Value Creators vs Toll Takers

The week before last, I attended a panel on Real Estate Technology at the NY Real Estate Expo to watch Rich Sarkis, CEO of Reonomy (he did a great job). One of the topics that came up was the role of brokers in the real estate ecosystem and the difference between "toll takers" and "value creators". Like the nice people who work in toll booths, toll takers refer to people who sit between a buyer and seller, collecting a "toll" without adding meaningful value. They exist in all industries, but are particularly prevalent in real estate where there's strong historical precendence. Value creators, on the other hand, are actors/brokers who work in the best interests of their partners to create added value that may not otherwise be present in the transaction/ecosystem.

The real estate industry may have more “brokers" than any other major American industry. There are residential property brokers, commercial office brokers, residential mortgage brokers and commercial mortgage brokers. The National Association of Realtors claims 1.2 million members as the largest trade association in the United States. Combined with the other categories of brokers in real estate, I’m guessing there are around 2.5 million professionals in the US alone. I know a few brokers in each segment and some are hard working people who add value. Many others do not. The most disruptive impact of the internet, in my opinion, is its ability to connect two disparate parties - buyer and seller - in a transaction. The marketplace model, if you will, is the internet's gift to the world and this is particularly relevant in real estate where the numbers are large (both volume of transactions and average size) and therefore, the incentives for an intermediary are significant. Over time, as the real estate industry continues to gain more comfort with technology, the need for real estate brokers will lessen and toll takers will be the first to disappear.

In residential property sales, we've already begun to see this play out. I purchased my home last year without a broker representing me, and I have several friends who have sold their homes the same way. Sites like Street Easy, RedFin, Estately make it easier than ever to find a home or conversely, list one for sale. Before the latest flock of web services existed, Craigslist did an okay job too. Commercial brokerage is starting to evolve in much the same way with products like ViewTheSpace, Hightower and TheSquareFoot bringing technology to a part of the market that’s never benefited from it. As technology seeps in and begins to do its magic, toll taking brokers (and actors, generally speaking) will start to feel pressure. This is a good thing for the market as it will ultimately result in greater efficiency. Residential mortgages have seen some innovation, but there's lots more possible, and commercial mortgages are probably lagging furthest behind, but will also eventually fall.

A good question to consider today: Are you a value creator or value extractor?