InvestingTechnology

Why real estate is overdue for technological evolution

Inefficiency is a catalyst for disruption
  • Entire industries have been disrupted, and companies such as TD Ameritrade and E-Trade have revolutionized the way investors trade and invest in stocks, and caused high-priced, full-service brokerage firms to shut their doors overnight
  • In the past, minimum investment requirements of $1 million or more have created enormous barriers to entry for the average investor.
  • Access to institutional quality real estate investments and fair investment management fees will become the norm over the next decade.

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In the past two decades, we have witnessed a technological revolution that has provided consumers with more choices and greater access than ever before.

We have seen companies such as Amazon, eBay and Zappos launch into the mainstream as a result. Entire industries have been disrupted, and companies such as TD Ameritrade and E-Trade have revolutionized the way investors trade and invest in stocks, and caused high-priced, full-service brokerage firms to shut their doors overnight.

Even recently, new companies such as Wealthfront are attacking inefficiencies in the wealth management sector by using technology to provide the same services at a fraction of the cost.

In all cases, new market entrants were born to create a more efficient way of doing business, and old, inefficient business models either adapted or died quickly. So why haven’t we seen the same dramatic changes in real estate investing?

Unlike other industries, the real estate investment industry has been held back by regulations that restricted managers from openly soliciting clients and advertising their products through traditional marketing. The industry has been forced to sell its products behind closed doors and only to its wealthiest clients. That’s about to change.

The Jobs Act, recently passed into law by Congress, allows investment managers to solicit investments online openly to accredited investors and create consumer access like never before.

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In the past, minimum investment requirements of $1 million or more have created enormous barriers to entry for the average investor.

Access to high-quality deals has always been limited to the ultrawealthy and institutions, and smaller investors have been able to access private real estate opportunities only through country club deals and nontraded REITs — both known for exorbitant fee structures and little transparency.

Technology and new regulations have created a catalyst for change in this industry that is certain to benefit the consumer. Institutional-quality real estate investments can be accessed directly online by accredited investors, at minimums of a fraction of what they previously were.

Access to institutional quality real estate investments and fair investment management fees will become the norm over the next decade.

However, sourcing and investment management of real estate investments is more likely to remain a personalized business. It’s important to remember that people own buildings, control buildings, lease buildings and sell buildings. For this reason, the value of relationships will never change and cannot be underestimated.

Commercial real estate remains an extremely inefficient market — if efficiency is defined as market information being readily available to all market participants at the same time.

In commercial real estate relationships with local owners, brokers and businesses all provide information to firms that invest in developing these relationships.

The result can be sourcing an off-market deal, receiving a first-look call from a broker on a deal coming to market or having the knowledge that a local business wants to move into an empty building after purchase.

In each case, this knowledge is valuable, proprietary and relationship-driven. If an investor receives a call on a deal from a market where they have no operations, relationships or local knowledge, is it reasonable to believe that those who do have relationships and expertise in the market already have seen and passed on the deal?

Local expertise does more than foster relationships and networks that create advantages in deal sourcing. Another benefit for locally positioned firms is accumulating the street-by-street and building-by-building knowledge that is necessary for identifying an investment opportunity from an investment trap.

The most important questions when buying investment real estate are:

  • Can this asset create enduring demand for its space?
  • Is it well-located?
  • Does the building require non-revenue-generating capital investment?
  • Does the building have a higher and better use?

These questions are more easily answered through street-by-street or even building-level expertise within the market.

Technology and the new rules created by the Jobs Act will continue to alter the landscape of real estate investing. In general, this new landscape creates a more transparent and efficient investment environment for many people who in the past had limited and often underwhelming options, such as nontraded REITs or direct deals with unproven local operators.

However, top real estate management teams will combine investments and technology for deal underwriting, market analysis and client communication with team members who live and work in their target markets.

This old way of doing business has proven to be the most effective and will continue to outperform a reliance on technology alone.

Michael Episcope is principal and co-founder of Origin Capital Partners, responsible for capital raising and marketing. He has 15 years of experience as an active real estate investor.

Email Michael Episcope.