Are Residential Real Estate Agents Really Needed?

My deep passion for PropTech began with my love of Real Estate.  Whether it’s a new home for a growing family, or a downsizing for empty nesters, real estate transactions are deeply emotional and often the most expensive purchase of someone’s life.  It didn’t take long for me to realize how complicated the business was.  There were so many layers of redundancies, and with all of the ancillary services that are part of a closing including mortgage, title, insurance, inspections, and legal, the process creates such a high level of anxiety.  Real Estate transactions often take place during times of great sadness such as divorce, death, and business failings, and the last thing that someone needs when going through these difficult times is the burden of a stressful and opaque process.  When I purchased my first home, my wife and I had a front row seat to the client’s journey.  Selling and buying at the same time was one of the most stressful events of my life.  With the amount of money that is generated by the residential real estate industry, it shouldn’t be this way.  My passion for PropTech comes from my desire to see the industry I love transition into modern times. All problems have a solution and I believe that the solution to most of real estate’s problems can be solved through technology.

PropTech has become an enormous industry (nearly $32B was invested in 2019), not just because the industry needs an overhaul, but also because the prize is huge.  According to Leanprop, Residential Real Estate Brokerages in the US generate approximately $70B in annual commission revenue, and this number does not even include ancillary services such as mortgage, title, and insurance.  An industry of this size, which needs this level of modernization, was bound to have entrepreneurs salivating at the thought of disrupting it.  PropTech has begun to have an impact but this article is not about the strides that have been made so far, rather the critical mistake I believe many are making.

The Agent Myth

It’s a common thought that real estate agents are overpaid for their services and provide little more value than opening up doors for showings.  This narrative is further enforced by reality TV agents seen making 6-figure commissions for ‘an hour’s work’ (most of their time spent bickering over non-work related matters).  A view many in the industry have used to build their strategy around involves removing agents altogether or significantly discount commissions.  Some have done this overtly, and some have proceeded under the guise of cooperation, only to cut out the agents once they had the data that they needed.  The role of an agent has evolved over time, but I believe that any model which aims to replace agents with technology or significantly reduce commissions without true time-saving efficiencies and stress reducing outcomes are destined to fail.

Walk a Mile in your Agent’s shoes

Anybody that questions the value of an agent has clearly never been one.  An agent’s salary is $0 / year,  they receive no health benefits, no 401k, no vacation time.  Their job often involves chauffeuring clients, showing them dozens of homes, coordinating with a plethora of stakeholders (with very different motivations and opinions)… and if you decide not to buy, or someone pays $1 more, they don’t get a dime (by the way, they don’t get reimbursed for the gas, or the tolls, or the childcare, or anything else).  Agents are on their own.  Being in real estate is not easy and most agents don’t make it.  According to top ranked real estate coach Tom Ferry, 87% of agents fail out of the industry.  And as far those 6-figure commissions go, sure some agents clear huge sums, but the average agent (as of January 2019 according to Forbes) earned $41,289 annually.  If you are looking for easy money, being a real estate agent is not the right career for you.

Agents work hard and deserve their commissions, but hard work alone does not prevent an employee from losing their job due to industry evolutions.  A cashier at Toys “R” Us worked just as hard as a cashier at Whole Foods, and even though an employee of the former did nothing wrong, disruption eliminated their job.  As unfortunate as that is, that’s the result of a free market.  As consumers, we are all winners with innovation.  Agents’ livelihoods won’t be safe just because they work hard, they’ll be safe because the industry needs them.  For years, we have heard about the death of agents.  Every few months, a new model comes out that promises to eliminate them and save homeowners thousands of dollars in the process, but time and time again these companies either fail or they pivot.  Disruption has been promised for many years, yet traditional residential brokerages are reporting their best quarter in years (courtesy of Inman News). 

Purplebricks entered the US market in August 2017 with a commission free model.  After spending $66M trying to disrupt the market, the company exited the US in 2019 (details here courtesy of Housingwire).

YHT/Foxtons entered the US market in 2002 with a discounted offering of 2%.  They lasted until 2007 after losing $40M (more details here courtesy of Disruptdaily.com).

It’s interesting to note that the most valuable residential real estate company (Compass - Valuation $6.4B) started their journey as a disrupter, but eventually pivoted to a traditional model.  Pivots like this are very common once entrepreneurs begin to understand what is needed in order to survive. 

Where is the Value

The reason why agents are needed is because real estate is complicated.  Competent agents will provide value, and help clients avoid pitfalls that often would be way more costly than the commission they pay.  Even more so, the model that exists today utilizes agents as a sales channel, a channel that you only pay when/if they perform.  From a B2B standpoint, a company typically pays a salary and then a commission upon success.  It may take a rep 6-months to ramp (you are paying them in full during the ramp), and then you may find out that they are the wrong fit…. or maybe they are amazing, but they leave you for a better role.  The cost to hire and retain internal sales teams is enormous, but rarely do you hear complaints about this.  Even if you wince when you see a broker commission, the value of hiring one is justified.

