The modern residential real estate ecosystem

Approaches to modernizing real estate

Agents are involved in over 85% of real estate transactions. And they generate $70B in residential real estate commissions. They remain important for two reasons.

  • Agents own access to inventory. Agents have a relationship with owners selling homes. Even if a new company can show every home on the market, they can’t bypass the 1M+ agents representing sellers.undefined
  • Agents monetize transactions. Real estate commissions are paid to an agent’s brokerage. But agents negotiate with clients on commission amounts, handle invoicing, and collect payments for the brokerage. Any new entrant has to replicate this structure. And it has to be licensed appropriately.

New real estate companies work with these constraints in a few ways.

Sell to agents

The most common approach for new entrants is to play within the confines of the system. This assumes that $70B+ of commissions will still go to agents. But these agents spend that $70B where they please. There are three ways this occurs.

  • Sell services to agents: This characterizes what a brokerage does. Brokerages provide essential services to agents. They charge agents fees and a percentage of their commissions. But this also applies to companies that help with marketing or coaching.
  • Sell leads to agents: Selling leads means that a platform loses control over the end-to-end experience. But it allows it to monetize its business without becoming a brokerage. To be clear, this often does rely on changing some level of consumer behavior. For example, Zillow had to convince people to visit their site instead of brokerages’. But it also means Zillow must work with agents as long as this is their primary business line.
  • Sell software to agents: Many real estate technology tools supplement or replace service offerings. For example, an agent may pay a higher split to a brokerage that provides great marketing. But marketing automation software may provide similar service at a lower price.

All three approaches can be combined. For example, some brokerages  provide essential services in exchange for a commission split. But they also might sell coaching and leads internally to agents.

eXp is a new brokerage model but still provides core services to agents in exchange for fees. Source: eXp Realty.

Sell to consumers on price and service

Many new entrants want to change how agents interact with buyers and sellers. They think the process of selling a home can be more seamless. It’s very hard for a traditional brokerage to get every agent to follow the same process. This is because agents are typically independent contractors. The fix is a combinations of full-time employment, technology, and standardized processes. Companies here typically become brokerages.

  • Employ agents on a full-time basis: employing agents as full-time employees makes them more expensive to support on average. But it means a company can institute consistent processes and require technology usage.
  • Build a strong brand with consistent service offerings: traditionally, agents are the brand for real estate, not the brokerage. But brokerages selling to consumers on price and service, the brokerage is the brand. This is because every agent should provide a similar experience. For example, most people will hire Redfin due to its price and service. They do not usually hire a specific Redfin agent.
  • Compete on pricing: competitive pricing helps drive volume and new business. Agents no longer personally chase commissions or leads in this model. Therefore, agents provide consistent service on every deal regardless of the home price. Longer-term, these companies may stop competing on price. But for now, this is one way they can compete with traditional agents.
Redfin markets agent service, better technology, and a cheaper price. Source: Redfin.

Shift consumer habit

The approaches above rely on working with brokerages or becoming one. But some companies try to convince consumers to bypass the traditional brokerage. This has been the approach of iBuyers who buy homes from sellers and charge service fees. There are two common themes with companies trying to change consumer habit.

  • The company is willing to buy the home and assume risk. Agents control most listings. In order for a new entrant to get around this, they may have to buy their own listings. This is what iBuyers do. They offer speed to sellers in exchange for a fee. They then sell homes by posting on their own site and traditional listing marketing channels. This shifts the risk of the sale from the seller to the iBuyer. Agents do not typically take on this risk.
  • Service fees replace commissions. The companies that are changing habits still usually charge fees. For example, platforms that post For Sale by Owner listings usually charge flat rates. For now, this segment makes most money from fees rather than home value appreciation.
Offerpad wants sellers to work with them instead of agents. Offerpad charges a sizable service fee similar to a commission. Source: Offerpad.

Use real estate as a loss-leader to lending

Companies are beginning to use the real estate transaction to capture mortgage revenue. This might mean a company does not care how much money it makes on a real estate transaction as long as it can generate more money from a mortgage. We haven’t seen a pure-play approach with this yet. But most large tech companies in real estate have started testing this approach. Redfin, Zillow, and Opendoor all have fully-owned lending arms. And Better.com, an online mortgage company, has started to offer real estate services.

