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Over Eating

Dec 27, 2018 laurey

No, I’m not talking about all the food I had over the holidays, I’m referring to a presentation called “Software Eats The Real (Estate) World” by Alex Rampell, a General Partner at Andreesen Horowitz, a Silicon Valley venture capital firm. The title of the presentation is a reference to the firm’s tagline, which is a quote from founder Marc Andreesen (one of the creators of Netscape): “Software is eating the world.” The presentation applies this same “software is eating the world” thesis to the residential real estate transaction and describes how new companies such as OpenDoor, Zillow, and many others are attacking the value proposition of traditional real estate agents.

I had heard of the presentation a few weeks ago but didn’t have time to watch it, but I was prompted to do so again today after I listened to Greg Robertson and Rob Hahn discuss it on their recent industry relations podcast. As Greg says repeatedly, he found the presentation “humbling” in that, in his view, it highlighted with surgical precision the weaknesses of the real estate industry, especially agents. With this review, I felt like I had to go watch the presentation, and so I did.

The core theme of the presentation was that these new companies can do things with technology and capital that individual agents cannot, such as use analytics to estimate pricing or use capital to actually purchase the home to speed the transaction for the seller. To be clear, Mr. Rampell specifically says that agents “might not go away,” but his prediction is that they’ll “be under the rubric of companies.”

I definitely agree that agents becoming employees (e.g., as they are at Redfin) instead of independent contractors (as they are at the various large franchises such KW, RE/MAX, etc.) is an important trend to watch. Technology platforms are an important tool for improving services to buyers and sellers, and there’s no question that it is easier to get employees to adopt technology solutions on a broad scale (because, as the employer, you can require them to use it as a condition of their employment) than it is to get independent contractors to do so.  So, yes, agents becoming employees is a big trend to watch as are all the new and interesting companies described in the video.

What I found tired and uninspiring about the presentation, though, is all the carping about how terrible most real estate agents supposedly are and how over-paid they are because organized real estate supposedly hasn’t allowed the market to work properly. One of the most tired things was an early slide in which he reveals that they did some research in Washington state showing that the mode (the number that occurs most frequently in the series) of the number of transactions done by agents in a year is zero.

Greg and Rob thought this fact was particularly damning as well, because, well, why would you have someone who doesn’t do any transactions help you sell your house? Would you hire a surgeon who has never done surgery? Of course, the answer given by the very statistics they’re citing as so damning is that, in fact, no one is hiring those agents, which, of course, is why they have zero transactions. So, yes, there are lots of “agents” who aren’t doing transactions, but they also aren’t being hired. Now, don’t get me wrong, of course there are a few who hire Aunt Amy to sell their house because they want to support her in her new career even if she hasn’t sold a house yet, but that’s not the kind of inefficiency that’s going to attract billions in venture capital, at least not profitably. What would have been a lot more interesting is if they had studied the top producers to determine the value they’re providing and then analyzing whether these new services are addressing that same value proposition or not.

The other point the presentation makes over and over again is that individual agents can’t do what these companies can do, because they don’t have the capital or the technology. The comparison is always between the well-invested tech company and individual real estate agents, which seems like an odd comparison. Or at least a comparison that isn’t very familiar with the current state of real estate technology and the role of agents in making the market work.

As anyone can testify who has been in this market for very long, there is no shortage of companies that are creating and trying to sell technology solutions to agents, brokerages, franchises, and every other party to the real estate transaction. The marketing emails, calls, ads, and other promotions directed at agents and brokers is massive. The presentation does make the point that agents can have a difficult time figuring out which of these technology solutions truly has value, but I trust the market will do that work over time better than any individual company will in assessing the effectiveness of its own technology. As I mentioned above, having agents become employees may well turn out to be the best way to get adoption of technology on a broad scale, but that’s not the same question as whether agents are providing value today in the role they’re playing.

The presentation didn’t really touch on the role of the multiple listing service (MLS) at all and I think that’s a critical omission, because it is the cooperation of competing agents and brokers that makes the market work in the first instance. (Of course, as an MLS vendor, I’m completely biased on this point, but I think my logic holds.) Over the last many decades and certainly the last decade, there have been no shortage of those predicting the disintermediation of real estate agents and organized real estate. But the actual market (as well as courts) has consistently re-affirmed the competitive value of agents and organized real estate, over and over again, as companies like Zillow and Opendoor move toward working with instead of against agents and organized real estate.

I still have more to say on this topic, I think, but this post likely has gone on too long already, so I’ll just end it here and tease that I’ll be back with more in a future post. Until then, watch what you eat!