One of the main reasons someone needs to hire a real estate agent is to help them understand how much the property they are buying or selling is worth. Billions of dollars in VC investment and years of work “disrupting the industry” with real estate tech startups have failed miserably. There is not been one success to date. Every firm that offered iBuying valuations and tech to eliminate the agent is failing. Interestingly, any intrinsic value in these companies comes from the agents these companies seek to eliminate. These agents were paid to defect and share their data. For these companies, the data was seen as the gold, not the agent. And once the data was gathered, the agent was considered expendable. They were seen as unnecessary overhead, and in turn, the promises and profits sold to these agents disappeared.
The problem with this whole idea of tech disruption in real estate was ill-conceived from the beginning. First of all, most of the people managing these new companies knew nothing about real estate to start with. They never did a deal, sold a home, or even managed an open house. They were not real estate people – to say the least. They failed to understand that it is not the data that gives value – it’s the agent that provides it. Most of the time, real estate is based far more on emotional decisions than practical ones. Unless you are one of those wonky Wall Street people, a spreadsheet or data set won’t be the thing that makes you love a home. Trying to eliminate the human element won’t work here. You can’t “disrupt” the feelings that come when you find your family’s dream home. In an effort to automate everything, the tech industry failed to realize this, and their current struggles are the result.
The involvement and efficacy of AI in real estate will inevitably change, but only when there are tech platforms and companies run by leaders who are familiar with the basic nuances of real estate transactions and the factors that drive markets. We are many years away from that day. For now, instinct and feeling still sway, just as they always have.
In 1997, I walked a client of mine through a building on N Moore Street in Tribeca. A warehouse building once housed dry goods coming off the piers was sitting empty. After years of vacancy, the owner was selling the property. I urged my client to purchase it for the $14M price tag (around $70 per square ft), but he passed. The fact that he was already a billionaire didn’t soften the blow when a single penthouse in the building sold for close to that number only five years later. The ultimate buyer (who had a more convincing agent) did very well on that purchase. My advice to my client was based on gut instinct that there was a market for luxury housing in Tribeca that would support $800 per SF. At the time, no AI would have defended that theory.
On the flip side, about eight years ago, an experienced developer paid over $1100 PSF for a piece of dirt on the water in Chelsea. Everyone thought this deal was overpriced. Betting on an unprecedented appreciation in the market, he got halfway through construction only to realize that the market wasn’t there. He lost all the equity, and the project went belly up. I highly doubt his agent underwrote the necessary sales targets at $4,500 PSF. You didn’t need to be a real estate financial analyst to figure out his target was a pipe dream. No AI (or agent) would have defended this thesis either.
This past week, a garage in the West Village traded for $64M. It is almost twice the price per square foot of the project in Chelsea. I’m not sure if the buyer used AI to determine what they’d pay for it because, in my opinion, it doesn’t make sense – although I am looking forward to seeing how this one plays out.
Buying and selling real estate is based on intangibles. Algorithms can provide insight, but they cannot see the vision nor feel the space. They cannot predict a market nor understand that your love for a home may be based on hopes and dreams for a future we cannot yet imagine. People (like agents) can – and trying to take the people out of real estate just shows you have missed the point.
Let’s do this.
-Shaun