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Crossroads

Crossroads

Real estate agents are getting scared. It could be said that last week brought the industry a step closer to annihilation (or at least a major paradigm shift). Over the course of the last 20 years, I’ve read many articles and books from people I respect that one of the first professions to be eliminated in the new economy would be that of the real estate agent. The irony behind this story is that it has been the agent who has been most responsible for their own demise.
 
Elon Musk (amongst others) feels that the greatest existential threat to man is artificial intelligence. Kept unchecked, it has the potential to alter the course of human history. We are already seeing this play out in many different industries, and real estate brokerage is no exception.
 
This has been no secret. The few people who have profited most from this shift have not tried to keep it secret. They’ve strategized it (under the guise of being broker friendly) announced it (sometimes with an agent at the helm) and celebrated it (as progress for the consumer and agent). They have managed to achieve this success thanks to the help from the agents and brokers whose jobs they’re eliminating. It’s a classic case of building the machine and then programming the machine to eliminate the programmer.
 
The real estate story is playing out in a few different ways by a few different companies, but they all seem to have the same endgame. They’re not all that different. It goes something like this:
 
Raise money from investors. Befriend and buy the agent’s short-term loyalty. Incentivize the agent to help build the machine. Gather data from the agent. Use that data to monetize it back to the agent and consumer. Squeeze the agent out.
 
This is where the major shift happens. In every real estate transaction, the agent makes the lion’s share of the commission. Sometimes as much as 100%. You don’t have to be an accountant to figure out that this business model is not sustainable. So here’s where it gets tricky. If the brokerage gets large enough, and has enough investor capital, they can eventually squeeze out the agent, offer lower commissions to the consumer, and maximize profits.
 
Going public at some time during this process is critical because this is where the founders make money by validating their self-professed valuation (especially in a frothy stock market environment where valuations have no rational basis on earnings but rely more on the promise of being a unicorn).
 
Last week, Zillow’s stock price soared on the wings of the real estate agents who sustain it. They had 2.2bn visits to their site last quarter. The agents who pay to be a “Premier Agent” for the leads the traffic generates, generated 3.3bn in sales. That’s a lot of (mis)leading. Everyone knows by now that a Premier Agent isn’t an experienced agent. They consumer is directed to the agent who is paying for the lead. The majority of the time, the Premiere Agent knows nothing about the property the client is asking about and has never stepped through the front door.
 
So who exactly is Zillow good for (other than the shareholders). We all know by now that Zillow’s market insight and data sucks. Ask Zillow for a Zestimate of your home and you’ll quickly understand just how far off base they are with this.
 
So, what’s next for Zillow? They have announced that they’re entering the brokerage space. I guess at some point, agents paying for leads might go away, but probably not.
 
They will also be ramping up their home buying/flipping business and thanks to the agents and their listings, they now have the largest database of housing inventory in the US. That’s something they will monetize. They plan on buying homes from homeowners, (conflict of interests?) and flipping them for a profit, in addition to making major money from the ancillary services and brokerage commissions that come along with this. iBuying makes up only 0.2% of the market, but that’s expected to grow exponentially as homeowners are lured by a quick transaction and the idea that cutting out the middle man (broker) will net them more money (which it won’t). Zillow’s competitors are growing. Some are already public, and others are making plans.
 
In the next few years, I expect the real estate brokerage industry to continue to experience major changes. Some agents will move on. Some of the tech companies will fold under the pressure of not having earnings. Some new companies will arrive looking to disrupt the disrupters and be the next unicorn.
 
One fundamental truth I know is that if you can provide a high level of expertise, discretion, and professionalism to your clients, you will be in the minority – but you will survive, and even thrive. And yes, there will be far fewer agents but there will also be far better ones.
 
Let’s do this.

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Work with Shaun Osher for a real estate experience defined by expertise, innovation, and a deep market understanding. Trust Shaun's proven track record and industry insights to guide you through every step of the process with confidence and success.

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