Episode #528 : Are real estate agents obsolete?

Are real estate agents obsolete?

There is a mis-perception in the world that real estate agents are middlemen in a real estate transaction.  The mis-perception is that they are not necessary, don’t add value, are overpaid, and generally not needed.  As an very educated friend once said to me, “I have no idea why real estate agents make 3% commission just for opening the door.”

In 1997, the President of the National Association of Realtors was seeing real estate listings start to hit the World Wide Web, aka the internet, and made a public comment that in 10 years real estate agents would be “obsolete”.  He said that people would just use the technology to market their own homes, find a buyer, and save whatever commission those agents were making for themselves.  Interestingly enough, at the time about 85% of all homes were sold by real estate agents.  What amazing is that 8 year later, in 2005, NAR reported that 92% of all homes were bought or sold with the use of a real estate agent.  The number of real estate agent assisted sales went up, not down, despite the internet.  Sop much for real estate agents becoming obsolete!

What makes this statement interesting is that just a few months ago, someone was talking about those companies that just buys your house cash (for a steep discount from market values) and then made the statement that real estate agents would be “obsolete in 10 years”.

Realistically, there are two big reasons that people will always need a real estate agent  vs just selling their home themselves.  First is profit.  People generally want to maximize what they have, and they know that using an agent, getting other agents involved with all their buyers, and exposing the home to actual buyers, and not just people home-surfing as a hobby on Zillow, that they have to use a real estate agent.  The other reason is that the entire transaction is a complex and fragmented process, with each house, subdivision, town, city, state, etc having its own unique and sometimes unknown hurdles.

While maximizing the outcome on a real estate transaction is usually a financial decision, there are a lot of human emotions that come into play.  A homeowner who has possibly lived in a home for 20 years, raised kids, and now needs to move may have a difficult time getting over their emotions selling their home.  While wanting to “sell to someone like me” for emotional reasons may be part of their motivation, certainly there are Fair Housing Laws that the sellers may not be aware of.  A seller may certainly sell to anyone they wish, but if their choice is something other than the price, terms, etc of the offer, they might find themselves facing prosecution from HUD.

A buyer who is looking to buy isn’t just having an agent “open doors” for them.  Most real estate agents that represent buyers are answering numerous questions about everything with the local market, that specific area, and how to find all the information they can get to make a good decision.  Making a bad housing choice because you tried to “do it yourself” can be costly when you find you either grossly overpaid for a home or you’re in an area you didn’t realize school zoning was changing, and you potentially picked that neighborhood because your children already attend a certain school and want to stay there.

Certainly local MLS’s have become more and more obsolete, as companies like Zillow and Realtor.com are getting direct listing feeds from them, but in essence, without real estate agents, you wouldn’t have the MLS and Zillow wouldn’t exist.  In effect, rather than real estate agents becoming obsolete, they are themselves that fragmented group of professionals that create the content-rich, single-source, mass of data that a person can simply go online and surf for homes.

What tends to drive the belief that real estate agents are obsolete is mostly ignorance.  I was at a big pitch event demonstrating Homing In, a real estate home valuation startup, and one of the venture capitalists spoke up and said “I’m not funding anything in real estate unless they are trying to make the real estate agent obsolete like Zillow is”.  I didn’t even miss a beat by telling him that he had no idea how Zillow worked and that 100% of people that view listing on their site are being directed to real estate agents that pay Zillow for advertising.  You can imagine he wasn’t happy to hear that those “obsolete real estate agents” weren’t going away, and that Zillow was actually reinforcing the use of real estate agent by consumers.

Certainly, as market become more efficient, the costs involved in those markets shrink proportionately.  But while technology has done a good job of displacing informational inefficiencies, like travel agents who charged 10% commission to find a cheap flight, real estate agents value doesn’t generally come from the knowledge of what homes are on the market and what homes are not on the market.  Their value comes from their specific knowledge of the process, their experience navigating the potential pitfalls of buyer or selling a house, and their desire to help a person make a “good fit” whether it be finding the right buyer that can actually close the deal with the most net proceeds for the seller or guiding a buyer to the right home that they will love living in, but won’t have buyer’s remorse a few months later.

Ultimately while the amounts of commissions, fees, or other compensation paid to real estate agents will certainly vary by market and specific type of transaction, the need for a human to be involved in the middle of every moving part and party will almost always be necessary, and it isn’t likely that real estate agents will become obsolete any time soon.