In 2018, the U.S. housing market increased its value by $1.9 trillion, bringing the total market size to $33.3 trillion, with an annual sales volume of $1.7 trillion. With fees around real estate transactions that can consume up to 10% of the property sale price, the size of the new dynamic sector that I will write about below can total up to $170 billion per year (with technology eating $100 billion of it as per venture capitalists). Obviously, half of the fees are going to realtors, who are very much needed to guide consumers. However, 2.5% of the commission that is received by the agent is not going to the pocket of a hardworking person; part of it goes to the brokerage, which needs to verify every single transaction. Additionally, agents cover the costs of things such as tools, insurance, and marketing. The other significant part of fees goes to the bank and title company, which also have to verify the transaction and process the closing, often manually. These businesses have a lot of expenses. Even more, due to the lack of data integrity, work is often repeated by these participants.
Currently, there is an evolving trend. A new wave of proptech (property technology) is rising, where real estate intersects with fintech (financial technology).
Until this year, software-only-based proptech companies failed to attract enough venture capital. It is because, unlike asset- and labor-intensive companies such as WeWork, proptech firms could not get rapid revenue growth. One example is Redfin. VCs in Silicon Valley loved the idea of disrupting realtors; however, Redfin struggled to obtain revenue and growth as per VCs’ expectations. Thus, it turned into a brokerage.
Currently, a proptech startup in the residential space can only make money if it turns into one of the following market participants that charge the most in transaction fees:
- Mortgage Provider,
- Escrow/Title Company.
We do not…