Wall Street has always been on the hunt for new and innovative ways to maximize returns on investment. Some turned out great, others not so great.
Ten years ago, it was subprime mortgages and mortgage backed securities, which led to the meltdown in 2008, which subsequently triggered the eventual $7 trillion dollar Wall Street bailout by the U.S. government.
Today, Wall Street is investing in the U.S. market again but this time it’s buying up homes. Since the mortgage meltdown and housing crash caused millions of Americans to lose their homes, institutional investors such as Blackstone, America Homes 4 Rent, and Colony Starwood Homes have purchased tens of thousands of these homes and converted them into rentals.
With new technology and cloud platforms to automate and streamline the way distributed assets can be managed, investment banks, private-equity firms, and hedge funds have found new ways to increase margins across the board. They look at these purchases not as homes, but as assets that can deliver a high rate of return.
As institutional investors leverage technology to become the largest buyers of most Americans’ biggest asset, they become the new iBuyers and could influence prices and terms under which homebuyers and sellers transact, including commission rates.
The iBuyer trend has just begun, but it will no doubt change the game in real estate. The “big money” always bets on technology to disrupt industries and make them “more efficient,” which is code for squeezing out more profit.
Drawing on institutional capital, iBuyers use technology to make quick offers on homes, close in just days, and either rent or flip them. New platforms are already up and running, with Opendoor, OfferPad, and the industry’s newest and most controversial, Zillow Instant Offers.
This new disruptive business model has the potential to make the housing market “more efficient,” – again code word for capturing generous fees. iBuyers use technology to offer homeowners a fast and guaranteed sale at purported “market value,” all for a flat service fee of between 6 – 13%.
Two of the industry’s leading iBuyers, Opendoor and Offerpad, currently operated in a few markets but plan on expanding quickly in the next 18 months. In Phoenix, the two companies have closed more than 600 transactions in the first quarter of 2017, accounting for almost 3% of total sales, according to Attom Data Solutions.
The transformation of the real estate industry is also attracting top talent in the technology space, as demonstrated by Opendoor’s recent hiring of Uber’s head of finance, as well as two former Amazon executives that will serve in key roles. Gautam Gupta, who heads up finance at Uber, but plans to leave in July, will serve as Opendoor’s COO, where he’ll focus on scaling operations and opening new markets.
“Opendoor has the opportunity to transform how people buy and sell homes much like ridesharing has transformed how people get around,” Gupta stated.
First, Wall Street is getting into the real estate business – leveraging its vast resources and might expedite the disruption. Second, the big money is now really zeroing in on the “direct to consumer” model as the ultimate model to make the home selling process more efficient.
Redfin, the Seattle based online brokerage has filed for an IPO with the Securities and Exchange Commission with its initial public offering priced at $100 million. In the filing, Redfin also announced it was testing Redfin Now, a new service in which Redfin buys homes directly from sellers and resells them to buyers. The company will test Redfin Now in two markets to start – the Inland Empire and San Diego California.
Redfin’s new program allows homeowners to sell a property to Redfin for as little as 7 percent commission. Homeowners will be able to view an immediate offer range on Redfin Now’s website and if they choose to request a formal offer, Redfin will send a representative to inspect the home and then submit a binding offer within 24 hours.
Accelerating the new iBuyer transformation is real estate giant Zillow, which just entered the picture a few weeks ago. Zillow launched a pilot program in two cities – Las Vegas and Orlando, Florida with the promise that a home sale can be completed in less than a week. Called “Zillow Instant Offers,” this new service allows home sellers to receive all-cash offers from a hand-selected group of 15 private investors.
Zillow, real estate industry’s chief disruptor, looks like it’s jumping into the iBuyer game, and leveraging its multi-billion dollar market capitalization and consumer brand to offer a radical new business model for home sellers. With Opendoor and Offerpad leading the charge and quickly gaining momentum in the space, Zillow really has no choice but to try and take the lead for fear of being disrupted itself.
