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The 4 biggest challenges of innovating in real estate

The hurdles are high, but so are the potential rewards

Real estate is an attractive field for experienced and aspiring entrepreneurs alike. Many of them are determined to make an impact in industries that have yet to be significantly modernized by technology.

The urge to innovate in real estate is only natural — any homebuyer or seller who is a creative problem-solver will notice glaring inefficiencies in the process. It is true that the industry has lots of room for improvement, but as many would-be innovators find out, it’s also slow to evolve.

A quick look at the history of real estate technology will tell you that almost everything up and down the transaction chain has been targeted for innovation. Smart, ambitious, well-meaning entrepreneurs have prototyped ways to make buying homes easier and faster; to get rid of unnecessary fees; to dispel the uncertainty around closing; to give industry professionals better tools and services; and to generally eliminate any other “sticky spots” in the transaction.

There’s been no shortage of effort, in other words. So where are the results? The reality is that things are changing, but it’s a slow curve. Like in any legacy industry, real estate up-and-comers have to contend with both inertia and tradition. In addition, another barrier exists: innovators who are new to the sector typically underestimate the complexity of the process and the industry they’re trying to influence.

Very few transactions are similar to buying or selling a home, which involves numerous parties and is centered around an extremely high-priced product. Both sellers and buyers have a lot to lose. Emotions run high. Ownership is personal. These are major reasons behind the difficulty of innovating in consumer real estate. Even so, entrepreneurs can make a difference if they understand the challenges involved.

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Know your customer in order to deliver real value

Building a business model or creating a solution that benefits more than one party is definitely feasible — but trying to solve for them all simultaneously is a common trap for entrepreneurs. Are you solving for the seller, the buyer, the agent, or another industry pro? Having a clear vision of who you’re helping is fundamental to the rest of the process.

Pick a primary customer type and learn as much as you can about their habits, how they operate, what real problems they have, and what motivates them. Be careful to shape your solution around these drivers so you don’t just create a marginally better solution.

If selling to agents is your goal, you should get to know them and their work habits intimately so you can build a profile of the customer segment most likely to gain extraordinary value from your product. Attend weekly broker huddles, shadow agents to see how they manage their day-to-day, and learn what their email inboxes actually look like. Otherwise, you’ll be operating on assumptions, which is never a good foundation for business-building.

If you are trying to eliminate agents from the transaction, then you should know that one of the biggest challenges to overcome is the “fear gap,” or consumers’ lack of confidence in completing the transaction mistake-free. You don’t get do-overs when buying a house, which is why roughly 90% of purchases still involve an agent or broker. In trying to build a disruptive product, this is a core problem you’ll have to work around.

Navigate regulations

Better, cheaper, faster — all that sounds great and it’s what innovation should accomplish. But are you doing it within the rules? Because like it or not, there are a lot of them. All facets of real estate transactions, from appraisals and advice to financing and insuring, are highly regulated. Making outbound calls to solicit a listing? Regulated. Giving consumers advice about buying or selling? Regulated. Handling a property title? Very regulated.

If you want to change up the status quo, you probably won’t find it difficult to garner support. All the red tape is intended as protection, but it’s substantial enough to act as a barrier, which can be frustrating. It can only be changed, however, from the inside out. Trying to innovate using an end-around will likely not only fail in the long run, but it may also land you in legal hot water.

Solve for adoption

Let’s say you have a game-changing solution, know your customer base intimately, and are compliant with every relevant policy and regulatory statute. At this point, you need clients. How do you get them?

Scaling the distribution of your solution will be a major challenge. Will you be selling directly to the end user or trying to distribute your solution through partners who already reach your end users? If direct, be mindful of the duration of the sales cycle. Ensure you have enough cash to last through multiple acquisition campaigns and cohort retention cycles to see if you are on to something.

If you’ll be selling through partners, does your product do enough to solve their needs? You may find that, even though a potential distribution partner has an overlapping customer base, their world view is entirely different from yours. You should treat potential partners as a client type and uncover all of the agendas at play instead of making hasty assumptions. Often, success with partnerships benefits greatly from strong relationships, not just cool new technology.

Check your revenue model

Figuring out where the clients will come from is a good step, but opening up those channels will cost money. Can you market to them cheaply enough, retain them, and make sure their lifetime value (LTV) is higher than your customer acquisition cost (CAC)? You need enough leverage and product stickiness to account for all your costs, from business processes to distribution partner royalties.

If your innovation centers around the elimination of fees — like cutting out agents — you’ll have to figure out how and when you will get paid and whether the revenue is substantial enough to build a sustainable company. If it’s a monthly subscription service to help industry professionals, how can you ensure your product delivers consistent enough value and performance to stave off the high churn rate that plagues the industry? Products that work tend to charge fees aligned to the delivery of value — and that value must be clear, measurable, and consistent.

The bottom line on innovation

Here it is: innovators, don’t give up. It’s taken Zillow a decade, but the Zestimate (love it or hate it) has turned into arguably one of the most disruptive services to hit consumer real estate in a long time. Innovators abound now — iBuyers are successfully eliminating one whole side of the transaction, title insurance and the closing process are being reimagined by companies like States Title, and managed marketplaces like Roofstock aim to create a better overall customer experience for specific segments within the industry.

The hurdles are high but so are the potential rewards, and it’s for this reason we’ve seen such a proliferation of investors backing real estate technology startups and forward-thinking entrepreneurs. As tech-enabled real estate companies continue to stake out an increasing share of the market and consumers look for easier, more seamless experiences, the writing is on the wall for innovation to shape the industry’s future.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Suresh Srinivasan at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]

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