Real Estate Industry Disruptors

disruptor noun [ C ]: a company that changes the traditional way an industry operates, especially in a new and effective way:
If customers talk to everybody else they get the status quo. We’re the innovator; we’re the disruptor.

The term “disruptor” gets thrown around a lot in the real estate industry when describing start-ups. I do believe that the era of drunk VC money is over for the time being, but for the past 10 years, if you wanted some of that sweet, sweet, drunk VC money, you had to describe how you were going to disrupt the real estate industry for the betterment of the consumer.

I’m a natural skeptic. Any time I see a new business idea, I start trying to poke holes in it. Why won’t this work? What’s wrong with it? This has served me well to not lose money over the years, but I’ve certainly passed up good opportunities because of this mindset.

Legitimate disruptors move fast. Zuckerberg founded TheFacebook in his dorm room in 2004. By 2008, everyone in the world dropped Myspace and was on Facebook. Google had a similar trajectory. It took a few years for everyone to drop AltaVista, move to Yahoo powered by Google Search, and then straight to the source at Google.

There are a handful of companies that people would consider disruptors by default, because that’s how the press labels them. Zillow, Redfin, Opendoor, & some others I won’t name because I don’t want to cause friction with good friends.

My question is this: How long should we continue to label a company an “industry disruptor” when there’s been no disruption?

Zillow was founded in 2006 with the public intention of empowering the consumer. The subtext to that was to do to real estate agents/brokers what Rich Barton (founder of Zillow) did to travel agents with his startup Expedia. I was somewhat threatened by this in 2006 and 2007 and very publicly tried to convince other agents to not send their listings to Zillow. My tiny voice didn’t work, Zillow proliferated, and everyone learned that most folks want an experienced agent to guide them through the largest purchase of their lives. Zillow shifted, started selling leads/ads to agents, and we’re in the same place with Zillow that we were in 2008. Did they disrupt the industry? No – we simply pay them a portion of our ad budget that we used to pay someone else. Some consumers search on their website along with other real estate portals. Is Zillow an industry disruptor? Not by the Cambridge Dictionary’s definition.

This is in no way a condemnation of any agent who pays for ads on Zillow. We pay for ads on Zillow.

Redfin was founded in 2004, in Seattle, with the stated goal of saving consumers money through technology & processes. There has always been a market for folks who want to save money when they buy or sell real estate. They wanted to tap into and grow this market. I personally thought this was a great business model and thought they would get significant market share. Today, 16 years later, Redfin has around 5% of the market in Seattle. Is that disruption? Not according to Cambridge.

Redfin has awesome agents that we love to work with and I think the business model has a niche market that they are serving very well. I just don’t think they’re an industry disruptor.

Opendoor was founded in 2014 with around $1.6 BILLION in funding and debt. They’re no longer operating. I don’t know if they’re permanently out of business, but it sure looks like it. Are folks still calling them an industry disruptor? Probably.

The real estate industry is not immune to disruption in any way. Listings went online in the late 90s. The average commission dropped from 6% to 5% as discounters entered the market. It was more efficient to buy/sell, so the industry changed. One could say it was “disrupted” 20 years ago by the internet.

What will be the next disruption? I wish I knew because I would invest in that idea. Anything that can reduce friction and improve an experience in a cost-effective way generally disrupts the industry it’s in. I personally think there’s a lot of room for AI in the contract to close process, but I don’t think that AI will replace humans in the real estate buying/selling process in our lifetime.

I’m extremely curious how long the market will give the publicly traded disruptors before they start valuing them on traditional metrics – P/E, etc… At that point, I think we’ll safely be able to remove the label “disruptor” from a lot of these companies, though I’m not sure when that will be.

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