Generating revenue from lending instead of real estate will open up new service models. Zillow, Redfin, Opendoor, and Flyhomes, among others, are already testing this. Source: Housingwire, Redfin, Opendoor, Flyhomes.

Customer segment entry points

Residential real estate experiences often vary by the value of the home being sold. Attempting to attack all segments at once is often challenging. It's competitive, costly, and time consuming. Companies usually start by saturating one segment. Once they reduce their costs and inefficiencies in one price point range, they enter others.

Starting with luxury - long-term investments in agents and their listings

Homes above $750,000 are only around 5% of all home sales transactions. But they represent over 20% of total sales volume. Agents in this segment provide top-tier service for their clients. They invest in marketing, service quality, and virtually anything else to make their clients happy. Companies that start with this price point need to focus on agents rather than clients. They understand a small percentage increase in high-volume agent business is a large profit impact. But it may cost a lot to sign up these agents and provide them with tools. These companies typically do two things well.

  • Provide value-add services to agents: these companies provide software and tools to make agents better at their business. For example, Side only recruits top agent teams (for now). It does not replace an agent’s prospecting, sales, and client services functions. But it does offer support on things many agents don’t want to do. This includes legal, listings postings, and marketing/advertising. Many luxury brokerages have offered marketing and brand work historically. But technology, which has traditionally been outsourced, is now being used as a differentiator.
  • Invest in unique technology and early incentives: support teams and technology for agents are expensive long-term investments. Agents focusing on luxury properties provide high-touch service for their clients. As a result, they demand lots of customization and features. And these agents may also require high commission splits and incentives. Most companies starting in this segment hope that the tools and staff they build for luxury agents can also support agents and clients in other segments.
Side recruits agents with high sales volumes. Side provides high-touch tech and support services to its agents. Source: Side.

Serving mid-priced homes - building a branded consumer experience and process

Over half of homes sold in the US are $250,000-750,000. This is a segment where agents provide solid service levels. But the experience is not as consistently strong as it is in luxury homes. Consumers will receive varying levels of service based on the quality of their agent. And these consumers may also be price sensitive. Many clients selling luxury homes are less concerned about commission. They pay an agent to ensure that the home sells for as much as possible. High-end sellers may believe the network of the agent matters a lot to get a high sales price. At the $500,000 price point, clients may feel that the home sells itself, whether that’s true or not. This reflects two opportunities that modern brokerages like Redfin use. For reference, Redfin’s average home sold for ~$465,000 in 2017.

  • Offer lower prices. There are great agents selling $250,000-750,000 homes. But they’re unlikely making more than $50,000 pre-tax each year. Most agents will not drop their commissions because of this. But a company that can sell more homes at scale is able to offer discount brokerage services.
  • Provide consistent service. Mid-tier agent service will vary a lot more than it does in luxury. Many customers in this segment just want a predictable experience that is easy. Some new brokerages can offer this in a way many agents can't by using technology and standardized process.
Redfin has historically focused on mid-tier homes. It provides predictable and lower-cost service, which is critical for its customer base. Source: Redfin.

Lower-end homes - creating ease and liquidity for consumers and agents

Homes under $250,00 are over 45% of transactions but under 20% of sales volume. This is a segment where agent service can fall short. Few agents want to spend a ton of time on cheaper homes. The commissions are lower. And it may take more work to sell than a nicer home. This has created two separate opportunities.

  • Providing lower-priced services for agents. Agents are getting less in commissions for each home sold in this segment relative to mid-tier and luxury homes. They are often more cost conscious on brokerage fees than other agents. Traditional brokerages are too expensive for these agents. And they include services that many agents don't need like office space. Some new brokerages solve this by charging lower fees without offering too many extra features.
  • Taking the hassle out of sales for consumers. People selling sub-$250,000 homes may struggle to find a great agent because the commissions are low. Their house may require work. And the seller is often cash constrained. They may simply need to move to a new market for a job. Any service that converts a home to cash easily can appeal to some group of people in this segment.

This segment has been a focus of iBuyers, 100% commission brokerages, and cloud brokerages. For example, eXp’s average agent-represented home sold for ~$240,000 in 2017. The median home sales price of iBuyer homes sold in Q3 of 2019 was ~$260,00 according to Redfin.

Cloud brokerages like Fathom Realty keep fees to a minimum for agents. This often appeals to agents selling homes at lower price points. Their clients are often not very concerned about the quality of their agent’s office space. Source: Fathom Realty.


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