On Friday, September 27, the Norris Group proudly presented its 12th annual award-winning black tie event I Survived Real Estate. An incredible lineup of industry experts joined Bruce and Aaron Norris to discuss perplexing industry trends, head-scratching legislation, massive tech disruption, and opportunities emerging for real estate professionals. All proceeds from the event benefit Make A Wish and St. Jude Children’s Research Hospital. This event is not possible without the generous help of the following platinum partners: the San Diego Creative Real Estate Investors Association, InvestClub, ThinkRealty, Coach Fullerton, Keller Williams Corona, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit isurvivedrealestate.com for event information.
This week’s radio show is Part 3 of our 6-part series that will cover our recent event I Survived Real Estate. Today’s show will cover blockchain technology, iBuyers, Realogy and their different brands under them, vertical integration, and which companies could be disrupted by the blockchain and iBuyer space.
- What is the definition of an iBuyer?
- Who are some of the brands under the parent company Realogy?
- What are Wall Street’s thoughts on the iBuyer space?
- Is vertical integration a big concern for clients looking to T3 Sixty for research?
- Would the brands that have not been around since 2014 survive if a recession hit?
- What is blockchain technology, and how does it differ from a database?
- Which industries could be disrupted and go away as a result of blockchain or artificial intelligence?
Bruce began this segment by asking about the Lehman Brothers. When they came to the table and wanted money, he wondered if it was the same type of meeting where they came, but the asset base wasn’t valuable and no one would exchange money for them? He wondered if that happened in that world or in a different world?
Doug Duncan said it is kind of in that world, but there are some differences. The issue in that world was that it was the single scariest day of his entire professional career. It was the second Friday in the month of August in 2007, and he had Michael Berman, who ran CW Capital, the biggest BP holder of commercial real estate in the country, call and say he just had a $3 billion deal that evaporated and that market was not coming back. They were sitting at the desk trying to figure out what to do about this and who they could discuss it with since they were not a regulator, but a trade organization. Then, the phone rang at quarter to 5:00, and it was Don Cohen, who is the Vice President of the Federal Reserve Board, and he asked Doug what they thought they should do. Doug told him if he was calling him, it’s a lot worse than he thought because he is not at the top of the totem pole.” He said he reads it like Economics 101. In order for an asset to have value, it needs to have a price since it’s valued by its price. To have a price, there has to be both willing buyers and sellers. Today, there are only sellers, so you have to be a buyer, which they did 11 months later. It’s because no one trusted the value of the balance sheets of their trading partners, but that’s not what’s going on today.
Aaron Norris came up to the stage to show the answer people had given about how they were feeling about the economy. A common answer was “opportunity.” Aaron wasn’t sure what to think of that since they were an investor crowd. Maybe they thought it was going to crash and they have an opportunity. The next question he asked is whether they think the iBuyer model here to stay? The choices were A: Yes, B: No, or C: what is an iBuyer?
Next, he called up three more panelists. Mark Lesswing is the senior V.P. at T3 Sixty, a management consultancy firm in the residential real estate brokerage industry with a specialty in technology. He has a lot of research on blockchain technology as he is a blockchain entrepreneur. Simon Chen is the Executive V.P. of Innovation for Realogy. He was recently appointed as the head of the new product and innovation for Realogy. He’s fresh off of being president and CEO of the ERA franchise systems. Finally, Sean O’Toole is the founder and CEO of PropertyRadar. He is now in his 11th season at I Survived Real Estate and is their longest-running panelist. He is the founder of PropertyRadar, the property data owner information platform real estate pros have trusted since 2007.
