You might think the UK property market has already been digitally disrupted by the arrival of large property portals such as Zoopla and RightMove. As well as listing properties for sale, these portals provide data such as sold house prices, area trends & statistics and current value estimates for properties. It makes it a lot easier for buyers and sellers to get a feel for the market quickly. But a number of heavily-funded U.S. start-ups in the real estate tech space are set to take things a step further by automating the home buying market – taking a number of links out of the property transaction chain.
OpenDoor, Compass, Knock, Offerpad, Flyhomes and Zillow, which is similar to the UK’s Zoopla, all believe that increasingly sophisticated valuation algorithms will soon reach a level of accuracy that can serve as the basis for a new, automated property market. The chain involved in the buying and selling of property is still viewed by Silicon Valley as an inefficiency ripe for disruption. The series of tech start-ups that have each raised millions in venture capital, and Zillow which is responding to their threat, are determined to introduce the kind of transparency and liquidity into the property market that other capital markets enjoy.
The new tech-enabled platforms hope to both cut traditional real estate agents out of the chain, profiting by gobbling up all or part of the up to 6% commission they can earn in the USA. They believe sellers can be attracted by offering a discount on the level of commission paid and/or the convenience of being able to immediately sell their property for cash. Essentially, these start-ups are digitally enabled ‘flippers’. They acquire properties from sellers, paying cash based on a valuation set by their algorithms. And then sell them on to buyers at quick profit. The model is similar to that employed by autotrading platforms such as WeBuyAnyCar.com.
There are, however, challenges. It’s a capital intensive, low margin business that relies on ‘i-buyers’ being able to quickly resell the housing stock they take onto their balance sheets. Accurate valuations also mean the housing stock algorithms assess needs to be fairly homogenous. The risk for investors is also obvious. I-buyers could hit serious trouble if they get caught with an illiquid and rapidly depreciating housing stock at the turn of a market cycle. City properties are also harder to accurately automate valuations for.
But with interest rates low and mortgage rates extremely competitive, there is enough investor interest to fund the expansion of this new breed of real estate tech start-up. If they gain traction it’s a fair bet that the UK market will be one of the first to see either copy-cat models spring up or U.S. brands spread across the Atlantic.