The Future of Home Selling

Before the internet era, international calling was charged on a per-minute basis, with high costs attributed to the extensive infrastructure required for these calls, including undersea cables, satellites, and other technologies. A few large telecom companies dominated the market.

So, they set the rates.

Then with the advent of the internet, and Voice over Internet Protocol (VoIP), our digital avengers, Skype and WhatsApp enabled free video calls and international calls. Subsequently, a once-powerful monopoly of infrastructure, became obsolete.

Businesses operate within an ecosystem governed by certain rules and assumptions. When these rules undergo changes that are incompatible with the practices of existing businesses, it can lead to their failure. The record industry went from being impossible to fail to impossible to work.

Obsolescence barrels towards a legacy industry like an asteroid taking the form of either technology, new behavior, or regulation.

All three are on a collision course with the residential real estate sector.

The emerging landscape is being vividly painted with a blend of permanent injunctions, unprecedented advancements in artificial intelligence, and consumers who were fully immersed in technology from birth.

It seems likely that the future of home selling will not be a paper-based, middleman-driven ecosystem. For Gen-Z and beyond, using an agent will not be the default choice like it was for their parents. In the not so distant future, I predict the concept of using an agent or paying a commission to sell a home will be an anachronism, and the REALTOR? brand, impressive as though it may be, will have largely retired to a Wikipedia page.

1. Predicting the future through regulation

If an industry is in fact relying on gatekeeping, antitrust violations, and intense lobbying — whether the customer value chain is poorly designed or poor by design — it is existing on borrowed time. Recently a jury for Burnett v. The National Association of Realtors determined in a $1.8 billion dollar ruling that Realtors are putting home buyers behind a giant paywall.

This has been going on for quite some time, so why all of a sudden are these lawsuits popping up?

I believe it signals a shift in consumer consciousness—an awakening where longstanding practices, once passively accepted as the norm, are now being re-evaluated in light of new consumer expectations, driven by technological advancements. Expectations like price efficiency, convenience, and simplicity.

Despite the internet, networks, and software – giant leaps in technological advancements – commissions haven't come down in over 100 years. You'd be standing on firm ground thinking they are glued into place because they are under the influence of something systemic, something other than free-market forces dictating the rates. Antitrust authorities and attorneys have looked under the hood of the real estate vehicle, and believe they have found the problem.

The class action lawsuits in a nutshell:

1. A buyer's agent is paid by the homeowner, not their buyer. This peculiar arrangement, although customary, makes negotiation and free market pricing totally impractical and unrealistic. It severely disadvantages the homeowner by virtue of buyer-agents being able to hold a home buyer hostage for a totally arbitrary commission.
2. Buyer-agents collectively expect a minimum commission of 2.5%, regardless of the property's sale price.Thus, it is artificially inflated and price fixing is a federal antitrust violation.

“The first systematic, nationwide evidence that buyer agents do in fact steer clients away from properties that offer low buyer commissions.”

The commission toll bridge: Pay or you do not pass!

A five or six percent commission typically gets split evenly between the listing agent who is hired by the homeowner, and the buyer agent who represents the home buyer. When homeowners exercise some discretion and offer a buyer-agent one percent or two percent or nothing at all, it consistently leads to issues. Some agents just leave angry voicemails, some go so far as to throw bricks through car windows, many steer their buyers away from these listings...

"I'll tell them it's sold."

An Audio recording was submitted as evidence, capturing a conversation where a buyer-agent, upon learning that the homeowner chose not to offer buyer-agent compensation, stated their intention to misinform their client that the property was already sold.

In another scenario below, a homeowner selling a property valued over $900,000 offered a 2% commission for the buyer's agent. In a private communication with the listing agent, the buyer-agent attempted to alter the deal to include a 2.5% commission for herself. Unbeknownst to buyers, discrepancies over their agent's commission can be the reason for a deal not materializing.

When fees are predetermined and fixed, rather than being shaped by the dynamics of the free market, they'll inevitably be disproportionate to the actual value provided. Buyer-agents are happy to receive an $18k commission if its 3% of a $600k sale, but not if it's 2% of a $900k sale. Economists present the argument that fixed commissions in real estate are a social waste, in that there is no substantive reason as to why the fee for selling a $700,000 should double when selling a $350,000, when the effort does not inherently double.

