Dear Realtors: It’s no secret that your world is about to get rocked. If we’re being honest, it’s already started.
Between the massive growth in discount brokerages willing to play matchmaker for skinny commissions (I’m looking at you, Redfin ... Purplebricks ...), and now iBuyers like Opendoor and Offerpad, who are willing to skip the middleman altogether, it’s a brave new world out there.
It’s not that realtors are obsolete. It’s that they are now optional.
One thing that the iBuyer phenomenon has revealed is that sellers’ chief motivation is not always maximizing sale price. Many home sellers privilege a quick sale over squeezing every dime out of a property. For others, it’s the possibility of structuring a deferred sale that lets them live out their days in the homestead. Others have even more nuanced needs.
Agents who have the creativity to facilitate solving these types of nontraditional transactions will continue to be viewed as trusted advisors and command healthy commissions. The rest will be relegated to being order-takers or undifferentiated commodities—or pushed out of the business entirely.
So, what can you add to your offering? Said differently, who might you add to your offering that would make a prospective home seller choose to work with you in this increasingly tech-enabled, agent-lite environment? Consider a local professional house buyer. You know, a flipper.
Hear me out ...
First, let’s address the barbarians at the gate. Who are these iBuyers anyway, these half-goon/half-geek corporate invaders who would dare threaten your turf?
Let’s start with the biggest names (Opendoor, et al). Two years ago when we started writing about them, many were calling these corporate house buyers high tech house flippers or wholesalers. A lot of realtors called them names that are not suitable for sensitive readers ☺️ As the space has grown and attracted competitors, even from within old guard real estate incumbents, the understanding of what iBuyers do has become more nuanced.
A more accurate descriptor is “market maker.” If you’re not familiar with the term, a market maker is pretty much exactly what it sounds like: a person or company that stands ready to buy and sell an asset on the spot. They provide liquidity to markets. The best example is the specialists at a stock exchange. When you sell shares of Netflix in your Fidelity account, you don’t actually sell it to the next guy looking to buy those shares. Your stock is bought by a market maker, typically a large financial firm. They agree to buy at the price you’re willing to sell. In that next moment (or perhaps later), they resell those shares to someone in another part of the world and make a small spread for the service. But all you do is one mouse-click, and a few nanoseconds later, your trade is complete. The speed and efficiency of that trade could never exist without market makers.
Well, that’s Opendoor—or at least what they’re aiming to become: market makers for houses.
So where do salespeople (realtors) fit in with these market makers? And is Opendoor trying to cut realtors out of the picture? The answer to both: It’s complicated ...
That said, we do have examples to guide us as to how these roles will likely interact. The most obvious industry to study is financial services, where there are market makers (such as the specialists described above) and salespeople, known as stockbrokers or financial advisors.
Consider this: the average cost for a stock trade in the 1980s was $45.1 And it could be much higher, since commissions were based on volume—hundreds, even thousands of dollars. In contrast, I bought some Home Depot stock in my Fidelity account the other day. The commission was $4.95.
What happened? Was it the introduction of market makers? No; they’d always been there. But you couldn’t just contact a market maker directly. You had to go through a broker. You’d call your guy at Merrill Lynch or wherever and get his best stock tips. He’d pitch you a few lines about what direction the market was headed and recommend a bunch of stocks, and you’d buy the best of the bunch. But then the internet happened. Access to information happened. And stockbrokers lost the mystique of being information gatekeepers. Instead, they became merely order-takers. E-Trade and Yahoo! Finance made it so you could do your own research and buy stocks without a broker’s help at all. When that happened, stockbroker commissions got crushed.2
[Related Reading: The Hottest Real Estate Markets of 2018]
While (and likely because) that technological evolution was happening, the mass market financial advice business was born. Every major securities firm in the world planted hard and pivoted away from peddling individual stocks to retail investors. The brokers at those firms became, at least ostensibly, problem-solvers. They even changed their name to underscore the shift in strategy. They were now financial advisors, or “wealth managers.” The firms began to retrain their salespeople to become trusted confidants to their clients, placing them at the table with the other members of a family’s team of strategic consultants: the lawyer, the CPA, and so on. At a tactical level, this meant getting away from one-off trades and instead focusing on long-term financial planning.
