On Friday, September 28, the Norris Group proudly presented its 11th annual award-winning black-tie event, I Survived Real Estate. An incredible lineup of industry experts joined Bruce Norris to discuss perplexing industry trends, head-scratching legislation, tech disruption, and opportunities emerging for real estate professionals. All proceeds from the event benefitted Make A Wish and St. Jude Children’s Research Hospital. This event was not possible without the generous help of the following platinum partners: the San Diego Creative Real Estate Investors Association, InvestClub, Inland Empire Real Estate Investment Club, ThinkRealty, Wilson Investment Properties, Coach Fullerton, First Lending Solutions, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit www.isurvivedrealestate.com for event information, and see Amazon Prime or YouTube for past events.
This segment opens with a brief recap of Aaron’s discussion with Marnie Blanco, Eddie Wilson, and Sean O’Toole on artificial intelligence. If you are some other company using public records data, the question is when the last time was you did something here before selling your home. You really have to dig through and see what you are making this prediction on and what data you are using. Then ask if you can use that data to make that prediction. Artificial intelligence allows you to do things at scale. It does not allow you to do things that were not previously possible. Could you look at this same data and predict who will buy a home? The answer is yes, and now you can use AI to do this at scale.
Aaron next went on to talk with Eddie about what he had done with the ThinkRealty magazine and Personal Real Estate Magazine rebrand. He is doing a lot of video and radio too. Aaron said as a marketer and PR guy himself, the mix is getting difficult. When you talk about zero interface, it is feeling more and more like we have five influencers. We will have to go through the filter of either Facebook or Microsoft Task Cortana, while Amazon has Alexa. Are these really the filters you have to learn to play in since they will not be going to websites anymore? Aaron asked if these are things he is having to think about now, which Eddie said it is. Eddie’s company has 84 companies, and a lot of the things they are doing in mass media is to get people to raise their hand or force them into some funnel. We are also using all these new tools, like voice recognition on Facebook. Now you begin to say a product, be served with it, and wonder how they knew what you said. The reason: the machine-learning that has the AI attached to it. It is getting fundamentally harder to get them to take action but not to find out who they are.
It is easier to find out who will potentially sell their home in the next six months or who will purchase a car in the next three months. Getting them to take that journey with you because of consumer trust is a totally different conversation. Aaron thinks there is a lot of opportunity. He made the joke about YellowLetter.com, but most people who get it just laugh at it and toss it. When Zillow spoke at I Survived Real Estate two years prior, they said there was no intent for them to get into the iBuyer space. Something changed this year; but what concerned Aaron is they have the largest eyeballs of consumers doing their Zestimate and search on their platform. They would know before anybody else because they have the data. For everyone in the room, what do they have as consumers?
Aaron asked if the realtors and regular investors in the room will have something to compete with some of the big iBuyers. Sean said one of the things you have to think about is for most of these iBuyers, it is a pretty small step. They are essentially house flippers and taking it a step bigger in scale. It is not like self-driving cars or some of these other things. In his mind, it is a fairly small step. If we are going to take this step in housing, he wants to see a bigger step than somebody buying and flipping the house. He could imagine with Blockchain, which is a fractionalized home where he is buying the right to live in it and you’re buying the right to the home’s appreciation and some of the income, completely different models or a lot of people pooling their homes together. However, Sean said if he decides to move, he would just move into another home and someone else moves into his. There is no transaction at all.
This would be fundamentally different. For the iBuyers, Sean thinks they will certainly play a role. It is like when they send out postcards and people say they want to sell their house for cash and leave the tenant in it. In this case, they are playing a role themselves. It will not be every transaction.
Aaron next asked Marnie what changed in the last year and why Zillow decided to jump in. She said, first of all, you never say never. What they found was that with Zillow, there are hundreds of thousands of agents. They make their money because they come, advertise, and buy leads. Marnie said what they found was the agents would come by the leads, and 46% of them would go unanswered. Marnie said agents would come pay them, they would give them their leads, and they would not respond to them. This is crazy. The consumer experience is not great because this is their first interaction.
Second, they found that sellers were coming in and wanted something easier. The day prior to I Survived Real Estate, they had issued their Zillow Consumer Report. You can go to www.zillow.com/report, and it will give you a lot of good trends, analysis, and information. They found that 39% of these sellers in the market will choose timing over profit and money to sell their home. They needed a faster process, but when you went out there and looked at OpenDoor and Offer Pad, they noticed there was a more industry friendly way to do it. They decided they would go into it and bring an agent into the mix. They believe an agent will always be a part of the process, and that is the best way to do it and create the best consumer experience.
Aaron heard a rumor that iBuyers have had conversations with large flipping companies that they do not have any intent of going after heavy fixers or hoarder houses. Aaron asked if any of them have heard of this formula where they will buy light fixes they can dejunk, paint it, put in new carpet, and get it out the door. Marnie said from their model, this is part of it. Typically on the markets, which they are only in about 4 or 5 of right now, they look at the median average price plus or minus 20%. It is kind of a framework, and there are other elements involved too. Bruce mentioned they do not buy gated homes yet.