The rational progression would be to implement an injunction prohibiting buyer-agents from receiving payment sourced by homeowner equity, and instead require the buyer and the seller pay their respective agents. This is articulated in Moerhl v. National Association of Realtors, a colossal suit with estimated damages, post trebling, that could reach $40 billion.

While brokerages not listed in the suit would not be legally bound by the injunction, once one court imposes one injunction, other courts are likely to follow. An injunction in the Burnett case or Moehrl case will likely have nationwide implications and prompt legislatures to enact new laws applicable to all brokerages within those states.

These lawsuits also implicate numerous secondary markets that sell all sorts of stuff to real estate agents and are sustained by the $100 billion annually spent by homeowners on commissions. This is why Zillows shares fell in response to the news.

The bulk of Zillow's revenue is generated through their Premier Agent Partnership program. Buyers use Zillow to search for homes, they request a showing, enter their name, number and email, and it gets routed to a Realtor paying Zillow big bucks to capture their info. Of course, the agents expect the return on their investment coming from the homeowner paying out a 2.5% commission.

While Zillow and Trulia have popularized home searching in modern culture, their platforms are not designed to foster or facilitate direct connections between the supply and the demand — the home buyers and the homeowners. Instead, their goal is to reinforce the barriers in an otherwise fluid and unobstructed two-sided market (more on this in the technology segment). They're incentivized to identify the maximum amount consumers are prepared to pay the gatekeeper. Their "Power to the people" mantra is seen by some as cleverly distracting from their business model of perpetuating junk fees.

From Money.com: "Zillow and Other Rental Sites Are Now Disclosing Sneaky 'Junk Fees' Upfront"

If buyer-agents are required to be paid by their buyer, we certainly won't see buyers agreeing to pay their agent 2.5% of the purchase price, or anything close to it. Since buy-side transactions account for half of the revenue of brick and mortar brokerages, this halves their revenue, and outright collapses many secondary industries.

In the comment sections, speculative discussion is brewing around how buyer-agent commission models may change; tiered services, an a la carte menu, etc. I think this overlooks a large segment of the population that feel agents have overstayed their welcome. Alternative compensation models for buyers agents addresses a surface issue, but may be missing the deeper point. I think what's in store is a shift from the current agent-centric landscape to an ecosystem marked by digital Darwinian pressures, selecting for disintermediation and efficiency.

2. Predicting the future through new behaviors

Lawsuits and legislative reforms threaten to wipe out half the revenue of the brick and mortar real estate brokerage industry. However, the real existential threat to the REALTOR?, and the six percent commission holding up the industry, is Gen-Z.

According to The Irrationality of Payment Behaviour, researchers estimate that only 5% of our behavior is conscious and planned, while at least 95% is unconscious, where decisions are made based on automatism, emotion, memory, intuition, environmental cues, and what we have been taught.

U.S. homeowners pay the highest fees in the developed world, but the actionable insight is that the fees are sustained by a consumer base that simply accepted it as "the way things are done". The price inertia stemming from Realtors seamlessly transitioning between homeowners operating on autopilot.

However, there's an unprecedented generational gap on the horizon. Gen-z is the first generation who was born into technology. We're shifting from a housing market comprised mostly of a generation who worships tradition to one that worships technology. Today's 15 year olds who are selling their homes in 20 years, aren't going to believe that anyone needed an agent to list their home for sale, let alone paid forty thousand dollars in commissions.

I think we can count on this as Gen Z and Millennial preferences increasingly shape market trends. We are witnessing a decline in casual dining restaurants because these generations often prefer convenience and digital experiences. Cultural megaphone, South Park, who often reflects and amplifies issues trending among "younger" audiences, called out Realtor commissions as being legal theft.

Characterized by their preference for on-demand, remote, and self-service options, Gen-Z and beyond is likely to perceive Realtors as something their parents once used, like kitchen phones. If a sufficient number of homeowners and homebuyers really start questioning the necessity of complicating transactions, introducing delays, or potentially creating drama over fees between parties who could otherwise transact amicably, a marketplace will inevitably be developed in response, featuring all the expected peer-to-peer functionality.

There are also economic variables in play today that didn't afflict previous generations, leading to a feeling of being unfairly disadvantaged. Younger generations are acutely aware of skyrocketing costs, some of it inflationary, some of it straight up price gouging.

