Fintechs have promised to make selling and buying a house more efficient. But they have yet to deliver on the promise.
To be sure, the ‘old’ guards of the fintech real estate world, Zillow and Redfin, have armed a potential buyer or seller inventory, neighborhood, and comparable transaction information before they even contact a broker.
Yet, the average transaction price has barely budged from its traditional list price of 6%.
In other countries, the price is less than half.
Rather than fleeing from this industry under attack, no one other than Warren Buffett and his company, Berkshire Hathaway, continue to acquire traditional real estate brokers.
However, a new breed of fintech companies, with names like Homie, Faira, Rex, Opendoor, and Offerpad, is trying to make home selling and buying quicker, easier and cheaper – and are taking on Warren Buffett and the traditional real estate industry while doing so.
The residential real estate market is huge.
In 2017, over 6 million homes were sold, and the aggregate value of the sales was over $1.7 trillion.
This would have generated almost $95 billion in commissions in 2017 alone at an average of 5.26% for real estate commissions.
When you consider that the average home has 40% of its value in debt, that commission represents almost 10% of a home’s equity.
Any way you cut it, that’s a lot of money.
At least that’s the way Warren Buffett sees it. Berkshire Hathaway entered the residential real estate market in 2000.
With three acquisitions made in 2017, Berkshire Hathaway is now the nation’s second largest real estate broker. It represented buyers or sellers on $127 billion of transactions in 2017.
And, according to Mr. Buffett, Berkshire Hathaway plans to expand its footprint: “Despite its recent acquisitions, [Berkshire Hathaway’s] HomeServices is on track to do only about 3% of the country’s home-brokerage business in 2018. That leaves 97% to go. Given sensible prices, we will keep adding brokers in this most fundamental of businesses.”
Traditionally, real estate brokers have performed virtually all services related to buying and selling a home.
According to Ron Abta, a San Francisco real estate agent who represented buyers and sellers on over $100 million in transactions last year, “The internet has leveled the playing field, somewhat, and changed the value a good agent can give the client.”
According to Mr. Abta, there are four things agents can provide that a fintech company cannot:
Access: experienced agents knows what will be coming to market before it is listed.
Reputation: “in a situation with multiple offers, a credible agent gives the seller surety of close,” which may even beat out a higher but less certain offer.
Negotiation: good agents will help their client with negotiation strategies.
Coaching: agents can help their clients better position their offer or better market their house.
In San Francisco, the median home sale price is over $1.6 million.
“Do you really want to go to a discount broker? That’s real money.”
However, not every market is San Francisco. In Salt Lake City, the median home price is just over $353,000.
A new fintech entrant, Homie, is now the second largest broker based on number of listings.
Homie provides a set of tools to “automate the entire real estate transaction for buyers and sellers”.
Rather than charge a commission, Homie charges sellers a flat fee of $2,000 and refunds up to $5,000 to buyers. It has real estate agents, attorneys and loan brokers on staff.
And along with its edgy videoand well-placed billboards, Homie has taken the Salt Lake City market by storm – enough to attract the ire of the incumbent real estate market broker, as evidenced by the billboard.
Other emerging fintech players are attaching the commission as well.
According to Kamal Jain, CEO of Seattle based Faira, “You should be able to buy a home like you buy a book on Amazon.”
With Faira, all the negotiation is done online and a binding contract is created and can be executed electronically. Faira is free to sellers, and charges buyers 0.5% to buy a Faira listed home.
Rex is entering a number of markets, bypassing the MLS and direct compensation for traditional brokers, instead using data mining both to find potential listings and then to market those listings to potential buyers.
Another class of competitors is using their own capital to help make the real estate transaction faster.
Offerpad and Opendoor have each raised hundreds of millions of dollars to purchase homes directly, many times site unseen.
They present an offer and can close virtually immediately.
These companies use technology to help the assess the value of and then sell the homes.
The value, for the seller, is much of the pain of the home selling process – such as showing the home and waiting – is eliminated.
After buying the home, they then turn around and sell the home in the more traditional way at a higher price. All of this comes at a cost.
According to Opendoor, they charge a service fee of 6-13% on top of their “fair offer.”
The success of this new generation of fintechs is still untested.
Although Homie is succeeding in Salt Lake City, it only recently launched in Phoenix and is not yet available elsewhere.
Faira and Rex have small volumes to date.
And Offerpad and Opendoor have been successful so far in markets where housing stock is tight and prices are rising.
Given the internet economies of scale, these companies need to expand in order to succeed.
Based on lower commissions charged in the rest of the world, there is a lot of opportunity for that to happen.
But in the meantime, Warren Buffett will keep rolling up the traditional agencies and continue with business as usual.
Betting against Mr. Buffet carries its own set of risks, as he is not short of capital and has plenty of experience with real estate cycles.
You can see what my firm is investing in at Centana Growth's website.