When you are selling a home and you hire an agent, you transfer most of the risk of advertising and cost of sale.  The agent takes the photos, creates the brochures, pays the listing portal fees, hosts events, does the analysis, pays for advertising, and does all of the administrative work.  The agent coordinates with their colleagues (who also happen to be their competitors), they handle all of the tours, the negotiations, and the paperwork.  And if the deal doesn’t close for any reason, you pay them nothing.  The value on the buy-side is even greater.  The argument has been made that because of the internet, all information is available to a buyer and therefore the value of the agent has diminished.  I agree that the level of information and education of today’s buyer has never been greater, but the benefit of using an agent is still vital, and the cost for using one on the buy-side is technically free in most cases, even when they deliver on what you hired them for.

It’s easy to look at a commission on a $600,000 sale of $30,000 (5%) and think, ‘Wow, that’s too much money.  Where’s the value’?  I totally get that line of thinking.  It's important to note that on that sale, each agent is not bringing home $30,000, but rather $10,500 (assuming they handle one side, and they are on a 70% split with no franchise fee).  However, this model has yet to be disrupted because the incentives are properly aligned to put the risk of performance on the agent.  The more risk someone takes on, the greater the payout when they deliver.

Too Many Agents

I am a big proponent of agents, but I still think that there are problems with this model.  For one, there are too many agents in the industry and with the bar to become an agent so low, the quality of the service can suffer.  To become an agent in New York, you need to take a 75-hour course.  You can take it online (like I did) and walk away with close to zero knowledge about the industry (like I did).  You pass a test, pay a fee, and you are an agent.  When people see that you can make a 6-figure commission on a 60-minute TV show, and can get licensed in a half a week without leaving your home (except for the test), it is a safe bet that the industry will attract folks that aren’t fit for the responsibility of handling the sale of your most important asset.  This low bar of entry hurts the professional agents’ earning potential significantly more than any threat of disruption, and bad agents that deliver poor performances add fuel to the fire about agents being overpaid.  For context there are approximately 2,000,000 licensed agents in the US.

The Exception

There is one exception when it comes to real estate commissions and that is residential rentals.  Residential rentals are far less complicated than sales due to their short-term nature and the lack of need for a mortgage and title.  Since some apartment buildings have hundreds of identical units, the advertising needs and administrative work is significantly less as well.  There is another hurdle on the horizon with broker commissions for rentals, and that is legislation (it's important to note that each market has different laws).  There is pending legislation in New York City to ban agents from collecting commissions directly from renters.  Laws like this are already commonplace in some countries like the UK.  To be clear, renters often need the help of an agent to facilitate their transaction and guide them through the process, and when an agent performs their duty, I believe that they should be paid the agreed-to commission in full.  Disruption is already happening in this sector and in all likelihood it cannot be reversed, nor should it be. Winners have yet to be crowned and at least in the US, the seismic shift is still a few years away, but it is inevitable. 

How Does Prop-Tech fit into the Equation

If you have ever sat helpless in the days leading up to your closing, not sure if your mortgage will get funded, or the mortgage of the person that is buying your home, or the mortgage of the person buying their home (many residential sales are contingent on the sale of other homes), then you know what I mean about the complications of this industry.  PropTech will streamline the process.  When that happens, there can and should be “some” compression on commissions.  The word compression may scare agents, but it shouldn’t.  The less time they need to spend on a transaction, the more time they can spend working on other transactions, and the smoothness of the process will leave their customers happier and more likely to return and refer them to others.  When this is paired with a stricter set of requirements to get licensed, it will leave more transactions for the professionals that can be trusted with this important fiduciary responsibility.

Coexisting

There are many PropTech companies that are working to streamline the real estate process.  For example, companies like SKYSLOPE and PROPY are trying to automate workflows and in turn help agents be more effective.  Companies like Endpoint and Spruce are digitizing the title industry.   Companies like SoFi and Blend are aiming to streamline the mortgage industry.  What really excites me are new, very creative models, that are launching to provide clients with creative options while also embracing agents.  For example, Pacaso recently launched a platform for clients to purchase and co-own shares of a second home in a fully managed LLC. This makes amazing second homes affordable to folks who would never be able to afford to buy the entire property, and since people only spend a portion of their time in their second home, this model creates a scenario where everyone wins.   Pacaso (led by Dotloop founder - Austin Allison) recognizes the importance of agents and not only embraces them, but provides them with other options to offer their sellers. Flyhomes is another example of a company that has a very unique model (they turn all buyers into cash buyers), but they still value agents and do not look to remove them from the process.  Whether any or all of these companies will make it is to be determined, but their willingness to embrace agents is a good start.   

Disrupters look for industries that generate enormous amounts of revenue while running on very old technology.  There is almost no industry more appealing to disruptors than the real estate industry.  Massive change is coming, and I am embracing this change.  Commissions will inevitably come down but only when the transaction process is streamlined and efficiencies are gained.  I believe agents are a vital part of the equation, their role will just evolve.