The Antidote to Disruption

Mike Cooke, Employing Broker Business Development

Skilled, professional agents will thrive as Zillow, Opendoor, Redfin, Compass and other so-called disruptors falter and fail to deliver on grandiose promises.

Zillow. Opendoor. Redfin. Compass. I think it was Brad Inman that coined the acronym “ZORC” for these alleged disruptors of the so-called traditional real estate brokerage model.

It’s an appropriate sounding label … having the ring of something sinister like a Terminator or Transformer about to wreak havoc on life as we know it.

While it has become conventional wisdom that ZORC will totally transform the real estate brokerage business, that picture is completely wrong. Each of these players, and the clones they spinoff will become niche players.

In contrast, the future is upbeat for traditional agents but only to those that are truly competent professionals.

Let’s begin by analyzing ZORC and their weaknesses. Then we’ll delve into how competence is the antidote to any disruption, either present day or in the future.

Zillow

Zillow is not really a disrupter at all. From day one, their success has depended on traditional real estate agents charging a historically normal commission. These are the only agents that can afford to pay the high advertising fees Zillow needed to survive in the early days and the only agents that could afford to spend endless hours converting 100 raw leads into two closed deals, the average lead to closing ratio.

While Zillow is now morphing into an iBuyer/seller lead generator that demands healthy referral fees from seller leads, they still need traditional, full-fee agents to make the system work. They don’t want a 35% referral fee from an agent charging a seller 1%.

In addition, Zillow’s iBuyer business is not going to make much of a dent in the overall market. Their stated goal is to be buying 60,000 properties a year by 2022. This is barely 0.5% of all the residential real estate sides that occur in the United States each year.

So, scratch Zillow from your worry list.

Opendoor

This is a true disruptor in that they seek to displace the agent from the seller side of the transaction. As a buyer directly approaching sellers, Opendoor or any other iBuyer needs to hip-check the traditional agent aside to make their model work.

It is not a new model. There have always been local investors in any market with some capital to buy houses for cash from distressed sellers that need a quick sale. Such sellers might represent 2% to 4% of the market.

Granted, today’s iBuyers are trying to grow the market from “we buy ugly houses” to normal sellers by claiming they can net a seller almost as much money as they will get by using a traditional agent but with much greater speed and convenience. But iBuyers face three headwinds:

  1. They spawn competitors and all of the competitors are competing for the same small slice of the market.
  2. Because they have to buy at wholesale so they can quickly resell profitably at retail price and because that differential represents a big chunk of change for most sellers, a good agent will be able to show most sellers that they’ll be better off using an agent.
  3. It’s pretty easy to get sellers to question the wisdom on letting the buyer tell them what their house is worth. It’s kind of like letting the plaintiff’s attorney tell you how much money you should give his client to settle the case against you.

Redfin

The disruption method here is price … “We’re cheaper”. It’s a tried and true strategy in any industry and perfectly legitimate. Discounters have been around on the local level since the beginning of real estate brokerage. The first time an agent chiseled “For Sale” on a slab of rock and propped it up in front of the cave he was selling for his buddy, there was another caveman from an adjacent tribe that offered to do it for less.

The issue with Redfin, to be perfectly blunt, is that their approach is not catching fire. Redfin has been around for 15 years. They’ve raised $167 million in capital and received $138 million from their IPO in 2017. The result? They are struggling for profitability with less than 50,000 closed sides per year. This is not even 0.5% of the 11,000,000 sides paid each year in the 50 states.

Compass

Let’s see. Can anything possibly go wrong here? Founded in 2012, Compass has raised $1.2 billion in funding. They’re involved in numerous lawsuits for alleged questionable business practices. They are paying insane multiples to buy local real estate brokerage firms. They pilfer top agents from other brokerage firms with crazy signing bonuses – agents that probably have egos the size of large meteors or small asteroids. What are the odds that this enterprise is going to spin wildly out of control? My guess is pretty high.

Plus, let’s face it, Compass is not a “disruptor”. They operate on a traditional real brokerage model at historically normal commission levels and without any real innovations.

Overall Conclusion about ZORC

Before we leave the subject of these so-called innovators and disruptors, notice what is missing. There is no nationwide player in the FSBO space – no one going to the market as the champion of owners that want to sell without help from an agent. Purplebricks tried … and failed.

Despite the mindless, sycophantic coverage claims about providing a faster, easier and more consumer-centric experience, they are unlikely to end up with significant market share. The claims are more smoke than fire.

The issue of competence

Undoubtedly, the brokerage industry has an issue with competence. Low barriers to entry allow almost anyone to be licensed in 30 days with less than $1,000 out of pocket. The ZORC consortium doesn’t do a darn thing to address this issue. While many others talk about the problem, very little is done about it.

Competence, however, is the key to providing great value.

Competence is what gets a seller the most net money in her pocket.

Competence is what gets a screaming deal for a buyer.

Competence is what ensures a safer transaction without post-closing drama or surprises.

A truly competent agent provides value in excess of the fee charged to the consumer.

Competence is the true disruptor in real estate brokerage. Become a truly competent professional and your future in this business is assured. Here are some characteristics of competent agents:

  • Pricing Wizards: I teach a class on pricing properties. I survey agents before the class begins on the amount of time they spend pricing a property before putting it on the market. The average time? 10 minutes! Let’s just call this what it is: malpractice. A skilled agent will spend several hours studying trends and doing in-depth analysis on specific comps to make sure a seller can squeeze every dollar out of a sale.
  • Staging Advocates: The competent agent will advise sellers on the many ways the showability of a property can be improved. From no-cost and low-cost strategies to full-fledged remodeling, the agent will show the seller what is possible. A client might not choose to do all or any of the recommended items, but they’ll do so with full knowledge of the money they are leaving on the table by failing to optimize their property’s appeal.
  • Marketing Gurus: From professional photos to compelling copy, good agents know they can get a higher price for a seller by maximizing the presentation of the property on public portals and on the MLS.
  • Negotiating Masters: Well-honed negotiating skills are an underappreciated opportunity for agents to put more money in a client’s pocket. A competent agent has mastered the special type of negotiating required in real estate transactions, which is less aggressive and more ninja-like than other types of negotiating. Getting small improvements in price, terms, closing dates and contingencies adds up to a big bottom-line improvement for clients.
  • Contract Experts: An agent can’t be competent if he does not understand the contract in-depth. Contract knowledge allows an agent to know when to let things slide and when it is important to press for changes. Additional provisions are a specific area where potential pitfalls can be created by sloppy language and the competent agent won’t let those things go without getting the need modifications.
  • So Much More: The professional agent has stopped selling and has started consulting. She is skilled at ferreting out what a client is trying to accomplish and coming up with a plan to get the clients to their objectives. Expectations are set and the whole project of buying or selling is skillfully managed. Proactive communication with the client is another trait of a competent agent. Perhaps surprisingly, a really good agent advises certain prospective clients that it is not in their best interest to sell or buy at the moment.

Closing Thoughts

So, don’t worry about ZORC. They will continue to exist, but they will not fundamentally transform the industry. What will transform the industry is agents that commit to becoming competent masters of all they do.


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