Earlier this year I released a whitepaper that outlined the number of homeowners that are “stuck” in the home sales process. These homeowners would sell their home if made a market price offer, however, don’t have a market where they can solicit such offers. Today, we uncover the real estate marketplace and what is changing with incumbent leaders and new entrants.
The current landscape
The marketplace is shifting towards a lower-cost model with traditional incumbents such as RE/MAX falling by the side. Once dominating a lion share of consumer volume, now sits far below years later.
Other incumbents such as Keller Williams have fought to maintain their share with significant investments in technology. Keller Williams announced a $1 billion investment in 2018 to develop new technology, products, and services. For Sale By Owner (FSBO) has seen growing consistent/growing share in the space with unknown committed capital towards improving the experience.
What’s obvious in these charts is that the consumer is looking for cost-efficient ways to transact on their home. The existing top-of-mind solution is Redfin, and its share continues to grow throughout the United States.
Selling fees have been averaging between 5–6%. Incumbent leaders such as RE/MAX have relied on these fees to offset overhead expenses. Newer players such as Compass have taken on the incumbent fees with a competitive advantage of having spectacular marketing and quality agents.
The newest entrants to this market are low-cost leaders and convenience leaders. Both aim to disrupt the existing marketplace.
The convenience leaders are Opendoor and Zillow Offers. These cash buyers referred to as “iBuyers” give cash for your home. The convenience of selling your home for cash and picking a closing date comes at a cost. This cost is approximately 6% of “Selling Costs” and between 1.5% and 7.5% in “Service Fees.” These fees indicate the opportunity for these iBuyers to offset the “Traditional 5–6% Models” as they begin to access cheaper capital and economies of scale.
As they are able to expand and lower their fees to 6%, it gives traditional incumbents nowhere to go but to lower their fees. Consumers will pick their desire for convenience vs. an effort to “get more money” by listing on the market. Studies have shown that they’ve offered prices close to home’s expected market value. This debate will take some time, however, in the end, cash is really king.
My prediction: The 5–6%+ models of historical incumbents will be eliminated or forced to change their model with the existing “Convenience leader” model growing.
“The in-between.” The first group of low-cost leaders.
The in-between is the first group of “low-cost leader” companies that have lower “listing fees” but similar “buyer-side fees”. If they find a buyer, then they charge reduced fees. If another agent finds a buyer, then they pay the fees “as set by the seller.” However, these fees are important to transact as this serves as the real estate agent’s incentive to bring their buyer. On average, agents set these fees between 2 and 2.5%.
Redfin: Redfin advertises a 4% selling fee for each home sale. Their model is well-positioned to sustain as the “Convenience leaders” most likely plan to disrupt the 5–6% leaders first, and years later catch up to them.
homie: They exist in Utah, Phoenix, and Las Vegas. They charge between 3,000 and 5,000 to sell your home (if bought and sold with a Homie agent). You can set buyer-agent fees when this does not occur. As said above, this averages between 2 and 2.5%.
Clever Real Estate: They take 1% of your home price or $3,000 per home sale. You’re still on the hook for buyer side commission which makes them similar to Redfin in their model.
The low-cost leaders
These models are disruptive and work outside of the fold. They aspire to cover both buyer and seller side commission with self-service options. Self-service selling makes up between 8 to 12% of total real estate sales each year.
For Sale By Owner: On this platform, a homeowner can claim their home for a free listing. From this point, they can pay for legal documents or their $399 plan where they provide legal documents, professional photos, and a yard sign. From this point, you’re on your own to sell your home.
REX real estate: REX sells homes for a 2% commission. This covers both sides of the commission. They don’t list their homes on the MLS however, say that they can sell homes just as quickly, if not faster.
AnyCurb: AnyCurb calls themselves “For Sale by Owner That Works.” As a licensed brokerage they provide all the tools that make a successful listing possible directly to the seller at no cost. This includes free professional photography, access to marketing tools and templates, and all legal documents. In addition, they provide live chat with licensed professionals. They vet all buyers on the platform before setting up a tour as well.
They make money if the seller chooses to use their Open Listing agreement. This agreement pays AnyCurb 3% in fees if they find a buyer. This is a non-exclusive agreement that prevents them from collecting if the seller finds the buyer themselves. They believe that with the right tools, the homeowner can sell themselves and they enable them to do so.
Real estate in 2030
The removal of 5–6% models will force dominant incumbents to change their models. They can take a position as a flat-fee model, reduced commission, or iBuyer model. iBuyers will get access to more economies of scale enabling them to lower their fees. Some iBuyers will be removed from the ecosystem given financial catastrophes.
The millennial consumer will become the largest group of homeowners and homebuyers. Their desire to buy and sell on their own is greater than any generation before them. They will seek tools to sell on their own. Companies positioned to help them take charge of the sale, answer their questions, and provide them a trusted marketplace will succeed.
There is a way to remain profitable and provide great value to consumers. Several industries have been disrupted such as a mortgage with better.com. Their removal of lender fees and commission is paramount and positioned to create value for the next generation. Residential real estate should be no different.