Real Estate 2.0: The Industry Goes Digital
Once upon a time, it was hard to know a home’s value until a state-licensed appraiser visited the property and made an estimate, weighing pros like a chic patio against cons like a mildewy basement.
“It’s always been this attempt at a starting point in home valuation for everyone who’s bought and sold and owns a home,” explains Nicholas Stephens, director of product management at Zillow.
Since it debuted in 2006, the Zestimate’s internal algorithm has drawn on traditional real estate metrics — bedroom and bathroom count, square footage — as well as contextual data, like local tax records.
The latest version of the Zestimate, released in June, goes even further. When people list their homes for sale on Zillow, they upload pictures; the new Zestimate can “see” these photos using cutting-edge computer vision techniques and factor elements like natural light and curb appeal into its estimates.
The new Zestimate’s median error hovers just below two percent. In other words, half of its estimates are within two percent of a home’s actual selling price. That’s a massive improvement — thirteen years ago, the Zestimate had a median error of 14 percent.
Even so, lenders remain skeptical of algorithmic estimates. It’s too easy to hide a property’s flaws from the Zestimate by simply not uploading pictures of them. That’s why obtaining a mortgage still requires a formal estimate from an appraiser.
But Stan Humphries, chief analytics officer at Zillow, remains optimistic. The Zestimate can’t replace appraisers entirely, but it could transform them from evaluators to fact-checkers.
“In the future, there is a role to make sure that the facts the computer is using are accurate,” he told the [email protected] radio show in 2017, “but that’s more of a technician type job as opposed to professional.”
Zillow isn’t the only company that foresees a shift in real estate appraisal. The more powerful AI technology becomes, the more automated valuation models (or AVMs) sprout up.
And they’re just one among many ways in which the real estate industry has gone digital.
The New Normal
When tech and real estate collided, a new industry was born: proptech. It attracted $12 billion in venture capital in 2017 and even more in 2018 — though at the start of 2019, adoption still lagged. So far, investors have seen more potential in budding proptech than consumers have.
It’s easy to see the investor perspective. Tech has fundamentally changed how the real estate sector operates. For one, it has sped up transactions. Discovering real estate listings and setting up showings used to take days.
Today, not so much. On-demand information and services are standard in this hyper-connected era, and the real estate industry has responded to consumer demand for immediacy.
Redfin debuted Instant Updates more than a decade ago, and the feature has only gotten faster in the intervening years.
“People can sign up for notifications for the types of homes that they're looking for,” explains Jen Chao, vice president of engineering at Redfin. “We can notify our customers faster than anybody else, so they can be the first to find out about homes that are hitting the market or price changes.”
The company has also accelerated booking.
“We have a feature called ‘Book It Now,’” Chao says, “where a user can go on our website and request a home tour, almost like they're requesting a restaurant reservation. In a couple of clicks, they can have a tour booked.”
In fact, a new proptech trend — instant buying, or iBuying — extends this on-demand ethos to selling a home, a sometimes interminable-seeming process. But selling to iBuyers takes only a few days. The companies make prompt, algorithm-driven offers, pay in cash and sell homes themselves — often sprucing them up in the process.
Today, iBuying represents only a sliver of all real estate transactions, but that’s poised to change. Zillow and Redfin both recently unveiled iBuying arms: Zillow Offers and Redfin Now, respectively. In 2018, Zillow Offers bought fewer than than 700 homes, according to the New York Times, but it expects to scale that up to 5,000 homes per month in five years.
“We obviously think Zillow Offers is going to be a massive business,” Zillow president Jeremy Wacksman told Curbed.
Here are 10 other proptech companies — several of them iBuyers — that are changing the real estate industry.
Location: San Francisco
What it does: This iBuyer simplifies the home buying and selling process, making it “as easy as buying and selling cars,” according to The New York Times. The company buys houses in cash, typically closing in 10 to 60 days. Then it resells them via the Opendoor app, backing sales with a 90-day guarantee: if the buyer doesn’t like it, the company will buy it back. Currently, Opendoor buys and sells homes in 20 cities ranging from Phoenix to Los Angeles.
What it does: This is another iBuyer, like Opendoor, but it doesn’t just buy houses in cash — the company helps sellers use that cash to make offers on their dream homes. (Cash offers give buyers a major negotiating advantage.) Sellers can move into their new house before their old house goes on the market. Knock handles all repairs and updates on their old house, too, bundling repair costs into the client’s new mortgage.
What it does: More than 6 million people worldwide rent out homes through Airbnb, but many landlords frown upon it, and in some areas, it’s illegal. To avoid these roadblocks, Airbnb has gone into business with Niido, a development company that designs apartment complexes with home-sharing in mind. Niido Nashville, for instance — which has a rooftop patio and an in-house yoga studio — hosts a mix of long-term residents and short-term visitors in its 300-plus units at any given time. Long-term residents can Airbnb their places for up to half the year, provided they give the building a quarter of their profits.
