but the history is what it is.

Is disruption over for the industry? Hardly. But disruption is coming from different directions.

Agents are not going out of business; they are being empowered by technology to do less of some things and more of others. But some of the services that they provide are being disrupted, which creates a challenge.

Disruption

Agents are grinders

Business has greeters, grinders and finders. Agents are no longer finders of real estate; Zillow and realtor.com do that work. Agents may not be greeters much longer, as many consumers can get so much information online and many are not keen on hanging out with their agents.

But agents are still grinders. Grinding out negotiations with buyers and sellers, grinding out the gnarly closing process, grinding out solutions to loan woes, grinding out scheduling, grinding through home inspection reports, grinding through title quirks, grinding through bureaucratic fumbles, grinding out the home’s right value and grinding through misinformation on Zillow.

It is these sorts of back-end services that account for a willingness by most consumers to pay a real estate commission. Navigating the process requires a grinder.

But as a new set of technologies are applied to the back end of the transaction, agents must find a way to articulate their value and find their place with the new technology. Being the ones who offer the technology would be an important first step.

Within a year, a mobile hub for consumers and vendors — including agents, lenders, title companies and home inspectors — will be created. This password-protected go-to place will have central document storage like title reports, mortgage information, inspections, offers and contracts. It will also have private communication with messaging like WhatsApp or Slack for the key players.

With the communication process more efficient, say goodbye to unnerving faxes, email dribble or annoying phone calls. The hub will offer auto notifications for inspection reports, loan approvals and deadlines, and it will include easy-to-use scheduling and instant showing technology.

I often make parallels to the Kaiser Permanente integrated health delivery system, which stores my medical records, notifies and alerts me of lab test results, and provides a private communication system for appointments, referrals, and doctor and nursing advice. All of it is mobile, password-protected and safe.

Unlike many health insurance schemes, Kaiser and the technology that it deploys allows me to focus on health and lets my doctors and nurses drill down on my care, sidestepping bureaucracy by wiping it out.

Imagine a real estate world where my agent and I work on getting the right house under contract at the right price, not on paperwork, bureaucracy and incompatible systems.

MLSs not threatened, brokers may need to pivot

The MLS is not being disrupted; this 110-year-old data masterpiece has never been more important.

Underpinning the MLS is broker cooperation — you share my listings, I share yours.

The one thing that could disrupt this pact are greedy agents who want to get paid twice by representing both sides of the transaction and keeping listings to themselves and off the MLS. These types of listings are dangerously disruptive to the iconic MLS system. This is a case of the industry being its own worst enemy.

Brokers can avoid disruption, but they must look in both directions as traffic is swirling around them from all sides. Their agents can get their own customers from the Internet, install their own software, process their own transactions and get office camaraderie through teams. The portals rule the roost on leads and others are jumping into the backend technology space, where brokers could provide the most value.

I am baffled that big brokers are spending millions of dollars on a front end consumer solution like the Broker Portal when they should invest in the backend where they are qualified and capable of owning. And where the next battle ground is taking shape.

Teams, portals and technology have eroded the value of the broker, and this explains why its splits with agents is on the rise and why brokers must recruit more marginal agents with better cuts, which dilutes their value, their services and their brands.

Brokers are not going away anytime soon, but they face disruption. And when you are being disrupted, you either change your business model or how you do business.

Look at the story of CVS Pharmacy, which transformed its 2,800 stores into neighborhood health clinics. The business model changed from peddling cigarettes, soft drinks, candy bars and cheap perfume to emphasizing health through its Minute Clinics and expanded pharmacy where you can get a blood pressure checkup, a flu shot, blood tests, and a throat exam.

Its public stand against smoking has allowed CVS to rebrand itself fully as a health care company.

The drug store giant saw disruption on the horizon and moved quickly to pivot its business model, and now it disrupts a lot of local  healthy care providers who lost business when CVS began offering these low-level services.

Innovative real estate brokers are doing the same. Take PorchLight. The Denver brokerage took aim at agent productivity by reshuffling resources and people to take certain tasks off the agents’ backs, creating a better work environment and improved quality of life for agents. This has led to better splits for the broker and profitability, less tension with agents, and a better and a more controlled customer service experience.

@properites in Chicago is doing the same thing, centralizing and controlling marketing and delivering consistent technology to get better efficiencies for both the broker and the agents. Plus, it is building out technology on the back end because it understands that is where much of the agent’s value proposition lies.

