{"id":23203,"date":"2017-11-15T17:26:37","date_gmt":"2017-11-15T22:26:37","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/digitalization-and-the-death-of-a-real-estate-salesman\/"},"modified":"2017-11-15T17:26:37","modified_gmt":"2017-11-15T22:26:37","slug":"digitalization-and-the-death-of-a-real-estate-salesman","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/digitalization-and-the-death-of-a-real-estate-salesman\/","title":{"rendered":"Digitalization and the Death of a (Real Estate) Salesman"},"content":{"rendered":"

The home-sale supply chain in America has historically been resistant to change. The hands-on nature of the real estate industry and the fragmented marketplace have supported a time-intensive and expensive broker system.1<\/sup><\/p>\n

Digitalization of Real Estate<\/strong><\/p>\n

Digital innovation over the last decade, however, has challenged the real estate industry and traditional broker model. Companies such as Zillow and Trulia have redefined the home search process by providing on-demand, quality data to the public. As consumers have increasingly shifted toward digital platforms (51% of homebuyers found homes via the internet in 2016), companies have digitized several parts of the home-sale supply chain from pricing (automated valuation models) to transaction management (e-signature platforms) to the open-house experience (virtual tours).2<\/sup><\/p>\n

Opendoor: Data-Driven Speed and Simplicity<\/strong><\/p>\n

Founded in 2014, Opendoor provides a web-based alternative to the traditional broker model for home sellers. It offers liquidity (3 to 60-day close versus 106-day national average) by purchasing a seller\u2019s home for a fee (6.7% on average versus 6% industry standard broker commission) and then reselling the home in the open market.3,4,5<\/sup> Opendoor utilizes a proprietary automated valuation algorithm powered through a combination of variables and data to efficiently determine the fair market value of a home.6<\/sup> The company\u2019s value proposition resides in its belief that big data and machine learning can effectively replace local real estate expertise and that there is a market demand for certainty and simplicity. The digitalization of home pricing differentiates Opendoor by allowing it to operate a supply chain with less labor (eliminating the need for a 1 to 1 in-person broker) and in less time than the traditional model.<\/p>\n

\"\"<\/a><\/p>\n

However, as the industry continues to be affected by digitalization, Opendoor must consider the risks associated with leveraging technology to determine home prices. These considerations include:<\/p>\n

Accuracy and Scalability:<\/strong><\/p>\n

Opendoor\u2019s success relies on the accuracy of its automated pricing model. As a result, the company has taken various measures to protect the efficacy of its technology. First, the company has limited the market in which it operates to focus on a category that is relatively easier to consistently price (single-family homes built after 1960 between $125,000 and $500,000).7<\/sup> Additionally, Opendoor has leveraged its residential expertise in conjunction with data science to determine the value and interdependence of specific home features to buyers.8<\/sup> However, as Opendoor looks to expand nationally (currently in 6 major metros), its model will be challenged in markets where it has little to no expertise, and thus may not capture the market nuances or momentum at a local level. In the longer term, the company should consider the ways in which it stress-tests its pricing algorithm across geographies and under a variety of economic conditions and interest rate environments before entering new markets. Because this model has not been tested in an economic downturn, market expansion should occur only after thorough testing over an extended period.<\/p>\n

Further Digitalization: <\/strong><\/p>\n

The market has already begun to see the ways in which digitalization is changing the value proposition of a real estate broker. Technology has not only democratized data and pricing estimates, but also allowed the industry to \u201cunbundle\u201d broker services and offer technology-driven alternatives.9<\/sup> As a result, buyers have more optionality and knowledge throughout the process, which places downward pressure on the fees that a traditional broker can charge. Given that Opendoor currently charges an average of 6.7% to cover the risk, associated fees, holding costs, and profit, if future broker fees drop below 6% will Opendoor be able to match that fee and remain profitable? In looking ahead, Opendoor needs to establish its brand and demonstrate to sellers the multiple benefits that it offers so that it can charge a premium to ever-shrinking fees within the industry. To diversify and increase its customer pipeline, Opendoor has recently expanded its services to become the \u201cone-stop shopping for real estate transactions.\u201d10<\/sup> The company has begun offering mortgage services and has launched its first \u201ctrade-up\u201d partnership with home-builder, Lennar.11<\/sup> However, although it is good to add ancillary services to a brand, to maintain its competitive advantage, Opendoor should continue to focus on its primary business and demonstrate the unique value that it is offering to sellers.<\/p>\n

