Why aren’t bots selling your house yet?

Or, what I learned in my tussle with an $80 billion industry.

(UPDATE: I originally wrote this as a note to hackathon teammates interested in real estate tech projects. The first idea every hacker wants to tackle in real estate is displacing the agents. Ironically, I find myself talking down their expectations now, even defending the system. Below, I share observations from building Ownerstation, a consumer platform to sell homes without a full-commission agent. I was not the first to try this. And, as Americans spend over $80 billion a year on residential commissions, I won’t be the last. Will you be the one to take that baton across the finish line?)

When I shopped for my first home some years ago, it shocked me by how much of my money went towards commission. I grew up to real estate chatter at the dinner table. It seemed sacrilegious to lose that much with every transaction. This is the 21st century!

So, I borrowed a book titled “How to Buy a House” from the library.

I later got licensed, started my own brokerage, and learned the transaction process by representing relatives & friends. I was moonlighting towards my real ambition, a platform for regular people to sell homes for a nominal fee.

My platform never took off. Residential agents charge 5 to 6% of the sale price in the US, which sums up to over $80 billion in commissions. As prices rise faster than incomes, growing fees exacerbate housing unaffordability.

In the San Francisco metro, commission on a home now exceeds six months of gross income.

Many consumers don’t even realize it’s legal not to hire an agent. If they don’t have a referral, most click on agent ads placed next to listings on Zillow and go with the first agent who responds. 28% of sellers do try to negotiate fees with their listing agent, but discounts are rarely given. Since fees are customarily split 50/50 with the buyer agent, neither the seller nor their listing agent want to risk getting the cold shoulder from the buy side.

Still, 11% of sellers complete their sales without a traditional listing agent. I surveyed, interviewed, or interacted day-to-day with hundreds of these “DIY sellers.” The top challenges they report are, in descending order:

1. Fending off listing agents — Every DIY seller gets approached by agents first claiming to have an interested buyer, then asking to be hired instead. In fact, most get more agent pitches than real buyer inquiries. Each time, the agent hacks away at the seller’s confidence, e.g. by saying some aspect of their sale is being mishandled. I spent a lot of time placating nervous sellers and fielding requests for trivial listing edits.
2. Accessing the “right” paperwork — If you’ve ever bought or sold real estate, you might remember the tall pile of “disclosures” your agent had you sign. The law usually requires a few pages of disclosure forms. The pile comprises mostly of disclaimers and advisories protecting brokers and agents. Realtor associations, which are trade groups, restrict the use of those forms to members only. Not even real estate lawyers have access.
3. Getting buyer agents interested — Many DIY sellers start by talking only to buyers without agents, hoping to avoid a 2.5–3% buy side commission. But half eventually sell to a buyer with an agent. Most brokerages won’t let their buyer agents do a deal without “full disclosures.” So, the buyer agent has to do extra work, providing those forms and getting the seller to fill them out. Also, the seller often needs a listing in the local MLS to reach buyer agents in the first place. This involves paying a “flat-fee broker” to manually create a listing and make any edits.
4. Life getting in the way — Despite the economic recovery, it takes months to sell a home in most markets. Some sellers overestimate their stamina to answer calls, texts, voicemails, and receive visitors week after week. One of my sellers got pregnant, and could no longer walk down her driveway to put up her open house sign!

(NOTE: If you’re actually in the market and I haven’t scared you away from selling your property the DIY way, I go into more detail here.)

One of my sellers does Tough Mudder races in his free time.

My platform attracted lots of house flippers, investors, and other repeat sellers who knew the process well. But, I also kept bumping into veterans, utility line workers, and even Uber drivers amongst successful sellers. Most knew little about real estate before their sale. But their resourcefulness proved more valuable than business experience. In fact, one of my unsuccessful sellers was a Fortune 500 exec with a top-ranked MBA & PhD!

As I chased after the DIY segment, I interacted with sellers all over California. One day, my radiator blew out in a small town outside Davis. My car couldn’t be repaired that day, so I went off to explore on foot. I remember stumbling onto a street where every house was in some stage of foreclosure or abandonment. Suddenly, I remembered how I got onto this journey in the first place.

At the depths of the recession, I used to drive all over California’s interior to acquire sites for a big solar developer. At the time, the American household was feeling profound pain. My job was to talk struggling families into selling their land to me at the absolute worst time…

So, friction is the reason our system must change, even more so than savings.

The transaction process has gotten too onerous and intimidating, causing people to overstay bad situations or get in over their heads. One couple I talked to wasn’t even married yet, but would only look at 4-bedroom houses big enough for their future kids. They ended up buying two hours from downtown at the peak of the market. I have met too many families stuck in houses that are too big, too small, too far from work, or underwater. I’ve known too many friends stuck living with their ex long after they’ve separated. The American Dream has become our ball and chain.