Eddie met with the Zillow rep in the Southeast where they are purchasing most of the properties in Atlanta. They are set to begin shifting a little, and it seemed there was a little bit of a beta test going on as well. Somewhere between 75 and 100 homes were being purchased. They sold a few of them to them, and the box was radically different from one to the next. They were looking at some with equity, some with potential growth opportunities, 3 beds, 4 beds. It seemed like they were still in that test case scenario where they were buying a variety to watch how they perform.
Marnie said they are a big company of testing and trying things out. They tested the Phoenix market for a long time before going into Vegas, then to Atlanta and Denver. She does think it will be everything. It will be a niche kind of market, and there will always be somebody who wants that sell side to be a little bit easier and more efficient than it is today. However, she does not think it will take over everything as they said.
Aaron was at a ThinkRealty conference, and he was really surprised they asked the question regarding how there is a lot of Wall Street companies in the private money space. He asked the question to a hard money panel that included the software provider who gets access to and sees a lot of lenders. He asked the question twice, once at the California Mortgage Association and once at Zillow’s event. He asked if they hit a recession, how many would be left. He said 85% would be gone. On the table right now, we have some pretty big companies, and some have hit in the iBuyer space the unicorn status of $2 billion. Google Instant Offers, OpenDoor, OfferPad, Knock, Redfin, Bungalow, Realogy, and Keller Williams are all examples. The latter had already tested 100.
Aaron asked if the iBuyer model works in the years 2008-2010. Sean thinks where this really started was not 2008, but 2009 and 2010 with folks like Way Point who realized they can buy these houses up and rent them out at a 7 cap. The thing to figure out is how to get the institutional knowledge around how to go after this market. They came in strong, and in a lot of areas they brought prices back up. Prices were at a 10 cap, and they would buy at a 7 cap, which pushed them up. What it really comes down to is whether or not there is still a return. This is very simple. If there is a return in the market to be had, they will still be there.
It then becomes a question of how bad. If it is like 2008 and prices are still going down, they would probably stay out until it flattens and comes back in. They would then come back in really strong. The thing about the institutional players is it is math and not emotion or other things. If there is a return there, they will take it. They all have slightly different models. Zillow is working in the agent angle; and Marnie said it was announced this week that Coldwell Banker with Realogy and Keller Williams has been testing it as well. If you look at it from two public companies like Zillow and Realogy, they are jumping the space and we see a shift in the market coming eventually. The model will sustain itself in some way.
The important thing is if you look at the shift in the market back in 2008 and 2009, so far it was not like a cliff that dropped off. It just slowly goes there. This gives iBuyers and these different models a little bit of a chance to play and test the models. Aaron said it was ugly in California, more so than other areas. Eddie said someone came to their office in Kansas City the past couple weeks prior who is going to broker million dollar fund Amazon put together to put into the private lending space. Eddie asked a fundamental question of why they are getting into the space, and why now. The answer was they had capital they needed to put to work.
Right now, with all the rate compression happening in the lending sector, they are also experiencing less of a yield. There is so much capital on the market today, and he does not think they would have even gotten into the market place from 2008-2010. The capital they have today is radically different from what they had back then. Eddie thinks there are two big factors. One, they are looking for yield. Two, the technology is dictating where they are starting to find that yield. Eddie had talked to Bruce on the road over to the event about private lending, and he was so amazed at his knowledge and how he parses down a deal. It is radically different from how the guy representing Amazon’s billion dollars parses a deal. In his questioning, he was hoping for 6 or 7% and hoping that the deals over the span of $1 billion will yield that. Some will be very bad deals, while others will be really great deals. They are running a spread, and it is a really tough question to answer whether they will be there or not be there or still be in existence. We are in such a different marketplace that it is mandating their place in it.
When Eddie told Aaron about them getting into the space, he immediately thought about what other verticals these iBuyers could possibly get into. He wondered if Lowes would get in there to buy the house, fix it up, and everybody looking at it would basically be looking through a Lowe’s commercial. He also wondered what Wayfair would do if they were suddenly buying houses and furnishing them. There are a lot of different opportunities and ways to make money. When real estate changes hands, a lot of money gets spent in different areas.
Sean said one thing everyone in the room needs to keep in mind is that these iBuyers are just folks who thought one day they would start to buy houses. However, they went to get institutional capital. Sean asked why, for example, if there is a C21 or any of these big things why you would not give every one of your agents a tool for when they are out there talking to the folks about taking their listing. They could then say they will buy the house on any day they want for a certain price and list it for one price. It would be part of the standard sales pitch and offer. This will likely happen. Aaron said with these big trusted brands, they are likely to do what Carmax did for the car industry. Now you have a ton of them playing at the same time, and they are very well-respected brands. It will be really interesting to see how it works out.
Aaron next went on to talk about 3D printing and the modular space. Amazon invested in a Rialto-based plant prefab and spent a lot of money with them. This was well-timed with the accessory dwelling unit conversation going on here in California. Aaron had the chance to interview Senator Bob Wieckowski at an event two weeks prior, who is the senator driving the conversation about ADUs in California. For anybody with a single-family or multifamily home, who will get more interesting come December and January because they are not done regulating it yet. You should be able to build a granny flat in the back of your property. Depending on the city, the state basically forced everybody’s hand and said that it did not matter. After January 1, 2017, whatever you wrote ordinance-wise before, it doesn’t count. They needed a new ordinance.