With a market cap of $8 billion dollars and still losing money, Zillow can’t grow its advertising driven model fast enough to appease Wall Street. The fear amongst REALTORS and the industry at large has always been that Zillow is gearing up to “flip the switch,” and become a full service brokerage – which they have always adamantly denied. But ultimately, they may have no choice.
It appears Amazon is jumping into the real estate space as well. A “Hire a Realtor” placeholder page, (which debuted briefly and has already been removed,) suggests the internet behemoth will add real estate agents to its professional services marketplace. If the marketplace works for agents like it does for other professionals, then agents would pay referral fees to Amazon in exchange for new business.
Where this leads nobody knows, but with Amazon’s scale and clout in the product space, one could only imagine the possibilities here.
In 2011, $186 million was spent on real estate tech applications. Fast-forward to 2016 and that number has ballooned to $2.7 billion.
At the end of the day, technology is going to change every aspect of buying, selling, and managing real estate.
According to the National Association of Realtors 2016 Profile of Home Buyers and Sellers, 88% of buyers purchased their home through a real estate agent or broker – a share that has steadily increased from 69% in 2001.
It will be interesting to watch the convergence of America’s continued and growing dependence on the expertise of real estate agents and the accelerating advancement of technology.
The National Association of Realtors, (NAR) estimated that the aggregate value of existing U.S. home sales was approximately $1.5 trillion in 2016 from approximately 5.5 million total transactions. It is estimated that consumers
paid more than $75 billion in commissions in 2016 for these transactions.
The residential brokerage industry remains highly fragmented, with an estimated 2 million active licensed agents and over 86,000 real estate brokers in the U.S.
Over one-third of middle-class consumer spending is on the home, so it’s no wonder the “big money” is betting on the real estate industry’s continued disruption – there’s money to be made. One thing is for sure, that technology will continue to play a larger role in the real estate transaction, and the direct to consumer momentum will continue to gather steam. Where this ends up, nobody knows.
But don’t plan on real estate agents becoming extinct any time soon. The size, complexity, and legality of buying and selling million plus dollar assets warrants seasoned, professional representation. Additionally, “off market, not listed on the MLS” deals represent over 20% of home sales in some markets, and you can’t access these without tapping into an agent’s local network.
Finally, buying anything is a highly emotional decision. The bigger the price, the more emotional it gets. Agents serve this purpose well, by acting as personal caretakers during the transaction process – something technology can’t do at the moment.
We’re truly living in a “wild west” real estate world today, and it’s only going to get more interesting moving forward. So sit back, fasten your seat belts, and get ready for the ride.
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As told to Danielle Accovelli | Photo courtesy of Juliette Hohnen
How has your London upbringing and international perspective influenced your real estate career in the US?
Having lived in London, New York and LA—I also spent time in France (where my mother lives) and Australia (where I have more family)—has given me an incredible network all over the world. LA has become a major destination for international buyers, and knowing how to find, relate and connect to those buyers gives me a great advantage over other agents selling houses in LA.
I studied interior design at the Inchbald School of Art and Design in Eaton Square, London, and part of the course included traveling to beautiful houses all over the country and studying their design and architecture.
What prompted you to pursue interior design?
My mother was a nursery school teacher, but she was also the bread-winner of the family and put all three of her daughters through private school. She supplemented her income from her business (The London Montessori Center—an international teacher training college) with house flipping, which she basically put me in charge of. I would preview all the homes and only show her the best ones, then we would move in and I would decorate them. When I left stage school and realized that I didn’t have the ‘look at me’ gene you need to be a performer, I wasn’t sure what to do, so she said, ‘You seem to love design, why don’t you study that?’ Honestly, if you could give me my dream job it would be finding a dilapidated house, completely renovating it, designing and furnishing it down to the towels, sheets and the flatware then selling the whole lot. I did this while I was having children and I have never been happier.
You describe yourself as a true “houseaholic.” What initially fueled your passion for homes and real estate?
I guess deep down I am a homemaker. I love finding properties, seeing their potential and figuring out how to improve them and make them beautiful. There is a creative and business side to this, so it is really the perfect combination. I used to flip houses, and then my friends would ask me to help them find homes. I found Madonna Cecil Beaton’s house in England, which now belongs to Guy Ritchie. My clients will tell you how passionate I am about houses. I want to buy at least a house a week, and luckily I can channel my house lust through my clients. I get into their heads and then find the house I would want to live in if I were them. It’s a fun job!