These are the types of memes regularly circulated on social media and permeating Millennial and Gen-Z consciousness.

Millennials and Gen Z say it’s harder to buy a house and get promoted than it was for their parents

This focus is signaling a more critical and discerning approach to financial decisions. There's a 'great awakening' on the horizon, where the topic of commissions gets pushed to the front of consumer consciousness. The costs involved in selling a home will become more deliberated and less of a default behavior.

Consider that a 6% real estate commission on the total sale price of a house can significantly erode a homeowner's equity, often consuming a double-digit percentage. Without significant property appreciation, which seems likely for the foreseeable future, commissions dip into the principal amount paid through mortgages, directly impacting personal finances. For someone earning $120k annually, this can equate to handing over months worth of paychecks to pay the Realtor.

While six percent commissions might have been overlooked in more prosperous times, today, as the kids say, it "hits different."

A 6% commission on a $250k home, where the equity is $50k, would absorb 30% of that equity:

I don't see an overnight change, in the way Blockbuster went from dominating the market and prospering across 6,000 locations, to declaring bankruptcy just two years later. I believe the new system would be adopted gradually, or even potentially operating as a new categorical choice, the way Airbnb didn't replace hotels and Uber didnt replace taxis. Whatever the alternatives, it will require a gradual introduction until it slowly cross the chasm into the mainstream, when Gen-Z become the mass market.

I also don't believe we will see "discount brokerages" and "flat fee" brokerages dominating the market in the future. While these outfits disrupted the traditional price, they haven't fundamentally altered the traditional buying and selling experience. They are brands competing for marketshare within an established market, they're not changing the very market itself.

3. Predicting the future through technology

Futurist and computer scientist, Ray Kurzweil created Optical Character Recognition (handwritten or printed text into machine-encoded text, whether from a scanned document, a photo of a document) in the 70s. He waited until the 80s to address speech recognition since it requires greater computing power.

Timing is everything. Based on technological trends and given tech curves, it's possible to predict when certain innovations will become viable, and then others obsolete. Consumers fell into the current home selling system as though it were a ditch. Many perceive agents as an unavoidable part of the process, acting as a gatekeeper in real estate transactions. Sure, the fees are exorbitant, but what are ya gonna do? They are a necessary condition to proceed with a transaction.

Until they aren't.

The current real estate system, unlike like the Model T's assembly line, was not designed with efficiency in mind. If we started all over today, what would we build?

I believe the ladder with which we'll climb out of the commission ditch have platform revolution side rails, and rungs of artificial intelligence.

The current, MLS-driven ecosystem

Before the internet, the MLS (Multiple Listing Service) were local, centralized databases Realtors used to share listings, disseminated through printed catalogs. Buyers could walk down their Main St., open the door to a brokerage, sit down across from a Realtor and flip through the pages of listings. Buyers could stay informed about the market and current listings by extension of their agent. When it appeared the internet was here to stay, the MLS's obtained website addresses and technologists developed a RETS, or Real Estate Transaction Standard, framework to facilitate the exchange of listing data, by standardizing the way its stored, transmitted, and received.

There is no national database. There are roughly 700 regional MLS's across the country. The vast majority are either owned by NAR or adhering to the policies and standards set by NAR. An individual in Dallas obtains their real estate license, they join their local REALTOR association, pay their dues and then get credentials to access to NTREIS covering North Texas, HAR if they're in Houston, BrightMLS if they're in the Mid-Atlantic region, etc.

Because MLS's are fragmented across counties and regions, ListHub was conceived to consolidate, acting as a centralized platform for aggregating property listings from the MLS's and then syndicating them out to all the brokerage portals, ReMax, Weichert, Sothebys, Fox & Roach, Coldwell Banker, etc., and the personally branded Realtor websites popping up in the hundreds of thousands.

Enter Trulia and Zillow, who launched websites in 2005 and 2006, initially obtaining its listing data from ListHub. With the same perspicacity that led to the founding of Expedia and Glassdoor, Zillow founder Rich Barton recognized there was a huge amount of brand whitespace in the real estate category.

The websites brokerages and Realtors offered consumers were hard to use and were often hiding the listings behind logins. Up close Zillow looked like a well-designed and freely-available portal. From a bird's eye view, or a macro-Wall Street perspective, it was a brand that symbolized real estate in the U.S.

