Dava Davin, Principal, Portside Real Estate Group
Will technology make real estate transactions a whole lot easier? The number of single-family home transactions in Maine has been flat for the last three years and is not expected to increase any time soon. This is a reflection of the economy, age of Mainers, and an inventory shortage. But could it also be that buying and selling homes is a royal pain in the rear for most people, preparing their homes for strangers to walk through, tons of paperwork, and the terrifying unknowns being able to find their next suitable home? With this in mind some companies are trying to shake things up the way Uber disrupted transportation and Netflix changed home entertainment.
Let’s take a step out of Maine for a moment. $100 billion of commissions are paid per year in the United States. Residential real estate has been sold the same way for decades, but we are starting to see change in other parts of the country as consumers would like to see a simplified method for transacting real estate. Millennials will account for 45% of buyers in 2019. Millennials, and frankly all consumers want information and action ON DEMAND, they don’t want to leave voice mails or send emails and WAIT, they prefer just to push a button on their phone and take an action. So, an enormous amount of money is being invested into technology to get a bite into the real estate industry and that $100 billion of commissions. The historical void of innovation in real estate has opened a world of opportunity for startups that are attracting billions of dollars from venture capitalists.
The VC world is all about PROPTECH (short for property technology) — a relatively new term referring to the sector of startups that create new products or business models for the real estate market. This is the future of real estate market.
The players in this space are VERY powerful. Global venture capital investment in real estate innovation was $12.6 billion in 2017.
One model the proptech companies have launched is the iBuyer. Sellers can trade in their house on-line! An iBuyer is a company that will make a homeowner an offer on their home online within minutes (or days), sight unseen, using an automated valuation tool. If they choose to accept the price, they can close in as little as a couple of days or pick a convenient closing date. The iBuyers tout the selling experience as quick and easy. No need to paint, stage, repair, clean up, have showings and open houses. Yes, these valuations are less than market value, but for a homeowner that needs to relocate for a job, is navigating a sensitive divorce, or a seller that can’t afford to buy without selling and want to act quickly…this could be the answer!
Opendoor, one of the iBuying companies has raised over $1 billion in VC money. Other competitors OfferPad and Knock have also raised quite a bit of money. It is not just startup tech companies investing in iBuyer technology, the traditional real estate players are also bankrolling new technologies. Zillow, Keller Williams, Realogy, and Redfin have developed their own iBuying arms and investing heavily in proptech.
Who is using these services?
Rental giants that used to gobble up distressed sales to grow their single-family inventory can’t do that anymore as foreclosures have dried up. 1 in 10 homes sold by iBuyers are bought by institutional investors. This number is increasing. It is not just big landlords buying through this method, the tight inventory is causing single family rental investors across the country to look for other methods to find inventory to buy. Rental demand is predicted to stay strong in the next decade.
iBuying is still a niche product. If we look at Phoenix, a city with where multiple iBuyers have been operating for years, the sector has only about 4 percent of the overall market. Would this model work in Maine? No, probably not, we have a lot of variety in our housing stock, the values would be difficult to capture without a human visit to the property.
But the venture capital money is allowing proptech companies to keep developing a solution to simplify the home buying process. The iBuying model (or another automated option for selling real estate) will gain in popularity. And that appetite will likely only grow as consumers skew younger and are more empowered by technology. It won’t be this exact model, but once the technology is discovered that does catch on, it will be a rapid change – think about quickly Uber changed how we get around and how Amazon changed our shopping experience.
It will be exciting to watch and be a part of these changes as technology is infused in residential real estate and if/when it will creep into Maine’s market.