Paul recently shared a presentation from Alex Rampell, a General Partner at Andreessen Horowitz that I think provides a great overview of why the current real estate ecosystem is broken and why companies are trying to fix it. His takeaway, nicely summarized in the first 20 seconds of the presentation (thank you for that, Alex), is that “In the future, you will buy your house from, or sell your house to, a company.” He then shares some staggering statistics about the real estate industry, perhaps most notably that the size of the US real estate agent commission market is $100B. $100B! This is massive, and, as Alex articulates, an industry that is heavily influenced by the National Association of Realtors, which has lobbied heavily to put rules and regulations in place to keep that number high. It’s working! However, as Alex also outlines, there are technology companies knocking on the door (no pun intended). The result: new-found competition for “sides” that traditional real estate agents would’ve earned commissions for, and a real estate landscape that we hope will continue to evolve.

Why is the time right in residential real estate startups to compete?

For starters, I think a critical component to what we’re seeing on the transactional side of residential real estate is that there is a massive gap between the existing real estate commission structure and the cost structure of many technology companies.

For example, Alex cites Fly Homes as a company that allows a customer to win in a competitive sale process by allowing someone to present themselves as an all-cash buyer (Fly Homes buys the home, then sells it back to the buyer once financing is secured). In a supply constrained market, this is a big advantage. The catch is that Fly Homes takes the commission that a traditional buyer agent would’ve otherwise received. For Fly Homes to work it implies that for the same price as what you’d pay for a traditional agent, Fly Homes will allow you to win a sale as an all-cash buyer at a purchase price that could be below what an agent would’ve presented (all-cash offers can win out even if they aren’t the highest bid). It’s also a digitally driven transaction. That’s an impressive product to offer for the same cost as a traditional agent.

Why does the opportunity for a Fly Homes exist? Why can’t agents offer this? Largely because agents and brands such as Remax or Century21 don’t carry the balance sheets to offer financial products like this. Fly Homes can exist because at the same cost of a real estate agent they can actually build a fintech company, sell a differentiated product, and have money left over. If agents were cheaper, could they better compete with Fly Homes? Probably. At a minimum, Fly Homes would have to re-think taking the buyer commission to make their money.

Another example cited is OpenDoor (or you can replace ‘OpenDoor’ with another iBuyer). They buy your home in a guaranteed-sale. Guess who doesn’t get a commission on the transaction? The traditional seller agent. The result? More competition for commission dollars for incumbents.

Another example cited is Divvy, which purchases a home for a buyer that doesn’t have the cash for a typical down payment, then leases it back to them. Guess who doesn’t get a commission on the sale? The traditional buyer agent. If a renter buys the property, they also buy it back from Divvy. The result is the removal of half of the sides that would’ve gone to a traditional agent.

(You see the pattern here)

The strong balance sheets and pools of capital that startups are increasingly capable of accessing are changing the traditional landscape. Startups can offer nuanced products that didn’t exist before. They didn’t exist because, although pools of capital may have theoretically existed for them to tap into, the technology wasn’t there. New, dynamic data sets and analytical horsepower to act on those data sets, paired with venture capital dollars, result in new products made for the different needs of home buyers and sellers, not just a one-size-fits-all traditional real estate agent experience.

With all of this activity taking place, it’s also interesting to watch how traditional agents and real estate brands/brokers are responding. Across the board, traditional brands are scrambling to figure out what they can do.

For real estate brands to make money, they need to attract and retain brokers who are going to pay them to fly their flag. In exchange, brokers get branding, training, and “tools”. Brokers ultimately decide whether they want to fly a Coldwell Banker flag or a KW flag, or someone else’s. Brands fight fiercely to win and retain good brokers. Brokers then make money based on the transactions of their agents. How do agents pick a broker and brand? Well, first, they need to be motivated and want to be an agent. In a $100B market, this hasn’t been hard. The next thing is to decide what broker and/or brand they feel is going to allow them to be the most successful. Brands are increasingly providing a ‘technology toolkit’ to agents that empower them to be more efficient. A better CRM. A more dynamic marketing engine. In some cases, leads. Keller Williams decided in 2018 that it isn’t a real estate company – it’s a technology company (?). Compass allegedly has built a technology backbone that makes agents more productive and attracted massive venture dollars. Redfin takes a different approach and employs their agents (W2, not 1099), which they believe allows them to operate in more alignment with home buyers and sellers. These brands are all built around making an agent more efficient, not in changing the system.

The traditional real estate operating model is also undergoing some evolution. “Real estate teams” are now much more commonplace. Per REAL Trends, there are 8 defined roles on a real estate team that allows the overall team to earn more business together than any member could individually (a classic whole-is-greater-than-the-sum-of-its-parts). Agents are getting smarter and realizing operational efficiencies however they can, and more than 25% of REALTORs are part now of a team. Again, these changes are just designed to improve efficiency, not change the system.

Nine Four would like to see more companies challenging the system and building products that fundamentally change the real estate landscape. As consumers realize that technology is replacing a lot of what an agent does – yet the amount of money agents make remains unchanged – we expect to see some commission compression. For what it’s worth, we do believe that there will always be a role for some real estate agents. They provide peace of mind and support in the largest transaction in most people’s lives and we think there will always be a segment of home buyers and sellers that will want, and pay, for that. However, we see massive potential for change and improvement in the customer experience that we hope we can fuel.