In March 2012, there were 32 million unique monthly visitors. By March 2014, this number had grown to 76 million. Today they generate 93 million unique visitors every month. Zillow captured the hearts of home buyers. It has a durable advantage because on the homeowner side of things, you can't count on getting top dollar without also getting maximum exposure. No seller would consider listing their home with a Realtor who isn't going to add their home to Zillow-Trulia.

Whatever the MLS used to be in terms of its place within the ecosystem, in the grand scheme of things today, for all intents and purposes, an MLS is just a piece of software for pushing photos and property description to Zillow. Agents are the mechanism for the data entry.

In the 1950s, switchboard operators undoubtedly played a crucial role in routing long-distance calls, connecting the caller with the receiver. The infrastructure that established these connections was replaced by automated dialing systems that made direct dialing possible. While it could be debated whether or not society has an appetite for introducing AI to have the 'conversations'; guidance with pricing a property, preparing a home for sale, calculating a seller net sheet, etc., there's no question that we're ready for a real estate direct dialing system...

An alternative to the MLS infrastructure

It is not a complex problem from an engineering perspective, to conceive of a system that would significantly lower the cost of transactions, make the process more transparent, and speed up the buying and selling process. The issue is the current system is entrenched. There is an estimated two million licensed real estate agents with an enormous collective sphere of influence, defending the status quo, acting as a giant sales force for brick and mortar brokerages and reinforcing the way we buy and sell homes in the MLS-driven system.

However, what I believe is on the horizon is an integrated, peer-to-peer marketplace facilitating direct transacting between buyers and sellers, bypassing traditional realtor and MLS systems.

These lawsuits could very well trigger a wave of proptech innovation. We would see a similar digital transformation campaign we saw in the banking industry, aided and abetted by its fintech partners.

Traditionally, obtaining a home loan involves physically visiting a branch, sitting down with a broker, filling out paperwork, and enduring a lengthy processing wait. Plaid, a fintech API solution that connects with consumers' bank accounts to instantly analyze transaction histories, streamlined the underwriting process with instant credit decision-making.

Galileo Financial Technologies offers middleware solutions that allow companies to white-label loan products without the need to invest in the extensive infrastructure that legacy banks maintain. This capability enables these companies to design more modern and user-friendly interfaces, catering to the growing consumer preference for on-demand services. With these fintech innovations, the loan process is expedited dramatically, enabling customers to go from application to approval in mere seconds, and from approval to funding in just a week. Non-bank lender, Loan Depot, rolled out their "digital HELOC", which "takes customers from quote to close in as little as seven days."

In the coming years, it is my prediction that listing a home for sale will become as straightforward as making an Instagram post. Independent multiple listing services like MyStateMLS, not being pulled by the National Association of Realtors tractor beam, syndicate to Zillow and Trulia. Their API will be harnessed by companies to create white-labeled apps, effectively making a consumer-facing MLS, with an enhanced user experience. Picture a 'Robinhood for real estate'—a platform offering commission-free selling and explanatory power embedded throughout the interface. This innovation will lead to an increasing number of homeowners choosing to bypass traditional agents, achieving the same outcomes more quickly and without any cost.

Peer-to-peer marketplace

A barrierless two-sided marketplace removes the Realtor as the interface layer, who is acting as a layer between the homeowners (data sources) and the MLS (data distribution system). It solves for the middleware, the technology intermediary that facilitates data exchange between the supply, a homeowner user, and the demand, platforms like Zillow comprised of home buyers.

Eventually, Zillow can be phased out if the marketplace accounts for the bulk of listing creation, whereby sellers would no longer need Zillow's exposure. A dubious proposition perhaps, but although Zillow is undoubtably rich with unique monthly visitors, the majority of them do not actually intend to buy anything, and Zillow is not a robust platform. A peer to peer marketplace undermines the MLS system whereas Zillow fundamentally depends on it.

Zillow’s innovators dilemma

Zillow’s downfall may very well be because it is inextricably linked to agents. Zillow has no way of tip toeing into a platform model of taking a cut from helping buyers and sellers transact directly, like Airbnb, less they alienate their realtor revenue base. In an effort to mitigate the "all your eggs in one basket" dilemma, in 2017 they entered the ibuying space alongside instant-offer companies like Opendoor and Offerpad. After hemorrhaging half a billion dollars, they shut it down. The lesson being that if you offer sellers fair market value, there’s demand but there’s no profit. If you offer something with some margin, there’s profit, but no demand.