Aaron asked Simon to explain what an iBuyer is. He said there are neuro competitors in the space now that are talking about iBuying. In brief terms, it’s basically the ability for a seller to sell their home in a very rapid fashion, usually in a span of five to seven to ten days. Typically it’s at a discount, so usually the buyer of the property is an investor that is looking for very specific parameters around what they would be willing to pay for these properties so that they go very quickly. The practical usage for the seller is for those who can’t be bothered with selling their homes because they don’t want to clean it out. You may be relocating or moving to some other property, and they have 20 years’ worth of things that they’ve accumulated that they need to get rid of. So that is the dynamic that’s out there.
Aaron said they’re basically getting into the investor space. All cash. Fast. Flexible. Nobody’s walking through the house anymore to check it out before making a decision. He was speaking to a realtor, and they told a story about how they received a call at 8:30 pm from someone saying they were out front wanting to see the house. The realtor told them they would have to wait until the next day, and they said their app said they could just enter any time. This made the agent very uncomfortable. They had just been cut out of the chain.
This is Wall Street money backed by lots of technology; and when we’re talking about that kind of money, he mentioned some of the players in the space. OpenDoor, who has only been around since 2014, has raised $1.5 Billion. They’ve just announced this summer a partnership with Redfin, and it’s no wonder. They have been spending millions of dollars on advertising on all the markets in which they’re involved. OfferPad has been in California for only a few years, having started in 2015. They’ve raised $115 million. Nick Bailey was at I Survived Real Estate a couple years ago touting that Zillow absolutely not would be in the iBuyer space. Yet, they threw their hat in this year, and they’ve gone pretty hard pretty quick, at least here in California. Keller Williams announced about a year ago at Inman that they had secretly done about 100 deals, and this summer they announced that they’d be working with OfferPad. Knock is not yet in California, but they’ve raised a total of $430 million. They have been around since 2015, and then NRT is a brand of Realogy. You also have the catalyst Cash Offer.
Realogy is a parent company to several, which Aaron asked to share. Simon said not a lot of people have heard about Realogy because they don’t go to market as Realogy, but you might have heard some of their brands. They own Coldwell Banker, Century 21, ERA, which is what he was formerly heading up, Better Homes and Gardens, Sotheby’s Real Estate, and Corkran. They represent about 18 percent of the U.S. domestic residential real estate market. Aaron said that’s a lot of money really quick.
He next asked Sean if there is a Wall Street arrogance about the iBuyers in the space. Sean said he was surprised by this wording sine Keller Williams had just secretly closed in on 100 deals behind the scenes. In anothern six months, they’ll catch up with PropertyRade, and in another 20 years they’ll catch up with some of the folks in the room that night. He guaranteed they all had better margins. There’s too much money out there chasing too little return. They will put that money behind folks that went to really good schools and can build really good models rather than people who are actually out in the marketplace doing things. Sean did not think it was a well-executed plan, and he jokingly referenced Rex from Toy Story to make his point.
Aaron belongs to several associations, and he has talked to some of the iBuyers who are very young and hungry. There’s a sense of competitiveness that’s happened as well. Aaron has asked them how they are feeling about this brand entering the market, and they say they will get them. He does not know if that is a good strategy. He has real estate investors that are actively pitting them against each other as they 1031 exchange outside of California. They’re purposely getting offers from every single one of them, taking the highest and best; and for the most part, he is hearing they’re really happy with the offers. They understand this model. When he spoke to OpenDoor about six months ago, he asked them why they are not working with real estate investors. At that time, they said that the brand was so important to them they didn’t want to work with Main Street. They were Wall Street and were about scale, so they were spending a lot of money on advertising. This summer, them announcing the partnerships with Redfin was really important. He heard that OpenDoor is one of the only iBuyers up in the Sacramento market. They’re spending hundreds of thousands of dollars every month and no home for the leads for things that they couldn’t buy. That’s horrendous.
