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Why technology will never replace REALTORS®

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01/04/2016 | Author: Steve Murray, guest author

Zillow is trading at 10,500 times its after-tax earnings. It is currently valued virtually the same as Realogy, which has nearly the same earnings before interest, taxes, depreciation, and amortization—also known as EBITDA—as Zillow has revenues. A small but leading technology firm was bought for eight to 10 times its revenues. A start-up brokerage with fewer than 400 agents was valued higher than the nation’s largest brand. Small start-up real estate technology firms are receiving two to three times their revenues in new investment from private sources. Many ask, “What gives?” 

Three trends are the main drivers of these valuations. First, residential real estate is one of the few sectors of the economy that is growing in home sales, average prices, homebuilding, and all of the associated activities. Housing, in short, is a powerful and large part of our economy. Second, there is an enormous overhand of capital sloshing around the United States. It’s not just the trillions of dollars printed by the Federal Reserve in its quantitative easing of a few years ago. You must also add in the trillions of dollars that have been pumped into our economy through deficit spending at the federal and state levels. 

Then, add the $1.5 to $2 trillion of cash and marketable securities held by American corporations (for which they can presently find no use), and it is just one huge pile of money—money looking for a return. There are few easy answers, and few obvious places to put it—0.5% money markets anyone? And that leads to the third issue, which is the residential real estate brokerage industry. 

Wall Street and Silicon Valley have been assaulting the residential brokerage industry for nearly 20 years. They cannot figure out why an industry that is so fragmented, so inefficient (from their point of view), and so ripe for their financial alchemy and smarts can’t be conquered. We talk to many investors who represent huge sources of capital, and the conversation inevitably leads to “Why can’t real technology do to brokerage what it has done to so many other businesses?” Why can’t the capital and the smarts of Wall Street and Silicon Valley figure out how to disrupt residential brokerage and drive huge valuations for their efforts? After all, it has worked almost everywhere else. 

The answer we tell them is the unique nature of homebuyers and sellers and their relationship with real estate agents and brokers. A transaction that is infrequent, complex, and fraught with downside when things go wrong drives consumers to use someone who knows how to reduce their fears, doubts, and threats and help them get a result they want: the smoothest transaction possible. And, in great part, the industry does deliver that.

That’s it: a great $64 billion business, an oversupply of money, and investors who want to disrupt an industry and hopefully make a fortune doing it. Who knows, these smart investors may be right, and one of them will find the key to take the middleman out of our business and make a fortune. Or, they may be one of many who have come before and not quite found a way to do so. Just don’t get hung up on these valuations in today’s market—they too will pass. 

This article originally appeared in the December 2015 issue of the REAL Trends Newsletter and is reprinted with permission of REAL Trends Inc. Copyright 2015.

Categories: Buyers, Sellers, Homeowners
Tags: industry news, business tips, housing industry

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