Can Digital Disruption Come to Real Estate?

It’s summer, and that means ‘tis prime season for prospective home buyers. The majority of U.S. homes are purchased sometime between spring and summer, so that the new owners can be in place once the school year rolls around.

Real Estate Agents Still the Center of Buying and Selling

Ninety percent of those home purchases — and the ones that take place in winter and fall as well — take place with real estate agents in the center. Given that more than 6 million homes are sold in the U.S. each year, that’s a lot of money spent for commissions. (Roughly $75 billion each year for residential commissions, to be precise.)

But why hasn’t digital disruption come to real estate? After all, from taxicabs to eyeglasses, from books to mattresses, many U.S. consumer markets have been digitally disrupted. In many cases, that has meant removing a middle agent (taxicab and limousine commissions, specialty stores, and dispensing opticians are all examples) and placing the means to buy directly in the hands of consumers, either online or via apps.

Theoretically, home sales could work the same way. Certainly many prospective home buyers shop online, with multiple photographs and virtual tours providing the first introduction to homes. They could begin by browsing, see the home in person via sellers, and proceed to online purchase.

The idea of digital disruption has certainly occurred to both Wall Street and Silicon Valley. Venture capital inflows into real estate sites has increased a great deal, from roughly $31 million in 2012 to $1.2 billion last year, according to Slate’s technology news.

Will home purchases ever take place entirely online?

A Difference Between Homes and Other Purchases?

But so far, even approaches touted as new look surprisingly the same in terms of business strategy, in that real estate agents are still central.

Redfin, for example, simply asks real estate agents to accept a lower commission structure in exchange for the volume generated by the Redfin site. Zillow, on the other hand, asks real estate agents to pay a premium fee to be mentioned along with Zillow listings. But neither embraces any “cut the middleman” feature that is so much part of other disruptive business strategies.

According to Slate, though, Zillow does have a plan in the works that could theoretically cut out the middleman and allow buyers to purchase directly from sellers via online transactions.

But there are also reasons to think that a fully online system for home purchases may not be the sort of thing consumers will ever fully embrace.

First, many digitally disruptive methods of selling to consumers rely on easy returns if a consumer doesn’t ultimately want the purchased goods. There is an implicit guarantee of satisfaction. You may be buying something you haven’t physically seen or touched online, but once you do physically see and touch it, you can send it back if you don’t like it.

Home purchases have no such implicit guarantee. Very few people are likely to be comfortable purchasing a home online without having seen it and walked through it, so any plan relying on cross-country online sales has to factor that in.

Second, real estate agents provide local knowledge. This kind of insight — about everything from school district rankings to safety statistics — is still key in home sales.

Third, home sales are complex. The process of appraisal and negotiation, to name only two processes, are far more complex than other types of consumer purchases. A middle agent is still important as part of those discussions.

Will real estate purchases be digitally disrupted at some point? Maybe, but real estate agents are likely to be part of it.

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