The Economist February 15, 2020 pp61-63 Finance & Economics. Real Estate in America. “Tearing down the house”. Dallas, Los Angeles and Seattle. “Technology is at last poised to upend the world’s largest asset market”.
Residential real estate in America valued at $34T is worth more than the market capitalization of all listed companies. Of course, stocks especially and bonds differ in many ways from homes yet homes are traded with markedly higher commissions. Selling an American home currently may cost the seller 4-7% of the selling price paid out for agent commissions alone. Reportedly, commission rates are much lower outside of America. Why the difference? Class action suits and the Department of Justice are pressing for answers. At the center of the controversy is the National Association of Realtors Multiple Listing Service (MLS). Plaintiffs contend that MLS is uncompetitive because member realtors, using the tool, push buyers to properties paying them the highest commissions.
How to level the playing field? In recent years Venture Capital starting investing heavily in what’s known as PropTech or Property Technology. The VC funded companies look to create value for themselves by transforming realty using information technology including data, computing power and algorithms. Upstart companies include Zillow, Redfin, Opendoor, Knock and Compass. Since a government ruling in 2008, firms have been able to publish MLS making these data available online to all. This enables buyers to search on their own and possibly strike a better deal with a seller by eliminating a buying agent commission which de-facto has been fixed at 3%. Using a company like Redfin selling commission is reduced from 3% to as low as 1%. Both of these adjustments to the “middleman” work in favor of the principles in the transaction.
Besides allowing online buying, these companies may make offers for unlisted or listed property that are cash and quick. They hedge their bets by making offers only on properties they can reliably value. These are typically “cookie cutter” homes in large suburbs for which their bid is near the average value or slightly higher. Even though sellers may often balk at these offers, these companies claim they are within 1-2% of the eventual selling price. While mathematical models are important estimates are still reviewed by agents or others on the ground or by staffers examining satellite photographs etc. to increase confidence or to modify an offer. Still it is early days with none of these companies making a profit as it is estimated by one firm that they spend $1.40 for every $1.00 in revenue generated.