Location: New York City
What it does: This company streamlines the process of finding a subletter. It’s free to list apartments on Flip’s marketplace, and the company background checks prospective tenants, guarantees timely rent payments and prepares ironclad sublet agreements so no one ends up liable for their subletter’s misdeeds. Through Flip Instant, the company will even take over leases immediately, finding tenants for abruptly-vacated places within 30 days.
Location: New York City
What it does: The real estate industry has seen a rise in AVMs, but East Coast-based Bowery Valuation hasn’t fully automated its process. Instead, the company’s team of 17 veteran appraisers works with its proprietary software to produce data-backed estimates informed by expert intuition. The hybrid process has attracted high-profile clients like Capital One and Greystone.
Location: San Francisco
What it does: This startup streamlines renting in more than 50 countries, digitizing the entire process. That means renters share personal information, eSign leases and submit repair requests online. They can also rent apartments in Paris, Rome, Budapest and in more remote locations, if need be. In addition, the company offers transparent rental auctions that prevent vacancies and keep rents from needlessly ballooning.
Location: Chandler, Ariz.
What it does: Selling a house through this iBuyer starts with a simple form. What’s your address? Got any pictures of your house? Based on those details, the company — currently rooted in smaller markets, like Phoenix, Ariz. and Charlotte, N.C. — algorithmically generates a quote, sight unseen. (Before buying a house, though, they send a representative to verify its condition.)
“We seek to provide an offer where the homeowner will net an amount very similar to what they would net in a traditional transaction,” co-founder Jerry Coleman told Forbes, “with our margin being what would be paid to other third parties” — including contractors and plumbers.
Location: New York City
What it does: Squarefoot matches companies like Casper and Instacart with office space — a task that’s more complex than it sounds. First, company leadership needs to sort out what they need. SquareFoot has online tools to help: the Space Calculator, for example, helps estimate the square footage required based on the number of employees a company has, how many private offices it wants, etc. Once clients have a specific space in mind, SquareFoot brokers can help track it down in 18 cities, from New York to San Diego.
What it does: Flyhomes clients don’t have to line up a lender before making an offer on a home. Instead, this real estate company fronts clients the money they need. Once the seller accepts, the buyer then tracks down a lender and purchases the home from Flyhomes. On the seller side, Flyhomes offers a compelling guarantee: its team will spruce up and sell a client home in 90 days, or the company will buy the home itself.
The We Company
Location: New York City
What it does: Is The We Company — formerly WeWork — a real estate company or a tech company? It’s a mix of both, renting out offices and co-working spaces in cities across the world. In many ways, it functions as a landlord.
Its leaders, however, position it as a tech company that has scaled quickly thanks to its digital platform. Technology certainly plays a role in its business; clients can network and reserve conference rooms through the WeWork app, and the We Company recently purchased a data platform, Teem, that tracks and quantifies users’ behavior in WeWork spaces.
The Next Wave of Proptech
What lies ahead for proptech? That largely depends on the housing market, which is linked to — though not completely dependent on — the general economy.
In terms of forthcoming technology, though, Zillow’s Stephens thinks AVMs will become more location-specific. His company recently hosted a data science competition on Kaggle that challenged entrants to improve Zestimate’s algorithms and offered a million-dollar grand prize. The submissions, Stephens reports, often tackled the problem of “hyper-local modeling at scale.”
The company posts location-specific accuracy metrics for the Zestimates, and the algorithm suits some locales better than others. (It thrives in Washington D.C., for instance, where the median absolute error is just 1.2% as opposed to 1.9% nationwide.)
Improving “Phoenix valuations, for example, or rural Montana [valuations], can sometimes be a very unique problem to Phoenix and that rural area in Montana,” Stephens explains. “The solutions aren't something you can just apply nationally.”
In the future, Stephens predicts, there will be no need for a national algorithm. Instead, the Zestimate and other AVMs will add hyper-local elements to their models.
For her part, Redfin’s Chao sees proptech heading toward what she calls the “complete solution.”
“When you buy or sell a house, there's a lot more [to it than] just getting an offer accepted,” she explains. “You have to work with your agent to find the house and negotiate an offer; you have to go find the title insurance company; you have to go find mortgage. Most people have to project manage all of this.”
Redfin hopes to eventually become a one-stop shop , Chao reports, so it can provide a seamless home-buying experience.
That shouldn’t be confused with automating away the work of agents and other real estate professionals. Redfin has no plans to do that.
“Real estate is a highly personal service,” Chao says. “[We use] technology to streamline and get rid of the [tasks] that software can do really well, to free up time for agents to focus on the things that require the human touch.”
Images via Shutterstock, social media, company websites and interviewees.