I’ve been very, very busy the last few days conducting in-depth interviews with some of the top brokers and agents in the real estate industry. So writing has been nonexistent. Coming up for a bit of air today, I thought I’d post something for the VIP audience that isn’t really getting talked about, but that I am convinced is headed our way based on those interviews I spent the week doing.
There is in all likelihood a tsunami headed towards the real estate technology vendor community. We don’t yet know how bad things are going to be, but it’s going to be bad.
What I Heard
As I said, I’ve spent the last few days interviewing top producing agents and brokers about their response to the COVID-19 situation. One of the things I heard time and again was that teams and brokerages are cutting “nice to have” items from their budgets. That seems obvious, as many brokers and agents are looking at 30-60-90 days with severely reduced income.
High on the list are technology tools and marketing expenses that do not generate adequate ROI.
Any tech startup that is as yet unproven in the marketplace are the first to get eliminated. I heard all kinds of tech mentioned — email marketing, social media advertising, auto-dialers, search marketing, big data, AI, etc. etc. Anything that the agent or broker had bought to try out to see if it would help is getting cut.
If ROI is not clear and established, it’s getting cut.
That should be plain and obvious.
What was less obvious, until I spoke with these people, is that a lot of the “efficiency” tech was also getting cut because their staff and agents were stepping up. For example, auto-dialers. A lot of the brokers and team leaders were cutting these off because their agents were jumping at the chance to manually cold call. This was something that many agents expressly did not want to do before the virus hit.
Similarly, a lot of the marketing-related tools — such as social media marketing tools — were getting cut because the admin staff suddenly found that they would much rather post all over social media than have their hours reduced… and potentially, their jobs in jeopardy.
So any technology product that is based on saving staff and agents time and energy is on the chopping block, not because they don’t have an ROI, but because the staff and agents would much rather do those things manually in this new environment than have a piece of technology do it for them.
My friend James Dwiggins has a motto for his company, NextHome: #HumansOverHouses. Well, in many an agent team and brokerage these days, it’s #HumansOverTechnology.
More Established Technology
But even the more established, more necessary technology companies – such as the ones in the CRM space, which teams and agents feel are necessary – will be under enormous pressure.
No one I spoke to said he or she was getting rid of the CRM system. No one is getting rid of e-signatures, or back office accounting. If anything, those are about to become more critical as the focus shifts to staying in touch with one’s sphere, farm, and past clients. So much of the conversation around “the shift” is about maintaining existing relationships, checking in on people, and providing comfort and advice… and if real estate happens to come up as a topic, to provide solid service and advice. Digital transaction tools are part of that mix.
Nonetheless, even these established companies offering proven products are about to face some real pressure going forward.
First, their TAM is about to shrink and fairly dramatically, because so many brokers and agents do not have the balance sheet to survive an extended downturn. And by extended, I mean like three months.
Losing brokerages and agents from the industry is not good news for tech vendors. New sales are going to be difficult. Even if an agent or team leader does survive, they’re unlikely to be looking to invest precious cash into anything new that is not absolutely must-have-critical. I have already heard from a number of my friends and contacts in the tech vendor space about the cliff-like falloff in new orders.
Second, their existing customers are likely to ask for discounts, deferment of payments, and other financial relief until things turn around. Every single person I spoke to talked about the importance of preserving cash until the crisis is over. So even if brokers and agents survive, if they’re doing things like borrowing from the SBA under the CARES Act, they’re thinking first and foremost about not spending cash. More than a few brokers and agents have straight up told me that they have already reached out to their major vendors to seek discounts, deferred payment, and changes in terms.
Look, if people are talking to their banks and landlords, they’re absolutely going to talk to their website vendor. It’s happening and it’s going to keep happening until we’re through this crisis.
Some companies will be able to accede to customer hardship demands, but it is unclear how many real estate technology companies will be able to do that. One of the characteristics of the real estate tech space is that it has a few giants, like Zillow and CoreLogic, but most of the companies are small, privately-held, and often in the startup phase. Deferring customer payments for three months is great for the customer, but it means the tech vendor now has three months of no income and no cash flow from that customer.
If a startup is particularly well-funded by investors, it is likely to make it through. But it seems clear at this early stage, with both the equity and bond markets in turmoil, that precious few investors are eager to put money into startups. If a company was looking to raise a second round, this is a particularly bad time — especially if they’re showing new orders flatlined and existing customers demanding deferred payment.
Bigger, Faster, Better, Stronger
Just like with brokerages and agents, of course, fact is that those companies who make it through the next few? several? months will emerge bigger, faster, better and stronger. Weaker competitors will have closed down, or have been acquired by stronger companies. Even with a smaller TAM that remains, the tech companies that remain will remain because their products and services are critical to brokers and agents.
If the U.S. and global economies are not completely ruined by the pandemic, and the response of the authorities, then things will eventually return to normal. The transformation of housing and of real estate will continue. If anything, much of that transformation has been accelerated due to this crisis; for example, those jurisdictions who resisted digital signatures and e-closings are resisting no more. Fannie and Freddie are accepting things like drive-by appraisals and AVMs in lieu of in-person appraisals; if those things do not end up as financial time bombs in mortgage portfolios, we could see how mortgage lending is done change completely.
So whoever remains standing will be part of that transformation. Investors will return once the crisis is done, since they recognize how big the transformation of American housing market and the real estate industry could be. It might take time, but it will happen.
The unknown is who will remain standing.
-rsh