In my adventures, I talked to dozens of agents. These are agents’ top explanations for why DIY selling doesn’t work. Interestingly, sellers almost never bring these up as challenges.

1. Mispricing — Agents argue sellers need them above all to restrain price expectations. Without them, sellers would ask for too much and cause listings to “sit stale.” Sellers would then wait too long before dropping their prices. By then, the only buyers paying attention would be “vultures” who lowball them in response. Studies on the vulture theory are sketchy. And, in normal markets where the average listing takes months to sell, I can’t see how a high opening price can’t be fixed by an adjustment later. Studies do show DIY sellers taking longer to sell than agents do. Interestingly, agents also take longer when selling their own homes. So, perhaps agents are rushing clients to sell for too little?
2. Lack of expertise—There’s a lot to real estate that’s grounded in custom, not law or written rules. For example, the way most buyers and sellers split up fees in escrow differs by locale. New agents flaunt this knowledge when they draft offers. Experienced agents wince if you don’t follow the usual pattern. Lawyers and escrow officers will tell you it doesn’t matter at all. Still, the DIY sellers who succeed are often those who play along.
3. Bad photos & staging —Many of my DIY sellers actually seemed better at photos & staging than listing agents in their area. The MLS is full of horrible pictures by agents. And, for most, staging is just decluttering and cleaning up as people might do for an important family occasion. In high-end markets, agents do hire stagers to turn their listings into designer showrooms. But stagers are just as happy to work directly for sellers.

In my view, agent behavior is behind most of the reasons why DIY selling is hard. I don’t think agents act in concert to subvert DIY sellers or out of loyalty for their occupation. They’re too busy hunting for their next meal and reacting to incentives on the ground. Most seem fine with making a commission from a DIY seller as long as they feel optimistic about closing. Some of my close friends are agents now. I know it’s a hard job.

Postmortem — My goal was to build a turnkey sales platform for the masses. But I couldn’t get the masses to consider selling their homes outside the traditional model. My customers were DIYers. They valued control, not convenience. They wanted access and advice, but kept asking to cut out any extras. And, not surprisingly, they were penny pinchers like me! I never got my cost of acquiring real estate customers below the value of services they wanted. So, I pulled the plug.

Generations of startups have tried and failed to disrupt real estate. eBay, Zillow, and Redfin each buried their subversive past when they found more profit in working with agents. Today, venture funding flows to startups that play nice with traditional agency. But there’s nothing inevitable about the way we transact real estate. If you need proof, consider how it evolved so differently in different countries. When I was a kid in Hong Kong, my family moved almost yearly as our needs evolved. There was just one agent each time. Commissions were 1%. I don’t remember anyone ever being stressed.

I’d love for America to figure this out, and win our freedom back with a lighter, more consumer-centered way of transacting real estate. I suggest the following for future innovators:

1. Build trust before convenience — When I worked in the countryside, I heard some buyers and sellers would negotiate in the back of a truck, jot down their price on a napkin, and bring it to a title company together to close. In my world, consumers don’t think a transaction has taken place unless they’ve signed the last page of a tall pile of papers. Consumers can already list homes for free in minutes on Zillow, the top buyer search site. Startups have tried to make paperwork easier by autofilling. But what platforms have never built is trust with consumers. Even my most self-assured DIY sellers interacted with me extensively before signing up, and contacted me all time for advice. Enter the bots?
2. Think outside the box (of double-sided agency) — Efforts to innovate on just one side of agency have had limited impact. In this post, I’ve described the pain my DIY sellers felt when interacting with traditional buyer agents. That wasn’t much I could do to address that. Redfin set out to automate buyer agency and rebate 75% of their commission back to clients. 10 years later, they’ve scaled back rebates and act much like traditional agents. Can innovation survive inside the current system?
3. Cut customer acquisition costs — In today’s system, fees have to feed four mouths — buyer agent, listing agent, and broker on each side. Fees are climbing along with home prices. But the average agent still makes below median income. Profitability remains a top challenge for brokerages. What can reduce the cost of finding a real estate customer?
4. Arriving at prices transparently— In my experience, consumers are very anxious about leaving their hard-earned money on the table. This is likely the biggest transaction of their lives! As buyer agent, my fear is a listing agent would take my offer and show it to all their agent friends for a chance to beat it, without extending me the same courtesy. What if there was an open, low-stress way to arrive at a price? Auctions?

NEXT POST: As my clients often sought advice on pricing, I zeroed in on that last point. Zillow’s Zestimate and CoreLogic’s regression-based appraisers are notoriously inaccurate in urban communities which lack cookie-cutter uniformity. It turns out one can often achieve higher accuracy by taking into account a few neglected attributes about the property. In my next post, I plan to talk about my experience developing a model that predicts near-term sale prices. My larger goal is to track the evolution of urban neighborhoods.

Follow me for upcoming posts on that topic!

Got an $80 billion idea? :) Please comment & share your experiences!