The real estate industry is going through so much change right now. Companies like Compass, Redfin, Opendoor, Homelight, OfferPad, and many others have entered the space and are using technology to finally bring innovation and choice to consumers. Despite all this innovation, one thing is not changing... Agents are still at the center of the transaction. We’ve talked to many industry thought leaders and people working within these companies and one thing they all believe is that agents will always be an integral part of the home buying process. Here are thoughts on each of these companies and business models and how they affect agents.
Tech-enabled brokerages
Newer brokerages like Compass and EXP have done an amazing job recruiting and incentivizing agents to join their companies. They’ve done so with attractive commission splits, cash, and stock options. They both claim to be digital or tech-enabled brokerages but they are seeing little movement when it comes to their agent efficiency. As you can see below, EXP and Compass are struggling to show meaningful improvement in their agents' productivity. Part of this is that real estate is inherently human and you can’t just drop technology on an agent and expect results immediately. Especially when they are contractors and technically their own business. While EXP and Compass provide their agents with technology, many of their agents choose not to use it, meaning Compass and EXP really aren’t tech companies at all.
Redfin
I put Redfin in it’s own category because it is in a league of its own. You can see in the charts above that they have cracked the agent productivity nut. I attribute this to a few factors. First and foremost, their agents are employees and paid a salary so they have much more control over their behavior and workflows. Their agents function more as customer service representatives than a traditional agent. I do believe this model plays a major role going forward in the real estate industry given the success Redfin has created for itself. HOWEVER, the best agents are not going to work for a company like this. Real estate agents are entrepreneurs and they will go where they can make the most money and be their own boss. Redfin puts a ceiling on their agents' earnings potential.
Homelight and Zillow
These two companies are similar in that the majority of their revenue comes from advertising and agent referrals. Zillow is the behemoth in the space and their business is totally dependent on agents. Both of these companies have done a great job helping consumers find agents to work with and make money on transactions those agents help close. They typically take about 25% of the commission. These companies are also working hard to own other parts of the transaction like title, mortgage and escrow. So far, Zillow seems to be doing the best job when it comes to finding ways to make money and most of their success can be attributed to their first mover status on real estate portals and their brand. However, lately, agents have grown concerned with Zillow’s behavior and rightfully so. I believe Zillow will continue to encroach on agents and agents will have to figure out ways to work with Zillow given their dominant position with consumers. If anyone is going to disrupt the agent model, it is Zillow.
iBuyers
iBuyers are perhaps the most interesting of the bunch. These companies include Opendoor, Zillow, Redfin, and OfferPad. They are extremely unprofitable and have added a digital twist that somewhat resembles the traditional wholesaler and home flip models. They make their money on the spread between the price they buy a house and what they later sell it for after renovations. They also make money on service fees. The optionality and convenience they’ve given consumers is their biggest contribution to the market and it has yet to be proven whether or not this can be profitable. It’s also a very very small percentage of transactions in the US. Given agents are still so important to transactions and consumers prefer to work with them, Opendoor and others offer to pay full buyer commissions, as well as seller commissions if a sale comes from an agent. This model is likely not a longterm threat to agents and actually gives agents additional optionality for their seller clients. Overall iBuying is still just around 1% of the total US market and less than 5% in major markets.
Summary
After our team has spent countless hours examining the real estate industry, we believe the future looks like the following:
Agents will remain a central and necessary part of the transaction. Consumers prefer to work with a trusted person in their market when making the biggest decision of their life! However, due to improving technology and consumer choice, agent commissions will be under pressure and they will need to find ways to provide better and more efficient service using technology of their own. The real estate market is too big, too complex, and too local for true disruption to take place. New models will continue to come and go but agents will be persistent and adapt.
