There are a lot of industries being changed irrevocably by technology and entrepreneurs. It’s what they call disruption. So far the real estate industry has fought off outside intrusion and kept the status quo. Control of inventory and high commissions are the norm. But for how long? There are a number of reasons why the real estate industry will change and won’t last in its present form. One of those is you learning to sell your home yourself.
The Cost Of Doing Business Will Change
It’s expensive to sell a house. The biggest expense are the commissions but there’s also a host of taxes, fees, and other costs.
According to The Economist Americans paid out 75 billion dollars in real estate commissions in 2019. That’s with only about 7% of homes changing hands. It might not sound like a big number in the context of the entire country but when it’s $13,608 of your money it’s a different story. Zillow.com estimates the average cost of a house in the United States is $226, 800. Some states that cost will be much more, some states it will be less. The average price to hire a Realtor is 6% of the sale price.
Add to that cost the federal and state taxes, closing fees, title insurance, mortgage fees and the cost of moving it can add up to more than 10% of the cost of the house. That really eats into your profits.
The commissions are by far the largest expense. You can avoid those high commissions if you sell your home yourself.
The taxes are unavoidable. It’s the government. The title company that provides title insurance and in some states handles the closing has to be paid. A necessary cost. Depending on how much stuff you have determines how much it will cost you to move. That leaves the commissions. Are they necessary? Sellers are becoming more and more fed up.
Those commissions can strip away your profits. Many home sellers are realizing they can save commission costs by selling their homes themselves. The real estate industry will change from this fact alone.
The Disrupters Changing The industry
Technology has moved in on the taxi industry, run video stores out of business, changed the way we trade the stock market and done away with travel agencies.
We still do real estate the old fashion way. The middleman, or broker, brings buyers and sellers together and takes a significant part of the sellers’ proceeds. It’s not that there haven’t been attempts to overthrow the traditional real estate agent, it’s just that nothing has stuck nationwide.
The main “threat” and most likely to succeed are the iBuyers.
One reason the real estate industry will change are iBuyers. iBuyers are companies, mostly investor funded startups, that buy a home directly from the homeowner. The attraction to iBuyers is no listing time, no real estate broker fees, no staging or marketing and no waiting.
They make money by buying a house and reselling it. The ibuyer uses local data and their own algorithms to determine a home’s value. Then the iBuyer will make a cash offer. If accepted the house can close whenever the seller wants to.
But…as good as all that sounds the iBuyer still needs to turn a profit. They do that by offering less than market value so they can make money on the sale. Or charging a commission. It still cost the seller money, sometimes even more. The attraction is the process is convenient and fast for the seller with none of the usual anxiety associated with selling a house the traditional way using a broker.
Some of the more popular iBuyers are:
Opendoor has its own automated valuation model (AVM) system so it can make offers quickly. The allure to Opendoor as mentioned is speed and convenience. The downside is the 7% commission. Yes, the 7% commission which is even more than a traditional broker charges. Opendoor is starting to gain traction in several cities and has plans for expanding to more.
Knock helps people that are selling and buying. People that want to move. They do this by buying the new home for them so the client can move and then selling their old home for them once they’re settled in to the new place. Knock also charges a commission of 6%.
Offerpad represents the true ibuyer philosophy. They literally buy your home from you outright then sell it at a profit. You’ll be getting less than full value for your property because that’s how they make money. Buy low and sell high.
Redfin is a real estate company that in the beginning was hostile to the real estate business. They bragged that they were going to change the way people did real estate by upending the traditional model. The ambitious plan didn’t work out quite as dramatically as they prophesized and in the end they were just another discount brokerage. Redfin Now is an extension of the original company that will make offers and buy homes outright for resell.
Zillow is the original real estate disrupter. In the beginning Zillow sold advertising and leads to real estate agents to make money and that’s still the brunt of their business. What Zillow did was insert itself in between the real estate agent and the consumer. They offered a simple way for buyers to browse real estate listings without the need of an agent and then “sold” those buyer leads to agents when they needed help. Zillow made real estate agents nervous because they attracted a lot of attention, but swore up and down that agents had nothing to worry about. Zillow was agent friendly and needed real estate agents to be profitable.
Recently Zillow has ventured into the ibuyer space, positioning itself for whatever happens in the future. Zillow is playing both sides of the fence, a very good move. Again Zillow swears they are only testing the iBuyer path and agents have nothing to worry about but whichever way the business shifts Zillow will be ready. Zillow is truly the 800-pound gorilla in the new real estate paradigm.
Discount brokers are just what they sound like. Some discount brokerages use a flat fee model. They presumably offer real estate services cheaper than mainstream brokerages. They’ve been around forever but recently have been trying to differentiate themselves into something unique and new with complicated pricing structures.
Purple bricks makes money by charging a flat upfront fee and then the remainder being paid after the house sells. If the house doesn’t sell the upfront fee is non refundable. It still costs between $8,000 and $10,000 to sell a home through purple bricks but can be less expensive than using a traditional brokerage. The problem with this model is the nonrefundable upfront fee. Purple Bricks is a UK company that tried and failed in the US and Australia.
Simple Showing is yet another investor funded startup that offers low commission fees, 1% listing fee and 3% buyer agency fee with an up to $5000 buyer rebate. The seller pays a 4% fee in total.
Redfin offers a 1% listing fee when you sell and buy through them. That 1% listing fee doesn’t include the buyer’s agent commission, which is generally 3%. Your overall cost will be closer to 4%.
This is certainly not an exhaustive list of iBuyers or discount brokerages, but enough to give you an idea of what’s coming for the traditional real estate business.
The success of these types of brokerages rests on lower commissions and flat fees, which means less money for the agents doing the work. What makes a career in real estate attractive is the amount of money that can be made. If that money is reduced substantially the field of experienced agents will dwindle. This in turn runs the risk of reducing an agent’s true fiduciary towards the client which is somewhat of a problem in real estate now.
After the investor money runs out time will tell if these types of new real estate brokerages will last and be profitable. We must wait and see if these companies are what will make the real estate industry change.
The Law Is After Real Estate
Courts and government are taking a hard look at what some think are anti-competitive practices. The real estate industry will change drastically if the Government wants change despite the millions spent on lobbying efforts to keep the status quo.
The Trump administration DOJ is investigating the real estate industry. If that course of action is pursued the real estate industry will change, but no one can really predict how just yet.
Some sellers question why they have to pay a buyer’s realtor. Sellers are forced to pay for both their own agent and the buyer agent. A commission is charged to the seller and that commission is split between the sellers’ agent and the buyers’ agent. There have actually been class action lawsuits by sellers against their agents claiming anti-competitive behavior.
No one knows and no one can be sure what will take hold and what will not but change is inevitable. Antiquated real estate practices are being challenged from all sides. The problem with iBuyers is cost. They offer convenience but don’t address the expense of selling a house. The discount brokerages are offering savings but so are many real estate agents due to competition among themselves. Even so, it’s still a lot of money to sell your house. Money that should be profits for you, the home seller.
What I think will come to pass is more people will realize that with a little education it’s really not that difficult to sell a house. Many thousands of brand new untrained agents do it every day. 10 years ago when I sold my first house I hadn’t a clue what I was doing and just sort of stumbled through it. Since then I have sold hundreds of homes and figured it all out. I know how to sell a house fast and for the most money. And people still pay me a lot of money to do that.
Whatever happens in the long run for the real estate industry happens but what needs to happen for home sellers is profit. They say real estate is the best investment you can make…and it can be.
Sell your house yourself.