Why has real estate side-stepped the technical transformation of the digital age?
We have long heard stories of the power of the internet and its ability to disrupt almost every business. How everyday we search online for everything we need and choose from multiple sources based on price and not on location supported by social recommendations and user reviews. How we no longer use travel agents or visit CD stores and how TV has been transformed from a linear experience to an ‘Al a carte’ experience.
Yet despite these radical changes we still experience real estate services in the same way we did 20 years ago. Sure we use smart mobile apps and the web to do the searching but this is merely swapping one advertising medium for another. The fact is self-employed contractors with a real estate license still spend two thirds of their time hawking their service in the desire to list a property and thereby secure the opportunity (with no guarantee) to sell that property for a commission.
It is still a process based on almost the same systems and processes of 20 or 40 years ago. Still paper based agreements facilitated between vendors and buyers accompanied by hurried phone calls.
The most significant change of the past 20 years though is the cost. The average fee for the service then based on average house prices was $4,500 (in today's money $7,200). Today you will pay $17,000 for the same service.
So why have we not got an online solution that allows to evaluate different modes of selling and evaluate the capability of individual agents? Why do we not have the ability to create our own custom solution for the services we need from agents? Why does the negotiation process not happen in a secure confidential online environment with support parties like lawyers and buyers agents assisting the parties without undue pressure; thereby reaching an agreement that is digital signed and transacted? Why can we not schedule property viewings using synchronised calendars open to all parties to optimise the schedule of the sellers, the agent and the buyers?
The fact is that real estate has not changed for a number of key reasons:
- First and foremost it has not changed because the industry does not want to change and the industry is dominated by 5 major companies that account for close on 80% of all transactions. I would go further by saying that the industry has avoided change and in many ways stifled innovation.
- Property transactions are in the main a highly infrequent event for the majority of the people. For most property owners each such events leaves them with a sense of “having to start all over again” as all the people involve last time have moved on and the location has changed - real estate is a local business and does not represent itself the same in any two offices as agents play to the ‘personal brand’ service rather than a company brand model.
- Property selling and buying is highly emotive and has a high perceived risk. For this reason there is a low tolerance to ‘try something new’ - the safest bet is to do what everyone else does and sell the same way everyone else sells.
- Commission fees regardless of how big they are, never appear on your bank statement or have to be paid for in the form of a cheque or cash. They appear as a line item on a lawyers statement of transaction. A statement that often these days has 7 figure amounts on the debit and credit side (including a 5 figure agents commission) but at the bottom only requires you to pay a cheque for c.$1,500.
- Irrespective of the market conditions the commission fee can be easily rationalised away. When the property market is on fire and property is selling like the proverbial ‘hot cakes’, the logical side of your brain says “I should try selling privately, an ad on Trade Me and I’ll have people queuing up at my door to buy”, but yet you fall back on the logic of saying “I’m so excited that my house has risen by $100,00 $300,000 or $500,000 since I bought it I don’t mind paying $20,000 to sell it”.
Conversely when the market is dead and property takes ages to sell the logical and emotional side of the brain conspire to say “This market is way too scary for me to take a risk of selling other than through a traditional agent - I need to sell and to get the place sold will be well worth the commission”.
New Zealand real estate is in many ways not that different to many other countries in the way the industry is structured and operates. There is some degree of innovation overseas along the lines identified earlier, however we have yet to see a radical restructuring of the industry and a reinventing of the processes and charging.
In my view there has to be a better way. There has to be a means by which greater efficiency can be brought to the process and with it greater transparency and naturally a lower cost. We cannot though sacrifice the service component nor the security of legal and principle disclosures and sureties so as to safeguard buyers and sellers in this most critical transaction.