Disruptive Innovation

By: Victor Normand

As I write this it is easy for me to imagine that countless technology innovators around the globe are hard at work crafting apps and programs to basically accomplish everything. If you name a product or service, you can be sure someone is out there trying to be successful doing it better, cheaper or faster.

In business it is called disruptive innovation and it really isn’t a new concept.  Think stone tools, fire or the wheel to begin with, everything that creates new value that replaces an existing good or service is disruptive, and that’s a good thing usually, in the long run. Not all innovation works out as intended, for example the dirigible had its draw backs. Things that are costly and widely used attract the most attention from innovators, like real estate brokerage.

Internet technology has opened the innovation door wide and has caused whole industries to change dramatically in an ever accelerating fashion. A friend from college thought she had an enduring career in travel and another of my friends once owned a bookstore. Uber now accounts for 40% of all business travel in 108 countries and Airbnb is giving the hotel industry heartburn. But for many reasons, the disruptive innovators have not been able to break the back of the real estate brokerage.

About 90% of all home sales still involve real estate brokers and that percentage has actually increased over the past 20 years. And a significant percentage of the balance, are transactions between close friends and family members. While technology has changed the industry, the traditional commission based model remains in place despite many well funded attempts to change the way residential real estate is bought and sold.

One west coast based real estate technology company that once thought the buying and selling of homes could be transacted almost entirely on line and has operated in markets across the country, never made money and burned through over $600 million in venture capital. They’ve effectively become a discount brokerage, a business model that has never been successful.

Residential real estate is not a commodity. If it were, Amazon would have figured out how to retail it. Actually, Amazon is beginning to offer referral services like Google and Facebook, recognizing the important role of the real estate professional in the buying and selling process; a role that has become increasingly more complicated as more and more information about properties and markets becomes available. To a great extent, the internet has made buyers and sellers more aware of how complicated a real estate transaction can become.

The real estate commission remains the big prize for disruptive innovators. But eliminating the commission expense from the sale of a home does not necessarily mean the actual sale price does not change. Since almost every home sale involves a commission, the commission is in fact baked into the sale price of all homes. Unless a brokerage is buying sales volume by operating at a loss, which always ends unhappily for that brokerage, commissions offered will reflect the effort required to provide service.

Someday a machine will write blogs like this and be read by a generation born into the world of artificial intelligence, until then the debate rages on.