The Business of Real Estate

The Business of Real Estate

The Business of Real Estate

I don’t pretend to be a particularly savvy investor. I have friends that are. I am not. I just don’t have the knack for it, and aside from regular real estate investments, my returns woefully lag what I might have otherwise earned in a standard index fund. Still, I find the world of private equity and venture investing to be extremely sexy, and 2019 took the thing I know and the thing I’m interested in and crammed them together. 2019, the year that would, with the help of billions of dollars of venture capital, transform the game of residential real estate.

With around $30 trillion in total market value, and more than 5 million annual transactions, the US housing market is remarkable. Each transaction generates an incredible amount of fees. Commissions, sure, but surveys and inspections and title insurance and attorney fees, not even mentioning state and local taxes, capital gains taxes, and more. The sheer size of the US residential housing market earns it the attention of all sorts of investors, and in 2019, that attention grew serious.

Backed with billions of dollars in start-up cash, companies like Opendoor and Compass bullied into the residential space, seeking to prove their platform to be the way of the future. Realogy, the publicly traded company that dominates the US market ended 2019 with a market cap around $1B. Compass, the company that barely registers a blip when considering market share, closed its last round with a $6.4B market cap. Opendoor, a company that really just wants to buy and then resell your home, closed its 2019 round at a $3.8B valuation. The world of residential real estate has gone mad, and everyone can agree that change is coming. The many billion dollar question is simple: What does that change look like?

The answer, according to the players that want to be chosen, is tech. The business will become an online transaction, devoid of annoying Realtors, heavy on software. The vision of most companies in the national space revolves around the concept of an iBuyer, which suggests that then you’re ready to sell your house, you no longer need to look for a specific buyer. You just sell the house to a large company. At what price? Well, at the price their algorithm tells you, silly. Once you’ve sold your home to this company, and you’re in the market for another home, you just click on their list of available homes, and buy one of those. For what price? Duh, the price they tell you. In that, the iBuyer process is clean, simple, smooth. Sophisticated! There’s one problem: It won’t work.

Correction, it won’t work outside of mass-markets. If I’m selling a house in Arid, Arizona, chances are I have some rocks for my yard and a small pool in the back. Also, scorpions and snakes and scorching heat. I know my home is worth $298,750. I know it with certainty. How do I know? Because Arid has 80,000 other ranches just like mine. The iBuyer can make great sense of this market, and they know they’ll need to buy your home for $288,750 in order to resell it for $298,750. You agree to this discount because you get to click the SELL IT NOW button, and convenience comes at some cost. The buyer, who pays $298,750 via their BUY IT NOW button, doesn’t mind paying the market rate, because that market rate is so obvious. In Arid, Arizona, the iBuyer will be an incredible success.

And then when it tries to expand to other cities and states, it’ll be an absolute disaster. Or more likely, it’ll just be a low volume player relegated to the fringe. The concept cannot work in unique markets. It cannot work in highly volatile markets. It cannot work in Winnetka, Illinois, just as it cannot work in Fontana, Wisconsin. The market forces aside, the concept will fail at a higher level when buyers realize they like to haggle, and sellers realize they don’t always agree with the listing price recommendations of a faceless algorithm. I’m the top agent in Walworth County by miles, I have 23 years of experience. I’m reasonably articulate. And still people disagree with my market opinions on a daily basis (they’re wrong, but still). If I cannot always win a valuation argument with a stubborn buyer or seller, how much more convincing can a computer program be?

No, the face of the future of real estate isn’t the iBuyer, no matter what the billions of dollars in support might suggest. Compass would tell you they are a tech company who will reshape the business of residential real estate, but that’s a sham built on a naive premise that lit signs and back-office software can somehow give a seller some rare proprietary advantage. This is silly, and the investors in such a model should prepare for an incredible, and costly, failure.

The future of real estate, as we learned in 2019, looks very much like the past. Technology will advance. I’ll get fancier computers. We’ll use fancier software. But when it comes time to sell a house, it’ll just be me, or some other agent, in Some City, USA, sitting on your couch telling you what your house is worth. When you’re ready to buy a house, you’re going to want to jump into my car and go for a drive, because that’s just the way things work, and I’ve never met someone that wants to purchase a multi-million dollar asset without first looking at the closets. Welcome to the future.

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