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The Broken Real Estate Market

21/7/2018

 
Picture
“Anything I got is not a rental / I own that” 
Drake, Trophies
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​When Elon Musk was thinking about the idea for SpaceX, he looked at the price of a commercial rocket and worked out that the actual cost of the raw materials was 2% of the price of the rocket. He looked at that as a giant market opportunity.  I believe the real estate market is also similarly broken and ripe for disruption.

Taking a page out of Elon Musk’s first principles analysis, I wanted to apply it to home buying and selling. In my mind, this is how I would buy a house:
  • Thursday night - Identify properties online – using Zillow (US) or Zoopla (UK), I browse thousands of homes and specify location, price, size and dozens of other filters. After a few hours, I've created a shortlist of 10 properties to go view. I contact the sellers to set up a time to see them on Friday.
  • Friday morning - Visit properties – I spend 15 minutes at each property with some travel time between them. By lunch, I have found my dream home and make an offer.
  • Friday lunch - Offer and negotiation – this isn’t rocket science. The seller is listing the property for $500,000. We settle on $475,000 over the phone in 5 minutes.
  • Friday post-lunch – I have a beer.
  • Friday afternoon - Title check – I need to ensure the person selling me the home has a right to do that. I find a service online, give them the address to the house. Within an hour they provide a simple 1-page explanation of the ownership of the property, the encumbrances on the property, and they even provide title insurance guaranteeing me what they did is accurate. I pay $200 for this service and it takes about 1 hour.
  • Friday afternoon - Appraisals/Mortgage – I contact my bank and tell them I want to buy a house. I’ve been banking with them for 5 years, so they have all the financial information they need. They do a quick credit check and ask how much I’ll be putting down. Everything checks out and they send someone to inspect the property. At 4 pm, they offer me a 30-year mortgage with a pretty good interest rate. I am happy.
  • Saturday morning - Inspection – I go online and hire an independent inspector to check out the property for any major issues. The inspector is well reviewed online. I pay $200 (it’s a $50 premium to do it on a Saturday which I totally accept) and get a nice inspection report at lunch time. Everything checked out.
  • Saturday afternoon - Contract for sale – I go online and find a website where I put in all the property details and the price. It generates a template agreement for both the seller and myself and emails it to both of us to sign electronically. While I’m a pub with friends, I sign the contract on my phone and pay $200 to the website that generated the contract and will later complete all the title and deed requirements.  The seller countersigns the agreement at 5 pm. The transaction is complete.
  • Sunday – I go to the park and enjoy the beautiful summer weather. I move in to my new home in 3 weeks. I am pleased about how smooth the process was.
Overall, I invested about 8 hours of effort and it cost me $600. The seller paid $99 dollars to have their home listed on the website. This all makes sense to me – anything else I tell myself would, just be fucking ridiculous.

The Current Home Buying Process
Now let’s look at buying a house in real life. I am oversimplifying a lot here, so please take it with a grain of salt.
  • Identify property online – this is probably the best functioning part of the market thanks to websites like Zoopla in the UK and Zillow in the US. You can browse almost any home available on the market. In the US, although the process has been simplified by Zillow, the market is controlled by real estate agents thanks to arcane regulatory capture. This involves things such as a license to be able to help people be able to buy and sell homes (and your license only applies at the state level making it even more idiotic).
  • Visit properties – the nightmare begins. Generally, you must schedule visits through an agent who then has to check with the owner then get back to you with available time slots. You then repeat this process for every home you might be interested in, each with a different agent.
  • Negotiation – the ineptitude continues here. Rather than a seller communicating with a buyer, both communicate through agents (generally only a sales agent in the UK and a selling and a buying agent in the US). This leads to protracted negotiations that last for days or weeks rather than minutes.
  • Title check – this is slightly better in the US than in the UK. In the UK, inquiring with a city or council to check the titles can take weeks. It is absurd.
  • Appraisals/Mortgage – the pain becomes unbearable at this point. You would think your bank would have enough data on you between a credit score and years of banking history, but byzantine processes require them to pull tons of documentation and ask tons of questions. Moreover, the amount you put down rarely changes the process. So even if you put down 30% deposit, meaning a bank would have almost no risk (since they can seize your property if you don’t repay), you still have to jump through a hundred hoops and wait for weeks for a decision. Remember this is if you are lucky enough to have a large chunk of cash for a down payment a good credit score.
  • Inspection – no real qualms here outside of the time it times to set up an inspection and then get a report produced.
  • Contracts - as a former lawyer this one really hurts my soul. With millions of homes changing hands per year you’d think we could have a super easy template where you change 4 fields and call it a day. But nonetheless, lawyers trample all over this process and in the UK particularly, control the home buying process to an incredible degree. Lawyers are the worst.
  • Costs - to top of the terrible process, it’s also going to cost you an incredible amount of money. In the US, the seller generally pays 6% (!!!!) of the home sales prices to the agents (in the UK its closer to 1.5%). In the UK, there is also stamp duty – where a buyer pays the government a chunk of money for buying a house. For a £556,000 house, the average price in London, a buyer must pay £17,750 (for a £1,000,000 house it is £43,750!!!). Add on legal fees and title searches, it’s a very expensive and very inefficient process.

Ways to Fix It

Now that my faith in humanity is wavering, I want to explore the potential ways to fix the issue. I’ve got 2 ideas. The first is the what I call the Skyscanner Model the other is the Full Stack Model.