"Realtor commissions are down across the board, currently hovering just above 5 percent..."
Realtors would do well to study the securities industry, the margin compression it experienced, and what the drivers of value were in that bygone, transaction-focused era, versus what drives value for successful financial advisors today.
The analog is playing out before us all, daily. Redfin received Kardashian-like press coverage for its 1 percent commission offering and successful initial public offering (IPO). Results of the 1 percent program have been mixed, but the company is still committed to providing a low-commission platform.
While the real estate boom has pushed nominal broker revenue figures higher, in fact, realtor commissions as a % of the transaction are actually down across the board, currently hovering just above 5 percent, down from the historical average of 6 percent. And many experts believe that number will fall below 5 percent in the next few years.
The National Association of Realtors (NAR) and others vested in the legacy realtor model will say that the current low commissions are a function of low inventory and brokers fighting for listings. Maybe.
But I believe the advent of new technology and the entrance of new players into the space will cause realtor commissions to remain depressed long after inventory levels normalize.
But back to our stock broker analogy. Net net, the wealth management business has fared well. AUMs have exploded as baby boomers continue to retire and move assets to professional money managers. However, the ranks of advisors have thinned dramatically in recent years. And, importantly, the way advisors get paid is drastically different from the way they did 20 years ago.
The wrinkle in our tidy comparison is that stockbrokers and realtors are selling a fundamentally different type of asset. People who own financial assets such as stocks and bonds trade them regularly—several times a year, typically. So there is at least an argument for the value of constant oversight of those assets (and the fees). But homes are not like that at all. According to the National Association of Home Builders, the average homeowner stays in a home for 13 years. No way to set up ongoing fees on that.
The good news is that you, realtors, are dealing with a more intimate asset: the family home.
While consistently the largest store of wealth, it is also a family’s most dearly held asset. If you can position yourself as the person to help them steward the management of that asset, you have one up on the FAs. The emotional ties between home and homeowner wrap around children, grandchildren, siblings, and spouses alike.
The way to secure your position in the transaction and to remain relevant for the long term is not to hold yourself out as having better comps or keener market insight than the next agent. The way to stand out—or to continue to stand at all, for that matter—is to bring a higher level of creativity to help the home seller solve a real-world problem.
Realtors are still the go-to professional that most homeowners think of when they have a house to sell. You have a tremendous amount of goodwill with homeowners.
But are you prepared to meet their evolving demands? If not, you will squander that goodwill. More importantly, as technology revolutionizes this business and erodes the ground beneath long-revered institutions, you risk being exposed as a mere order-taker.
So, what does any of this have to do with adding an investor to your team?
Take a look at your current team—your employees and the vendors that you typically refer business to. Is there anyone in that group that could help a seller who needed to close in two weeks, perhaps due to a sudden opportunity? Do you have anyone for a seller whose personal or health circumstances make it impossible to know exactly when they’ll be ready to sell? Do you have a buyer on standby who could close in six weeks ... or six months, whichever turns out to work for them? Got anyone who could offer your elderly seller cash now and the ability to stay in their home? Not likely. But there are different types of investors that can provide solutions to all these problems.
Most require some sort of price concession from the seller to provide this type of convenience. But if the numbers work, the deal can get done. No question. And if you’re the one to make it happen, you win thrice. Yes, I used the word, “thrice.” Sue me ...
Look, the macro forces referenced earlier, both financial and technological, have been unleashed. And there’s no reversing them. Margin compression is coming—certainly for your run-of-the-mill sell-side listing.
But for sellers who require a more nuanced approach, you can add tremendous value by helping them navigate the new avenues now available to them. Many of the challenges they face can be solved just by having a more flexible pool of buyers—namely, investors.
If you’re not sure where to look for helpful house buyers, check your local Real Estate Investors Association (REIA). If you’re not already a member, you should find one. Find a few. It doesn’t even have to be an REIA. The biggest/baddest investor in your market probably has his own meetup where all the local players go to network. Go there and make friends. Introduce yourself as an “investor-friendly” realtor. They’ll be glad to have you, I promise. ☺