How much will ignoring innovation cost the real estate industry?

There’s so much talk of disruption, it’s easy to ignore it as white noise. Real estate is a high value, low volume and high-risk transaction. People will always need an agent to guide them through the process – right?

Well that is right, right now, because real estate is complicated and slow. There’s legal issues and paperwork – lots of paperwork. And there’s  fingernail biting negotiations and expensive marketing. And banks and conveyancing and phone calls and emails and so much communication.

In the current environment, most people feel safer having a person they can turn to who will look after all of that. They want someone to guide them through the ownership issues of something that is both a big asset and emotional investment. A website can’t do that. There’s no app for it, and a robot can’t do it – yet. So real estate agents get to rest a little easy.

The hierarchy of service

But most real estate agents are interested only in vendors first, and landlords a distant second. Buyers and tenants meanwhile cop the worst of agent service and as a result inflict untold reputational damage. This is the real estate industry’s Achilles heel. That’s not an opinion – let’s look at the data.

State of Real Estate in Australia

Over the past 12 months across Australia, there was $278 billion in residential sales with 459,964 settled sales (to June 30, 2018), according to CoreLogic. If we calculate real estate agent commission based on 2.5% (maybe you earn more, maybe you earn less, but bear with me), that represents $6.95 billion made by real estate agents around the country.
So far so good.

14% of buyers and sellers have awful experiences

But from the Perceptions of Real Estate Agents research, we know 14% of vendors, and 14% of buyers both have a truly awful experience with the agents they deal with. This is an important number for us as an industry, because it’s the proportion of clients who never want to deal with us again.

So the next time they transact – in 7 to 10 years – if there is a piece of technology that can perform the services of a real estate agent, these are the people who will lead the charge towards it. That 14% is the proportion of the market actively going to hand market share of real estate services over to new solutions. This is the proportion of the market where poor service is handing on a plate to new technology competitors.

Ignoring innovation risks $1b commissions

How big a problem is that? Well 14% is the equivalent of nearly $1 billion in commission leaving the real estate sales pool. And that’s a telling number in itself, because in the startup world, $1 billion is the magic amount that needs to be up for grabs to pique the interest of VC funding.

So the poor degree of service currently offered by the real estate industry is actively handing over market share to the new technology solutions. And it’s doing it to such a degree that VC is prepared to fund – and scale that disruption even further. Ouch!

And when you add to that the proportion of sellers who received average service (an additional 22%), that number jumps up by $1.6b. Those vendors who received average service are likely to be open to the idea of using an alternative to a real estate agent the next time they transact.

Total size of the problem? $1b – $2.6b

So the total size of the problem is somewhere between $1 billion and $2.6 billion in commissions we stand to lose. This represents between 64,394 and 101,192 real estate sales.

How do we feel about that as an industry?

Happily, the expectations of vendors and buyers as to what they want to trust and receive excellent service from their agent are really straight forward.

The research shows that both sellers and buyers are looking for agents who have great market knowledge, excellent follow up and response times, empathy and understanding, and first-class negotiation skills.

When agents nail these basic deliverables, their clients feel they are in safe hands. They feel that while buying and selling is complicated and confusing, they are going to be okay and that their interests are being protected. Feeling that degree of trust, leads them to be grateful and to recommend their agent to all their friends and family. So while they may not transact for many years, those agents who master this level of service receive regular referrals.

But based on the current data, there’s only 33% of real estate agents who deliver Excellent or Good service. This represents $2.3 billion to $4.7 billion in commissions. Unless our service improves dramatically as an industry, these are the only agents likely to still be viable in a digital future.

Extra reading: Check out the 15 Proptech innovators you need to know about now.

What do you think? How much is ignoring innovation costing real estate? Make a comment below.