Skyscanner Model

The Skyscanner Model is essentially empowering the consumer to sell and buy a home. Unlike in the 90s when you would have to call a travel agent who would then call airlines, this process removes a lot of 3rd parties that suck value out of an ecosystem – reducing friction and cost.
For a seller:
  • You, the seller, download an app (let’s call it EasyHomes) and register with a $500 deposit. This deposit is take out of what you pay EasyHomes when you sell. For your $500 you get a professional cleaner and photographer sent to your home to take professional pictures and a good cleaning. You also get a box to put in an extra set of keys mailed to your house.
  • EasyHomes then provide you a price indicator so you can get the best value for your home. Your home is listed on EasyHomes and on Zillow/Zoopla.
  • You set the times your home is available for viewing in the app. You never have to be at your house. The buyer will be sent a code via the app when they arrive for viewing to unlock the keybox. EasyHomes offers an insurance policy in case a potential buyer steals anything or ruins your home – giving you peace of mind to have 5 home viewings while you are at work.
  • Buyers make an offer to you on the app and you can accept, counteroffer, or reject any offer instantly.
  • Once you accept an offer EasyHomes takes care of the rest with the buyer and all you have to do is set a move-out date.
  • Once the sale is complete you pay EasyHomes 1% of the purchase price, capped at $5,000/£5,000.

For a buyer:
  • You, the buyer, download the EasyHomes app and browse homes or you find an EasyHomes house via Zillow/Zoopla.
  • You download the EasyHomes app and go through registration. You can see all the available time slots to view the property and select a time. There will be some KYC required prior to viewing to give peace of mind to both sellers and buyers.
  • You arrive at the property and are given a unique code to unlock the keybox. The app registers when you enter and leave the home.
  • If you want to make an offer, you do so via the app. If your offer is accepted, EasyHomes gets any required documentation from you and begins the title, mortgage, and appraisal process. You sit back and relax. Any questions you have you can call EasyHomes or just chat an EasyHomes agent. EasyHomes works with a panel of mortgage providers that are required to hit certain SLAs to ensure this process is quick and efficient.
  • You are presented a few mortgage options and pick one. Once the mortgage and title processes are complete you get a purchase contract to sign and then settle on a move-in date.
  • You pay nothing.

There are limitations to the EasyHomes model and it likely works best with an educated buyer/seller and in high density markets – but it would be amazing. I am happy to lead a seed stage investment if anyone wants to build this.

Full Stack Model

This model is much simpler but much more capital intensive.

For the seller:
  • You, the seller, download an app called SimpleHomes and tell them you want to sell your house. You answer 5 questions and put in a move-out date. Within 24 hours they inspect the property and present an offer that you can accept, counteroffer or reject.
  • You sign the sale agreement on your phone.
  • You move out on your proposed date and cash hits your bank account.
  • You pay nothing.

For the buyer:
  • You, the buyer, download the SimpleHomes app and see what properties are for sale. You like one of the properties and you pick a time to view it on the app.
  • After your visit you make an offer which SimpleHomes will accept, counteroffer or reject. If its accepted they handle everything from legal, title and mortgage (it’s a SimpleHomes mortgage offer to you).
  • You sign the mortgage contract and purchase agreement and agree on a move-in date.
  • You pay nothing.
 
Light at the end of the tunnel

Luckily, there are a few companies doing incredible things in this space and I am cheering for all of them to succeed. Best players that I could find:
  • Opendoor (Full Stack Model) – the most exciting startup in this space. Incredible team (Keith Rabois – former executive at Paypal, Square, and a partner at Khosla Ventures; Eric Wu – previous company acquired by Trulia, understands real estate space; Gautam Gupta – was the head of finance at Uber). They have raised over $600M to date.  They charge 6.5% of the home price which gives them a 10x better product but similar pricing (they claim average ends up being 8-10%). I hope they can get this down to 5% within the next 12 months to have significantly better pricing compared to market (not just a bit better).
  • Perch (Full Stack Model)  – similar to Opendoor above though raised significantly less money ($30M) but what really matters is the debt behind it, as that is what will ultimately fuel the home buying process. Perch is very transparent on its fees (8.5%) of the home price which I think is way too high, not a substantial enough improvement from the current home selling model.
  • Reali (Skyscanner Model) – focus on low cost, simple process through an app that benefits both buyers and sellers. If they aren’t providing the mortgage via their model then the $30M raised will go far (sales/marketing). Also, a strong team and a high NPS score (customers love it)
  • Flyhomes (Skyscanner Model) – connecting buyers with intuitive online user experience to make home viewings and mortgage super easy. Essentially trying to remove 4 parties from the deal and be the full-service model.
While I’m bullish on what people are trying to build, I’m always bearing on the entrenched players in real estate and their passion for regulatory capture.

Other notes that might only interest me:
  • A look at real estate agent commissions globally from the WSJ. Mexico, Japan, the US, Spain, Brazil, Jamaica, France, Argentina, and Italy are the only countries globally where agents make 5% or more of the home price. 
  • The history of stamp duty taxes is relatively modern for home buying in the UK, largely introduced in the 1950s and has been increasing steadily. 
  • In the UK, lots of houses are leaseholds rather than freeholds (particularly in London). What that means is even when you are “buying” a house you are really buying a long lease (generally between 100 and 1,000 year lease). This means if you want to do significant renovations to a house you legally own, you often have to ask your landlord for permission first. More details about leaseholds in the UK.
 


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