A number of tech-driven real estate brokerages are popping up in Los Angeles in an effort to save homebuyers and sellers money on agent commissions, which have ballooned in tandem with housing prices.
Silver Lake-based Open Listings, which launched in 2015, closed a $5 million Series A funding round in May, according to a Securities and Exchange Commission filing.
The company said it has also raised another undisclosed amount in an effort to expand the business, which unbundles an agent’s role in the homebuying process. Customers locate homes on their own on the site and call agents affiliated with Open Listings if they have any questions, utilizing the company’s agent network to assist with showings. Open Listings connects buyers with an agent to assist in making an offer and negotiating a deal.
“We believe homebuyers today are vastly overpaying for their agents, especially with L.A. prices. Those agents are delivering a service model that is from the last century,” said Stuart Law, Open Listings’ vice president of operations.
Sell-side and buy-side agents typically split a commission of 5 percent to 6 percent of a home’s sale price. Yet buyers now need much less hand-holding given the rise of websites such as Zillow and Realtor.com, which have democratized access to listing data so that buyers can find homes on their own.
When a client buys a home through Open Listings, the company typically earns a commission of about 2.5 percent on the sale, Law said. Open Listings gives half of its commission to the buyer – essentially cutting the standard fee in half. It then pays an agreed-upon portion to the agent who helped the client negotiate the offer, and keeps the remainder as its revenue.
“We became obsessed with solving this problem after me and my co-founder Alex (Farrill) each went through the homebuying process for the first time,” Open Listings Chief Executive Judd Schoenholtz said in an email. “For me, I managed the entire process myself and my agent still earned a $20K fee for minimal work.”
Open Listings also counts Peter Sugihara as a co-founder.
Those fees are a pain point Open Listings and other competitors are trying to solve for buyers and sellers. Real estate tech funding in the United States rose to record levels last year, with $2.6 billion in funding across 277 deals, according to New York-based CB Insights. The research firm projects $2.9 billion in funding across 247 deals by the end of 2017.
There is a lot of financial incentive for disrupting the current model, according to Paul Habibi, real estate lecturer at UCLA’s Anderson School of Management, who said the U.S. housing market is worth $29.6 trillion.
“It’s also way behind in the adoption curve for new technology,” he noted.
Habibi also said entrepreneurs have succeeded in bringing down transaction costs for other investment classes such as stocks, bonds and currencies, but they haven’t been as successful with real estate.
“By definition, it’s less tech sensitive because it’s a real asset,” he said. “The market is also very fragmented and localized. L.A. has 88 different real estate markets.”
À la carte
Santa Monica-based brokerage HomeLister, which launched last fall, aims to help sellers save money, though it’s taking a different approach.
The company allows customers to purchase services à la carte as opposed to hiring an agent with a fixed fee or going the for-sale-by-owner route with no help.
HomeLister Chief Executive Lindsay McLean experienced the problem she’s trying to solve when selling her New York home in 2013.
“I ended up using an agent. My home sold in five days,” McLean said. “It was an incredible amount of commission. It was an incredibly administrative process. Most of that process can be turned into software.”
Some of the firm’s services are paid for when a client’s home sells, while others are paid upfront. The most basic package allows a seller to post a listing on multiple listing service sites and pay the firm about $200 when the home sells. MLS sites feed the listing data to websites including Zillow and Trulia.
A seller can select additional services such as professional photography, which typically runs $300 in Los Angeles; wooden-post yard signs for $135; offer management and transaction coordination for $600; or attorney review from $200 to $1,000 depending on the complexity of the sale. A premium package of services that resembles a full-service agent guiding a seller from start to finish would cost about $2,500. HomeLister clients would still pay a buy-side agent for bringing a buyer.
“The primary difference is we don’t come on your property,” McLean said. “We do it all virtually.”
The firm has been used to sell 40 homes in Los Angeles worth a combined $18 million in the last couple of months and is active in six states, she said. The company employs four in-house agents who are licensed in multiple states.
Woodland Hills-based brokerage Rex Real Estate Exchange helps sellers by cutting buy-side agents out of the equation and targeting clients using artificial intelligence and machine learning. When a home sells, Rex earns a 2 percent commission.
“Instead of putting something on a passive website and paying someone to bring us a buyer, we can, through big data, find a buyer who would be interested in this home,” said Rex Chief Executive Jack Ryan.
The company, which launched in 2015, uses computers to target certain buyers in specific locations through platforms such as Google, Facebook, Instagram, Snapchat, and Waze.
Its software assesses the locations, demographics, and past purchase decisions of those who responded to the initial ads, which informs Rex on who to target next with more ads.
“Our initial intuition about who the buyer is gets smarter and smarter with every home we sell because the computer is collecting data about this bedroom, this many baths, this location – the likely buyers are here,” Ryan said. “Every transaction we do, our supercomputer is getting smarter and smarter.”
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