They next went on to discuss vertical integration, one of his favorite Wall Street words. He wondered if maybe they don’t need to make all the money on the buy-sell side of real estate. Maybe it’s because they’re opening up lending offices and closing businesses. Mark Lesswing has been in this space for a long time, and T3 Sixty is really well known for all the research in this area. Aaron asked if vertical integration a big concern for a lot of the clients that are looking to T3 Sixty for research. He wondered if there is a lot of pressure for every real estate brand to get into this business. Mark said there’s always a lot of pressure. He loves the iBuying space because just when things seem to be calming down, we have to always invent something that gets a crisis mode, and then it calms down. It’s the thing everybody’s looking at, so you would address it all the way up and down, getting into other businesses, and you can make it more efficient. But this too will come to pass, and some new crises will come up after that to occupy your space.
Aaron said a lot of these brands have not been around since 2014. He asked if they are recession-proof? He wondered if they will survive if there’s a recession that hits and the prices start declining. Simon said yes. One of the innovators in this space is OpenDoor, and they have received a lot of money from SoftBank, who would have made the news recently. There was this little company called WeWork that didn’t go public over the last couple weeks, and their valuation went down over 80 percent over private money valuations in the last couple of rounds. As profitable operations are looking at that with a fair amount of interest, they want to see if this 1999 all over again where the private equity invested into a lot of these companies is going to turn around and bite them when they try to get public investments into them. He said as brokers, they have 300,000 agents globally. There is certainly a place for people like his dad who is very concerned that he does not pass along a legacy of debt to the kids. Therefore, if he needs to go to senior housing, he wants to be able to turn his house easily without burdening them in any way, shape, or form. Simon would respond that he is a broker, so he could sell his house with no big problem. For him, he doesn’t want to burden them at all. He thinks that there will be some portion of the market that wants to sell their house at a discount for convenience. It’s just like how you go to 7-Eleven to buy that pack of gum instead of Costco because you don’t want 8,000 packages of gum at your house. However, the unit cost is very different, so there will be a role for it. Some people are saying that it could be as much as 60 percent of the residential real estate market. However, he doesn’t believe that. He thinks when it all normalizes after 10-15 years, it’ll be more like 10-15 percent.
Aaron had heard the 60 percent number too, so he wondered if they are in or out. Sean first agreed that they are addressing a market need and that there is a reason why so many folks are pouring so much money into this. The normal house sale process is difficult, time-consuming, expensive. To the point on vertical integration to the degree they can pull in title and mortgage and other things and build that into their stat cred, he thinks that there is an opportunity for savings there. He saw that in the trustee sale business. He had multiple trustee sale customers that started to vertically integrate as the market got more competitive. They may not have made as much money at the sale, but if their construction company did the repairs, one even went so far as to have a title company and a mortgage company and the real estate brokerage. If you roll all of that in, maybe there was zero profit on the flip. However, the profits on all those other pieces still made that business work. He believes you need to have some level of competition. Vertical integration is going to have to happen. He thinks what they’re paying for properties in order to try to prove out their model is certainly not sustainable. There needs to be more margin there. If you let the margins get too thin and take more risk, you get hurt in a downturn. Therefore, he thinks that they face a lot of risk in a downturn.
Aaron said he is using PropertyRadar to track every buy-sale transaction for all the major iBuyers. He’s that kind of a nerd and loves OpenDoor because it says it puts it on their credit line. Every time they buy, it’s like $400 million. Mark said if you look at the motivation behind the iBuyers, he agrees with what could occur when it does calm down. He doesn’t know if it can ever get to that 16 because he thinks it’s going to take part in the market that’s the physical market today. In a physical market, you have 12-13 percent, so it’s going to be a percentage of that. He thinks it’s going to be even lower. He thinks it’s going to be closer to 5 or 6 percent. It can’t take over the physical market, but for the buyer or the seller, there is a kind of motivation by the same kind of things that you find in iBuyers. Aaron thinks there will be things real estate investors are not going to buy. Craig in their office calls them “situations,” and he often uses quotes. It’s the messy stuff, the people who put up the duck wallpaper or the grapes in the kitchen. They say since they just put that up 20 years ago, it’s not worth $20,000 more. He doesn’t think complex probate transactions will be taking over all the real estate investor transactions. However, there is definitely competition for realtors and investors, especially if we don’t keep up. That leads to disruption.