A large majority of the cities did not respond, and they have not been very happy. They started layering on ways to make money, and the state said no. It sounds like they are going to do it again, so it is very well-played by Amazon. Aaron asked regarding 3D printing what it means that you can build something for under $10,000 in 24 hours. Aaron used the analogy of it taking him $150,000 to build it, and he bought the lot for $100,000 in the High Desert. If somebody can replicate this scenario for much less, what does this do for the price of real estate. Sean said it has been 110 years since the Sears modern home catalogue hit the streets. If you look at the Case-Shiller chart, it starts in the 1800s and has its big drop at 1910. This was why, even 20 years later in 1929, you could buy a home out of the catalogue for $1,000-$4,400, which would be $15,000-$65,000.
It has been 100 years since we have had that kind of major technological shift. They did this by pre-cutting the lumber and shipping it in box carts. This is 1908, so it’s crazy. We are way overdue for this to happen again. 3D printing is one of the things one of the companies Aaron mentioned is doing. They are making factory built modular, not 3D printing. Sean said if everything goes well with underwriting, he should have one of the first 10 3D printed permitted homes in California by this time next year. It’s a guest house, but it’s still a home. He begged Stealth Company to talk about it at the event, but they are still Stealth and are located in San Francisco.
They even have their own video, but they won’t come out until 2019. With the time remaining, Aaron asked where it will get stuck. It is good timing because if it happens soon with the ADU conversation, politically they just want housing and want it affordable. This will do it, especially if it is just ADUs and not whole homes. He can imagine the unions and the jobs this will upset, and he can see a lot of people being upset with this technology rolling out. So Aaron wondered where it will get stuck. At the city level, they do not understand it, so they will highly regulate it. Eddie thinks just the opposite in that we have a major construction shortage. We cannot find these skilled laborers, and Eddie’s team is actually looking at this because of the high-quality density of the printed material for all the soundproofing qualities. They could not find a qualified commercial builder that far north of Atlanta that was willing to come up and work with them. Eddie thinks this will help
even out the situation.
Aaron asked them if they think 2019 will be the year we start hearing more about this. They have already been doing it for the last two years in the Ukraine. Aaron wondered why we are not seeing anything happening stateside. Sean said it was interesting how places like Underwriting Laboratories are starting to get involved to try to solve that issue. With the building codes, how do you change that so dramatically? This is where the biggest challenges, both the building code, structure, whether it will fall apart, what happens with the sun hitting it after ten years, come into question. Sean hopes we will see the first ones next year and a lot more longer term.
The bigger impact is it potentially replaces our entire housing stock. You have to think about what it does for design, such as the Guggenheim in New York. This is a very different design. It does not have to be square walls and the rest. It really changes everything; and we may end up like Japan where houses are worthless after 15 years. The land is worth a lot, but the house itself is worthless after 15 years. On average, they are replaced every 30 years. He does not think there will be a jobs problem and we will likely start tearing down and replacing houses like we do with kitchens and bathrooms.
Aaron ended by asking each of them what technology they are most excited about for 2019. Marnie said the AI since she believes it will be much bigger than people think it will. Google just announced their assistant made a haircut appointment with Google Duplex. It is a total natural language. She sounds like an assistant and knows the best responses.
Eddie said their biggest business is an insurance company. If they can introduce AI correctly, then you won’t have to sit there by the hour listening to actuarial science on where we are going. It will just automate, we will get the data fed in, and we will make our choices. AI, especially in the insurance business, would help make interaction with the consumer base better.
Sean thinks in the next year that, because of the ADU push and affordable housing push and lack of construction workers, we may see quite a bit happening around both 3D homes and bringing automation into factories. This way, we can see a lot happen with the factory-built homes, plant-built homes, and catalogue homes. We could see a lot with affordable housing, ADUs, and other interesting things like cross-laminated timber that can take beetle kill. We could also see cost effective wood that also happens to be a carbon store. When you use this in a structure, you are permanently storing carbon that is good for the environment. There are all kinds of interesting things happening right now in the construction space that is not construction as we know it.
The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Coldwell Banker Town and Country, Guaranteed Rate and Nathan Chabolla, In A Day Development, Inland Valley Association of Realtors, Jason Thorman with Coldwell Banker, Jennifer Buys Houses, Keystone CPA, LA South REIA, Las Brisas Escrow, Michael Ryan & Associates, New Western, NorcalREIA, NSDREI, Orange County Real Estate Investors, the Outspoken Investor, Pacific Premier Bank, Pasadena FIBI, Pilot Limousine, RealWealth Network, Rick and LeeAnne Rossiter, SJREI, Spinnaker Loans, South OC REIA, Tri-Counties Association of Realtors, uDirect IRA Services, White House Catering. See www.isurvivedrealestate.com for event information.