Real Estate - The Consumers Will Have the Final Word!

Sunday, 7 July 2013

"The first step toward change is awareness. The second step is acceptance". --Nathaniel Branden

Change is good for the consumer and for the real estate industry. It fuels competition and drives innovation and efficiency. Yet, the real estate industry has seen little change during the last 50 years. Indeed, other than marginally lower commissions as a result of the introduction of "discount brokerage models," the change is imperceptible.

Will the industry survive as we know it today? What will it take to thrive in the future?

Technology and changing consumer behavior will be the driving forces behind change, but not the only forces. What matters is what the consumers want -- not what we think they want.

We searched for answers. We went from denial, to awareness, and finally to acceptance. The lessons were harsh but clear. We needed to listen and learn from the consumer. Here is what we learned and want to share with you.

Legislation and regulation can't stop evolution and innovation.

It is not business as usual anymore. Prior success no longer guarantees the future viability of the existing real estate business model and profitability for the industry. While it has been a long and rewarding ride, its time has passed. However, there should not be any doubts that there is a bright future for the real estate industry. After all, real estate will continue to be the heart and engine of our economy. And it will be especially brighter for those embracing radical change and seeking new ways to serve the consumers. Those that embrace the change brought by evolution will succeed. Those that continue to use legislation to defend the indefensible will see their business succumb to innovative models that put the interests of the consumer at the center of the process.

Consumers have lost confidence in the traditional model.

Is anyone surprised about this? Have consumers been taken for granted? Did the industry forget that consumers are critical on both sides of the transaction? You would have thought that consumers would be in control of the process. Yet, ironically, consumers do not have any leverage because the power resides with intermediaries. Consumers' options are limited when buying or selling real estate, particularly for those who want to go about it on their own.

We hear frequently: "Why do we need to pay a 6% commission for selling our property?" That concern is being felt across the real estate industry, and while commissions are being reduced, the decrease is still not commensurate with the "homeowner's perception of value".

Homeowners believe that fees should be based on "the value of the services" and not on "the value of the property". The adage that a rising tide lifts all boats has proved to be true in the real estate industry. This rising tide has brought housing values to record high levels. The good news for the homeowners is that their equity has increased. The bad news (which materializes at the time of the purchase and sale of property) is that such increase is completely independent of the contributions of third parties. It is simple market forces at work : supply and demand.

Consumers see through the lack of transparency.

Consumers know that you are not what you write or say, but what you do when no one is looking. Consumers want more transparency. They want all the myths to disappear. They want a leveled playing field, with unrestricted access to the tools and knowledge required for a successful sale or purchase. They want transactions that are "procedurally" easier, smarter, cheaper and faster. They want to choose how to go about buying and selling. The one size fits all approach is not longer valid.

Because of this lack of transparency, consumers are paying more for less value. Consumers are working more, but not being compensated for their efforts. Over 74% of buyers are now using the Internet to search for properties, yet they cannot complete the process because the back end is controlled by intermediaries. Sellers who want to sell on their own do not have an "effective platform" to market their properties, unless they use the Multiple Listing System. The cost of representation currently based on the value of the property is archaic and does not reflect the realities of the times. The absolute value of commissions paid continues to increase and the beneficiary is not the consumer. It is the consumers' equity that continues to erode, while the economic benefits are enjoyed by the intermediaries. Simply stated, the time has arrived for the consumers to be in control of the process. After all, the consumers own the properties and who better than them to decide what to do and how to go about it. They are willing to pay for the services and guidance they need, but not as a function of the value of a property.

The traditional model does not reflect today's consumers.

Advances in technology and the ever increasing sophistication of consumers are destined to change the way home real estate is bought and sold. Did the industry fail to recognize changes in the behavior and expectations of homeowners and investors?

Today's consumers are tech savvy, more independent, more sophisticated, more knowledgeable and want to be in control. They want to have choices!

Almost every traditional brokerage house has a web site mostly used to provide "photographs and summarized property information." This is a step in the right direction, but not quite what the consumer wants. Consumers want access to the same information and tools that professionals have. They want a buy and sell process that is "easier, smarter, faster and cheaper". Consumers know that the Internet has made it possible to have access to information and resources that in the past only were available to professionals. The Internet has also made it possible to provide these services at a fraction of the cost. Technology based models are not a substitute for good judgment, but they are more efficient and transparent. These efficiencies result in lower cost of representation, and access to information and know how that is completely unbiased and independent of the value of a property. Put another way, technology drives down the cost of representation!

Homeowners want real options, not a recycled traditional model. While real estate is a $ 1.3 trillion industry that is highly fragmented, there is little differentiation between options. The industry also exhibits behavioral traits typically found in oligopolies. Consumers have been led to believe that the process of buying and selling is complicated and unmanageable without the intervention of an intermediary. This is simply not true. Consumers want real options that remove the "fear, uncertainty, and doubt," which historically has been foisted on the real estate transaction by intermediaries.

There are over 2.3 million licensed brokers and agents in the United States. Entry and exit barriers are low. In theory, it looks like consumers have a very large number of choices. In practice, that is not the case. Mostly everybody offers the same and there is little differentiation between companies, business models, and services provided by brokers and agents. Consumers want "real choices," not variations of the existing business model.

Currently, home owners that wish to sell their property have two options: (i) sale by owner (FSBO); or (ii) a contractual engagement with a licensed real estate broker or agent.

For those owners who desire to sell their property themselves, advertising and valuation tools are virtually non-existent. Their intent is to avoid the high commissions sought by brokers, but they are restricted in their advertising and analysis capabilities.

Looking to take advantage of the market necessity for a FSBO real estate solution, a plethora of market developers has begun to introduce solutions in this area. Nonetheless, these developers have focused on creating revenue from either individual online FSBO advertisements, advertisements from or referrals to third-party real estate professionals, lead generation, or some basic set of information services/tools with limited capabilities. These are legitimate alternatives for some but not for all.

Real estate consumers are actively seeking alternatives. Consumers have an infinite appetite for information and knowledge. Web based applications have made that possible and there is no turning back. According to a 2004 report from the National Association of Realtors, the Internet has rapidly become the preferred method of property search with over 70 % of homebuyers indicating that they utilize it as their primary source of property listings. In fact, 2003 marked a milestone in the technological evolution of the real estate industry. That year, for the first time, more buyers used the Internet than newspaper advertisements as an information source. Buyers are doing most of the work, yet they find themselves having to go through an intermediary. Buyers do not buy the myth that "Commissions are paid by sellers." They know these commissions are part of the gross purchase price and paid exclusively by them.

Most consumers want an innovative online business environment with functionality that incorporates optimal data sources, analytical tools, marketing exposure, and opportunity leads in a comprehensive and user-friendly online solution. They know the Internet has created new industries and new ways to transact business and they want to be the beneficiary of such transformation. New games and new rules will become the standard. And we better learn to play the new game! The consumers will have the final word.

Change is unavoidable but not easy to accept. Change is good for society and we are constantly witnessing the transformation of everything around us. Change drives innovation, efficiencies and progress. Why should it be different for the real estate industry?

We need to listen and learn from the consumers. They want choices.

They want to compare those choices and decide how to proceed with what is for most people a very important investment decision in their life: buying or selling real estate. This is not about who is right or who is wrong. It is all about what is right for the consumer.