Aaron next asked Simon about Realogy and what a good investment in technology looks like for them? You have Keller Williams who says that they’re planning on spending $1 billion. He wondered where they invest $1 billion dollars in technology for their agents. Simon said that billion is the amount that the head of Keller Williams is investing, but it isn’t necessarily being spent in any sort of defined timeframe. At Realogy, they actually spend about $200 million a year on real estate technology, and that’s for their the investor or for our aging population. Simon is reasonably well connected in the real estate world, and he buys for a number of properties a year. He is an investor himself and thinks the experience is kind of crappy for consumers. One of his great passions of being in the industry for the last 20 years is how to make it a nice experience. One place that he shamelessly spends a ridiculous amount of his income is Amazon.com. He jokingly said by the time he walked home that night, there will be a wall of boxes in front of his door that he would need to bring inside. The point to that, though, is that they create value. Otherwise, we wouldn’t be spending money there. The thing they are considering now is how to make the consumer experience more like Amazon.com. Right now, the consumer experience is far from it right now for real estate purchases. The direction in which they are moving is actually applying more modern technology so that the consumer experience is a lot more intuitive. There’s a lot more transparency for the consumers. This is happening more on the mortgage front where you can actually see what’s going on in the transaction. You can sign your forms online, you can see the workflow, the contingencies, and everything like that all online. And then, heaven forbid, once you close escrow, that whole homeownership experience, basically the Amazon of homeownership for the consumer, is all on the website as well. This will come in handy if you ever need to pull your documents for your taxes or if you ever need to see what needs to be installed in your house. This could include anticipating getting your air conditioning serviced before it ends up costing you four times as much because it’s hot outside. Those sorts of things should all be within that experience, and your engagement with your realtor over that nine out of 10 years that you’re not transacting is all in there. There’s an awful lot to still be done on that front, and that’s a big part of the load that he is bearing right now.
Aaron was glad he went that far deep into the sales process. A lot of people think that the sale is over when the transaction stops. However, he was talking about taking it all the way through further. What it feels like is that there’s a lot of pressure for real estate brands since once you enter an ecosystem, you’re controlling it not just for the first transaction of the buy, but much further down the road. Simon said the interesting stat about that is that ideally you would hope to get a consumer rating, and then they’re yours forever. However, the numbers actually belie that. 90% of consumers say that they would work with their agent again right after they close escrow. The actual percentage that ends up using that agent again after seven to nine years, depending on whose data you’re looking at, is 12 percent. If the technology he described can help bridge that gap between 90 and twelve, they will be dancing in the streets as a publicly-traded company because they’re suddenly capturing a tremendous amount of business that they don’t have to go out and re-farm again.
Aaron next asked Sean what he thinks the real estate investors and realtors should be focused on. He thinks it seems a little overwhelming when you see the amount of vertical integration that some of these huge brands are pouring a lot of money behind. Not everyone is behind a $1.5 million credit card to spend money on technology. Sean agreed we should not be focusing on this. At the end of the day, if you focus on your core business and find efficiencies in your own business – these guys are trying to find efficiencies on a massive scale. However, we can all find additional efficiencies. A lot of the trustee sale customers started to vertically integrate themselves, even if it was on a small scale. If you’re doing a larger investor, flipping quite a few deals, it’s not out of the question to own your own construction company or to own your own title agency. However, there are a lot of things you can do. It will be interesting for real estate investment groups or clubs to start thinking about sharing things a little closer. We can all be a little more efficient, and that’s one thing we can take away from all of this. In terms of whether these things are going to completely dry up, there’s still going to be all these things that these guys aren’t going to want to touch.
