Outdated and unaligned with the services it provides, the real estate industry’s payment model is slower than walking backwards from Boston to Montreal. Realtors invest hundreds and often thousands of dollars upfront to sell a home and toil an untold number of hours before seeing a paycheck.
Historically, hefty commission rates and minimal marketing and business costs compensated for delayed payment. But today the costs of digital marketing, compressed commission rates and the complexity of deals have made selling real estate a tougher propositioin.
Beholden to a gaggle of vendors who make the process unnecessarily protracted, the transaction spreads out over weeks — even months — with an archaic and long sales cycle and a closing process that creeps along like a security line on Monday morning at JFK Airport.
Let’s take the typical deal once a listing agreement is signed.
Stage the house and prepare it for sale, including marketing collateral, digital placement and advertising: Days or weeks.
Plan and hold the broker open house: Days.
Plan and hold open houses: Days or weeks.
Mortgage approval: Weeks.
Offer, counteroffer and closed agreement: Days or weeks.
House in escrow: Weeks, aggravated by mortgage, title and escrow delays.
Feels like a slow motion video, doesn’t it?
How long will homesellers get a raw technology deal?
Yes, the real estate backend is coming out of the dark ages, dumping legacy steps like multiple data entry, wet signatures, faxes and piles of paper.
But while technology has done a good job of showing off and marketing homes online, it has done a rotten job of speeding up other sales and closing steps along the way for the homeseller.
Consider the arcane process of human-powered home showings, staging, open houses, broker opens and old-school back-and-forth contract negotiation. It’s like scurrying up an escalator that is moving down.
Smart contracts, consumer authentication, on-demand showings and instant offers and closings are nascent technologies but will soon offer a path to a new future of swifter home sales.
What takes weeks and months should take days, and an expedited closing will get the agent paid faster.
Some of this is an investment in the necessary infrastructure to do business, but it adds up to hefty upfront carrying costs that are not recovered until deals close. In the worst-case scenario, the agent receives no compensation when the deal falls apart.
This upside down cash-flow model has also made it tough for broker owners over the last twenty yeas to invest in innovation, giving venture-backed firms like Zillow a competitive advantage attracting consumer leads.
Change is coming but too slowly. Broker Bill Lublin says the timeline is “much faster than the process was 15 or 20 years ago” but that everyone wants to make it quicker. Time is money.
The ‘mystery zone’: Mortgage and closing paperwork
Agents can push only so hard as their clients want and ask for more, but worse is a paper-obese and lethargic title, escrow and mortgage process that shoves too many deals into institutional quicksand.
The mortgage and title process is like being stuck in bumper-to-bumper traffic at Atlanta’s “spaghetti junction” where Interestate 85 and 285 intersect. You want to jump out of your car, climb on the hood and start screaming at the top of your lungs.
Life insurance companies can make underwriting decisions on $1 million policies in minutes but the “mortgage industry is stuck in a convoluted process,” said Houston broker Katie Maxwell. “Lenders blame it on slow turnaround times from buyer requested documents but it’s not. It’s them. I have been in this industry for 16 years and I still have no idea what’s happening when a deal is in this mystery zone.”
“It usually takes a lender 21-30 days for an approval, possibly with conditions, to be issued, allowing for the mandated consumer disclosure time,” said Southern California agent Elaine Hanson who is dubious about fast tracking inspections, showings and other steps that protect the consumer.
“If every consumer had an accurate, digital history of all their financials at the ready, at the beck and call of the lenders, maybe the approval process could speed up a bit. Maybe, that is where blockchain comes in,” said Hanson.
Blockchain offers a software solution that authenticates buyers, sellers and homeowners for instant loan approval and fast closings.
Who pays the biggest price? Agents
The victims of the current process are real estate agents who do not get paid expeditiously. And the competitive battlefront with new entrants like Opendoor make transaction compression a more pressing priority.
The solution is not an upfront-fee business approach because the award-based commission model offers too many consumer benefits to abandon. Nor is the solution payday banks who slice commissions but collect exorbitant fees and interest. These are Band-Aids, not solutions.
Instead, the holy grail is a compressed real estate transaction that gets the house sold quicker and agents and their brokers paid faster.
But we must be careful what we lose, warns Hanson.
Homebuying is “a purchase involving value, taste, choice, budget and preference — all of which are highly subjective to the buyer. Wouldn’t it be great for a buyer to pull up a house online and say, ‘That’s the one!’ and blockchain their money right to the seller. Not going to happen. It’s not even a good idea.”