Future Considerations:<\/strong><\/p>\n

Opendoor is providing a service that once established and recognized should allow it to charge a premium over the traditional real estate home-sale fees. However, it is not clear whether its pricing algorithm is accurate enough to justify investing large amounts of capital with all the risks of homeownership nor to justify the company\u2019s current fee structure. Even if the automated algorithm is accurate enough in its current markets, it is not clear that it is scalable into other markets under a variety of economic scenarios. Given the rapid digitalization of this industry, has Opendoor positioned itself in a scalable and sustainable way?<\/p>\n

 <\/p>\n

[798 Words]<\/p>\n

1. PWC, \u201cMeasuring Industry Digitization: Leaders and laggards in the digital economy,\u201d Strategy&<\/em>, p. 10, https:\/\/www.strategyand.pwc.com\/, accessed November 2017.<\/p>\n

2. National Association of REALTORS, 2016 Profile of Home Buyers and Sellers.<\/p>\n

3. Redfin, \u201cHome Prices, Sales, & Inventory,\u201d https:\/\/www.redfin.com\/blog\/data-center, accessed November 2017.<\/p>\n

4. \u201cClosing Times are Speeding up,\u201d Realtor Mag<\/em>, March 19, 2017, http:\/\/realtormag.realtor.org\/daily-news\/2017\/03\/20\/closing-times-are-speeding-up, accessed November 2017.<\/p>\n

5. Opendoor, \u201cPricing,\u201d https:\/\/www.opendoor.com\/pricing, accessed November 2017.<\/p>\n

6. Amy Feldman, \u201cSilicon Valley Upstart Opendoor Is Changing The Way Americans Buy And Sell Their Homes,\u201d Forbes<\/em>, December 20, 2016, https:\/\/www.forbes.com\/sites\/amyfeldman\/2016\/11\/30\/home-shopping-networkers-opendoor-is-upending-the-way-americans-buy-and-sell-homes\/, accessed November 2017.<\/p>\n

7. Ibid.<\/p>\n

8. Ibid.<\/p>\n

9. Michele Lerner, \u201cCommissions of 6 percent for home sales once were the norm. That\u2019s changing,\u201d Washington Post<\/em>, April 15, 2016, https:\/\/www.washingtonpost.com\/realestate\/commissions-of-6-percent-for-home-sales-are-the-norm-but-that-is-changing\/2016\/04\/13\/91bb758c-fb55-11e5-886f-a037dba38301_story.html?utm_term=.9dafa2e751b4, accessed November 2017.<\/p>\n

10. Feldman, \u201cSilicon Valley Upstart Opendoor Is Changing The Way Americans Buy And Sell Their Homes.\u201d<\/p>\n

11. Lennar, \u201cLennar Las Vegas Creates New Home Trade-Up Program,\u201d http:\/\/theopendoor.lennar.com\/nevada-las-vegas\/lennar-las-vegas-creates-new-home-trade-program\/, accessed November 2017.<\/p>\n","protected":false},"excerpt":{"rendered":"

Can companies like Opendoor effectively disrupt the real estate broker ecosystem and home-sale supply chain through big data and machine learning?<\/p>\n","protected":false},"author":10268,"featured_media":23204,"comment_status":"open","ping_status":"closed","template":"","categories":[298,2123,3610,775],"class_list":["post-23203","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-big-data","category-digitalization","category-opendoor","category-real-estate","hck-taxonomy-organization-opendoor","hck-taxonomy-industry-real-estate","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\nDigitalization and the Death of a (Real Estate) Salesman - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/digitalization-and-the-death-of-a-real-estate-salesman\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Digitalization and the Death of a (Real Estate) Salesman - 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