Sean said they grew up on Wall Street and went to really nice schools. They want nice clean houses, like what we used to buy in 2009 when that first wave of foreclosures came through and you got brand new houses that were two years old and the carpet was clean. Aaron said at last year’s I Survived Real Estate event, they made a joke asking if brands like Amazon and Home Depot would come up with the Sears catalog. What if Amazon or Google gets in the game? Amazon invested in a company called Plant Prefab. If you listen to the Norris Group’s radio show, one of the reasons he interviewed them was because Amazon was investing in them. Berkshire Hathaway owns Clayton Homes. You have some very big money behind prefab, and Aaron was really interested in DIY. But, what if Amazon starts listing homes that you could just get delivered on your back door? Well, in some cases, you already can. However, they don’t have water and toilets, so just be careful about what you buy. You could buy a house for $8,000, but it’s basically a treehouse.
One of the reasons Aaron wanted to bring Mark in, specifically last year as well, is he spent 17 years at the National Association of Realtors, and he was on a radio show a couple of years ago talking about blockchain. He had already discussed it with both Simon and Sean prior to this. Mark is really deep in it, so Aaron wondered if anybody in the room that night was ever really going to touch blockchain and understand what it is, or if it was going to be one of those things behind the scenes where it’s already cool, secure, and we’re good to go? Mark said, first of all, the best news is you’ll never have to worry about touching it because it’s actually going to be buried in the applications. But, he went on to explain what blockchain is, doing it in under a minute. It is comparable to when you have a driver’s license, there are around 15-20 fields. You can’t add any information to that. That’s a database. You can probably list all the information in an Excel spreadsheet. Very rectangular. Now, as you go and drive around a little bit and you get stopped by police, you have a driving record. There’s a number of things, like a chain of things. Some people have a long one, some people have a short one. That’s a blockchain. It’s a record, a log of what’s happened versus a driving license. In short, a driver’s license and a driving record. Similarly, you have a database and Blockchain. You also have the other crypto stuff, but that’s crazy.
Two years ago, Aaron interviewed blockchain.info for a report they were writing. He said you were not going to see it in the United States. We have a lot of bureaucracy in real estate. You basically have to get the Appraisal Institute, ALTA, the National Association of Realtors, and the Mortgage Bankers Association. What he is seeing right now is title companies creating their own private blockchain, and it seems like that is not what the technology was supposed to be. However, Mark disagreed with this. If you think of things as a driving record, every offense is chained out there. Therefore, if we try to use blockchain to rip apart all these repositories, whether it be MLS, title, lending, or even the county records, we’ve done ourselves a great disservice. But actually, it can help you move the transaction across them, therefore making vertical integration more of a reality. Therefore, it will help what they’re doing. It does not replace it. Therefore, it’s foolhardy to think that we’d be replacing everything with blockchain.
Aaron added we will just be making it more efficient by adding blockchain. I was gonna try to find a fun way to do this. After jokingly asking which game of Mary, Kuddle, Kill they should play with the different sectors, Aaron went on to talk about the industries they think are really going to be disrupted and probably go away, whether it be because of artificial intelligence, blockchain, or another reason. Mark Lesswing said the main thing that gets disrupted is whether anybody is making money out of holding on to data and then making a profit off of your data? Therefore, they take your data, put it someplace, and they make money and never give any money back. That is going to be out. This means the concept of data as labor and you should be rewarded for it. These new technologies can track where all that data came from, and we should change the economic model.
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Coldwell Banker Town and Country, In A Day Development, Inland Valley Association of Realtors, Keystone CPA, Las Brisas Escrow, LA South REIA, Michael Ryan and Associates, NorcalREIA, NSDREI, Orange County Investment Club, Pacific Premier Bank, Pasadena FIBI, Shenbaum Group, SJREI, Spinnaker Loans, South Orange County Real Estate Investment Club, uDirect IRA Services, White House Catering, Wilson Investment Properties. See isurvivedrealestate.com for event information.
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