Another example is Real Estate Concierges, a Dallas brokerage that real estate broker Heather Anderson, 35, co-founded in October with a model that addresses the eroding value she feels brokers and agents bring to a deal. She has owned a traditional brokerage for 13 years.

While it charges a six percent commission and provides full service, Real Estate Concierges’ wants to become a client’s lifetime consultant for all things home. What if a former client needs their gutters cleaned, a door resized, real estate tax or investing advice, recommendations for a good roofer, or tips on what to do when they’re robbed?

Real Estate Concierges has a handyman on staff (the first two hours with the handyman are free with closing; services are $50 per hour thereafter). The plan is to secure long-lasting relationships with clients, capture repeat business and referrals, and justify the full commission rate as real estate’s landscape continues to change.

Change is important because I suspect brokers will face another threat — when realtor.com and Zillow begin to offer agents a referral fee model. This is something brokers and agents have been familiar with for decades in the relocation business, but it makes no one too happy when another party inserts themselves in the middle of commission revenue.

I have no evidence whatsoever that Zillow or realtor.com are going to shift their business model any time soon, but I see it as an obvious threat to brokers over time.

Franchises enjoy best business model, but proposition disrupted by Zillow brand

Old-school franchises have the best business model in town; they get a piece of the commission. The largest real estate company in the world operates out of one office in New Jersey.

But traditional franchises depend heavily on old-school brokers to survive, and they will increasingly feel their pain from disruption.

Plus, the veil around traditional real estate franchise brands is being lifted, revealing the truth about their brand clout. The big franchises have always depended on big annual TV and digital ad spends to show brokers the power of their brands.

But with Zillow overwhelming these branding initiatives, the dividends from franchise ad spends are more suspect. For a while, the franchises attempted to send traffic to their websites, but today that is a waste of money until they offer a consumer proposition distinct from the portals.

Today, the smart franchises are refocused on technology and training, and staying ahead of trends that may help or hurt their brokers. Realogy acquiring ZipRealty is an example and KW’s training program is another.

Also, Realogy, Re/Max and Keller Williams used their clout with Zillow to cut sweetheart deals for its brokers for no-fly zones on their listings by preventing competing agent ads.

Longer term, the franchises must further pivot to thrive.

Disruption from new entrants

Never forget that disruption may come from somewhere you never expected.

The volatile unconnected actions of two groups changed the music industry forever. In the 1990s, German engineers figured out audio compression algorithms to create the revolutionary MP3 file format.

At the same time, young and rebellious music pirates were illegally converting CDs to digital files on the Internet. These unexpected developments cost the music industry $22 billion and freed up music in ways unimaginable 20 years ago. The music industry was slow to the innovation game and suffered mightily.

In the middle of the Inman Connect conference earlier this month, I received a text from a venture capitalist who wanted my thoughts on a business plan from a young entrepreneur who wants to disrupt the real estate industry. I see these plans frequently, but this one was a tad more sophisticated.

From top-notch schools, the co-founders are bright and experienced; their plan is focused on the listing side of the real estate equation, a blue ocean of opportunity for innovators. Over the last 15 years, 95 percent of the investment capital and successful startups are all focused on the buy side of the equation.

Think about it: Zillow, Trulia, realtor.com, Redfin and the latest generation of hybrid broker models are almost all taking aim on the buy side. Whether it be search technology, tools, agent leads or business models, homebuyers are getting all of the love.

The plan that I saw centers on a mobile, software-driven platform for DIY home sellers with built-in buyer agent cooperation. The tiny startup is licensed in dozens of states and learned much from working in the fragmented fee-to-list business, which represents an estimated 15 percent of the market.

The odds of this new venture failing are high, but could this fee-to-list market grow with killer software, comparable to Airbnb and Uber’s platforms?

Much of the fee-to-list business gets by despite itself: marginal technology, a mangled process, often poor digital marketing, a small market and sloppy representation. This approach is only suited  for certain sellers — for now.

But if an Uber-like experience were offered and marketed properly, a mobile DIY service might begin to roll up the fragmented fee-to-list industry. Could it then go deeper into the mainstream for-sale market?

Disruption follows a predictable cycle. Niche first, everything else later. Uber started with upscale town cars and now offers cheap and reliable transportation for everyone.

But disruption is often unpredictable. That is why it’s smart to look both ways before crossing a one-way street.

Email Brad Inman.