Artificial Intelligence

You simply cannot speculate about how a market might succeed or fail without dealing with AI. In the near future, every homeowner will have easy access to AI-enabled tools for every conceivable workflow; valuing a home, generating a purchase agreement, etc. AI camera apps will transform your photography so it is indistinguishable from professional photography.

Google developers used a small number of photos and AI to recreate an entire 3D model of a home.

You will be able to speak with highly realistic AI avatar at 11 O'Clock on a Friday night, that is prepared to have a flawlessly and legally accurate conversation about pricing, process, home inspections, escrow, title, down payments, deeds, estimated closing costs, negotiation, and more. We're talking about the smartest most competent agent ever conceived, all at your fingertips in an app.

Should we?

I obtained my real estate sales license in 2016 and hung that license up at Berkshire Hathaway Home Services, a repeat defendant in the class action lawsuits. One year later I won the "Rookie of the year" award. Then one morning while sitting at the settlement table, I felt a bomb go off in my mind, and I was left searching for ethics among the debris.

I was at a closing with my buyer who was purchasing a townhome from another young lady who was sitting across the table. I could see on the settlement statement what she was going to net on the sale of her home after all the fees. I calculated that the 6% commission was consuming almost half of her equity.

I itemized my transactions as a buyer-agent, and on my worst, most time-consuming deal I still made $241 an hour. Cardiothoracic Surgeons average $249 an hour. I thought, lets be honest, there's no way this is going to last forever. This is ripe for antitrust litigation:

Homeowners spend one trillion dollars on Realtors every ten years. A stack of one trillion dollar bills would be 67,857 miles high, a quarter of the way to the moon. Economists have been investigating and lamenting on the topic of Realtor fees for quite some time.

In economic terms, the difference between the amount paid for a service and the amount saved by using that service is often referred to as "net savings" or "economic benefit." For example, hiring a plumber for $10,000 who prevents $30,000 in damages results in a net saving of $20,000. This concept is also related to the idea of "opportunity cost," which in this case would be the cost of not hiring the plumber and potentially incurring more significant expenses due to damages. The economic benefit or net savings demonstrate the value of the service.

"Neutral value proposition" or "Non-value-adding transaction."

The commission paid to a Realtor does not result in a financial gain in the home sale compared to selling the home without a Realtor (For-sale-by-owner). It is an additional cost without a tangible return on investment in the form of a higher sale price. Unfortunately, it gets worse in that real estate agents may even add negative value...

A study analyzed the impact of selling a house FSBO versus using an MLS. Researchers found that, on average, there is a significant positive premium for selling FSBO – about an 11% premium or $14,800 more. This is on top of the saved commission.

The study's findings highlight the fact that market dynamics are the primary driver in achieving optimal sale prices. You may have heard of the book, Freakonomics. The authors unpacked this phenomenon, the findings being that the full commission business leads to misaligned interests and incentives.

References:

1. A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure: https://ecommons.cornell.edu/server/api/core/bitstreams/a1e89832-8c04-4f15-96a3-b5c13f4ab5cb/content
2. Commissions and Social Waste in the Real Estate Industry: https://www.nber.org/system/files/working_papers/w9208/w9208.pdf
3. How Much Value do Real Estate Brokers Add? A Case Study: https://drive.google.com/file/d/1IdAEb6LJC6DH7BUltgOtIStkUYUvjnZW/view
4. The Costs of Free Entry. An Empirical Study of Real Estate Agents in Greater Boston: https://www.nber.org/papers/w17227
5. The Impact of Commissions on Home Sales in Greater Boston: https://barwick.economics.cornell.edu/Commission_AER_2010.pdf
6. The Relative Performance of Real Estate Marketing Platforms: https://www.nber.org/system/files/working_papers/w13360/w13360.pdf
7. The Superfluousness of Realtors: https://insight.kellogg.northwestern.edu/article/the_superfluousness_of_realtors
8. The Great Realtor Rip-Off: https://www.economist.com/business/2012/05/05/the-great-realtor-rip-off