How did you come to join Douglas Elliman Real Estate, and what is unique about the firm?
I moved to the firm because it allows me to offer my clients much more in terms of marketing exposure and networking—both locally, nationally and globally—than any of the other companies in LA. There are two types of firms in LA: the big firms like Coldwell Banker, which are large and corporate, or the boutique firms that have one or two offices and a small collection of agents. Douglas Elliman is the best of both worlds: it is a huge national company with offices all over America (New York, Miami, Aspen, the Hamptons, Connecticut, Westchester, Long Island), and has true international reach as a result of its association with Knight Frank from Europe. There are 17,000 agents across 441 offices, 55 countries and six continents. When you list a property with Elliman, you are really getting that listing great exposure, certainly more than any of the other agencies in LA. Half of the other companies say they offer this type of global reach, but having worked at some of those companies and having friends at those companies, I can tell you they do not. At Elliman, I am part of a national networking team who represent the most affluent and well-connected people in America. If I have a listing, I can personally pitch it to these agents on our bi-weekly call. This type of networking really does work.
Why choose to base your real estate career on the Westside—what draws you to work in this area?
I actually work all over LA. Right now, I have listings and buyers in Venice, Marina del Rey, Brentwood, Santa Monica, Malibu, Silverlake, Hollywood, Beverly Hills, Ojai, Studio City and Encino. I do not have a firm where I bombard people with my flyers and postcards. I am referral based, so I work everywhere. I don’t have a battery of assistants who show my houses, I do it myself, and that means whoever hires me knows the job will be done properly. I turn up early and make sure the houses are shown and presented in the best possible way. Working all over LA is a lot more fun, although it does put more miles on your car!
Will you elaborate on acting as an entrepreneur to create new and innovative ways of marketing properties for your clients?
I used to be a journalist and produced a weekly TV show called The Big Picture on MTV. I would have to come up with different ways to cover the same topic each week. Same thing when I worked as an editor for various magazines (Tatler, British Harpers, Esquire) writing covers on stars who had already been written about year after year. I would have to come up with another way to sell that film or star to the public. This is the same with houses. If the house does not sell immediately you have to come up with another angle to entice buyers through the door. Most realtors just plop their sign up, put an ad in the paper and wait for calls to come in. I look at who the sellers are and actively go out and find the buyer, because chances are the buyer and the seller are going to be similar in some way. In Venice, houses over three million take 90 days to sell. The last one I sold took 30 because I found out who the buyers were that were looking in the area and I literally dragged them to the house until I sold it!
Do you still dabble in interior design while selling real estate? Does one pursuit inspire the other?
Yes. I love designing houses and being inspired by other people’s designs. I am doing several houses at the moment. It is the way I express myself creatively. My style is eclectic…I love wallpaper, I hate upper cabinets in kitchens and I love using natural materials. I am building a house in Venice, and because I have so little time to really focus on it I keep putting it off, but it is my true love. I feel really lucky that most of my clients are creative people and so their homes, which I get to sell, are incredible and unique.
Are there any particular homes you are excited about selling, or past properties that still have a hold on you?
I love all the homes I sell, but right now I love my Frank Lloyd Wright Jr. house that I have listed on Benmore Terrace in Brentwood. It is so unique and beautifully restored. Not only are you buying a home, you are buying a piece of art that will appreciate over time. It is so ripe to be taken to the next level with the addition of a pool and guest house. I have a fabulous house in Beverly Hills in the Hidden Valley Estates area, designed by Scott Mitchell, and every realtor who came to my broker’s open loved it. This is a very hot area at the moment, as every other house is owned by a movie star. I also have a fantastic traditional house in Brentwood Park for $12 million on a huge lot. One of my favorite houses that I sold was one of Ron Radziner’s houses on Glencoe, east of Lincoln. The house is really a beautiful example of modern architecture.