UPDATED, November 17, 5:15 p.m: When Nick Narodny, founder of online listing and home-buying service Aalto, bought his first home six years ago, he found that little had changed about the process in years.
He could search for properties on Zillow, but if he wanted neighborhood comps or information on the local homeowners’ association, he’d have to outsource.
“Today in America, if you want to buy a home, you have to hire an agent,” Narodny said.
That might have been the case until Oct. 31, when a Missouri jury gave homesellers a landmark victory over the National Association of Realtors and two brokerages. The guilty verdict could upend residential real estate by changing how commissions are paid, though implications of the decision have yet to crystallize.
A new crew of proptech startups, including Aalto, see the verdict as a stroke of luck in their mission to disrupt residential real estate platforms and practices.
If they succeed, will every buyer still need an agent to secure a home?
“Not anymore,” Narodny said.
Crack in the armor
Narodny got the idea for Aalto during his home search when he realized he was lucky to be able to consult with his mom, a veteran Realtor.
Recognizing not everyone had such an expert on standby, he created one.
On the surface, Aalto is similar to Zillow and Redfin, but a team of licensed agents behind the scenes allows users to move beyond what’s listed on the MLS. Aalto only operates in the Bay Area.
All homebuyers now search online for homes, according to a recent report from NAR, but only about half ultimately buy one they found that way.
Aalto’s platform aims to push up the percentage. Users can see off-market properties, comparative market data and other information — all without an intermediary. They can even submit offers for homes through the platform, aided by Aalto’s team of agents, and get 1.5 percent of the purchase price back because Aalto keeps only half of what a typical buyer’s agent gets.
“We’re trying to build a product that buyers will actually pay for, and know they’re paying for, and be comfortable paying for,” Narodny said.
Plaintiffs in the NAR case argued that bundling commissions for sellers’ and buyers’ agents blurred how much sellers and buyers were each paying them.
Our phones have been blowing up since that verdict.
Nardony has raised over $17 million in venture capital funding since starting Aalto in 2021, according to Pitchbook. He launched the buyer’s side of his platform last week to coincide with the Missouri ruling.
Commission structures, and the MLS’s roles in upholding them, are now under a microscope, and the fallout could include changes to both, weakening the MLS’ control over listings. Moments of legal or regulatory change like this are opportunities for startups, he pointed out.
He is not the only tech founder stepping on the gas.
“Our phones have been blowing up since that verdict came out,” said Tim Quirk, co-founder and co-CEO of Final Offer, a listing platform that allows agents, buyers and sellers to negotiate offers.
Final Offer launched in Massachusetts and the Washington, D.C., area last year and has since raised $8 million, including $5 million in a Series A funding round that closed Nov. 1, according to Pitchbook.
On the platform, sellers can stipulate their “final offer” — the money and terms they’re willing to accept immediately. Prospective buyers can monitor offers in real time and adjust their bids accordingly.
Quirk and his co-founder, Compass broker Kevin Caulfield, herald the platform’s ability to bring “transparency to the market where it hasn’t existed” — an issue that’s now top of mind for the industry.
“The lawsuit has as much to do with transparency as it does commission dollars,” Caulfield said. “What we’re doing is in the spotlight right now, so of course we want to take advantage of that and get it out.”
On Final Offer, Quirk said, sellers can articulate their compensation offers clearly and the extent to which they’re willing to negotiate.
“Today, it’s an elephant in the room,” Quirk said of sellers’ terms. “By just being upfront about where things stand, we see that as an opportunity.”
Earnings calls to arms
It’s not just the entrepreneurs gearing up.
In the wake of the verdict, executives at major proptech players including Zillow, Opendoor and Redfin explained how they would capitalize on, or at least weather, any industry upheaval.
News of the verdict initially sent real estate firms’ stocks tumbling, but two weeks later, shares are trading above Oct. 31 levels.
During Redfin’s earning call a few days after the decision, CEO Glenn Kelman warned investors of the potential for drastic change.
“The Missouri verdict and other court cases may lead to a revolution in our industry, not just reform,” Kelman said.
Kelman predicted Redfin would emerge from it as a leading platform. The executive is betting his firm — which is a defendant in two similar antitrust suits — can cut out the middleman and market listings directly to consumers.
“If buyers’ agents become less common, Redfin will prosper in that world too,” Kelman said.
Zillow and Opendoor echoed this approach in their earnings calls. Each said they could dominate in the worst-case scenarios that might follow the ruling.
Zillow CEO Rich Barton said the company is “well positioned to thrive regardless of how it all plays out.” Zillow’s Premier Agent segment relies on revenue from buyers’ agents and accounted for 66 percent of revenue last year, according to the firm’s annual report.
The day after Zillow’s earnings call, Opendoor CEO Carrie Wheeler said a reduction in buyer’s agents could serve as a cost-cutting mechanism for the iBuyer, and that the company’s proprietary data could give it an edge.
“Everything is up for grabs,” Kelman told Inman. “We’re all trying to figure out how to be an agent of that change, how to be the aggressor in that situation and not just to be on defense.”
Some insiders expressed doubts that the proptech behemoths could pivot away from agents so easily.
“The consumer is smart. Agents and brokerages are smart,” said Thomas Ma, founder and CEO of the real estate listings and social media app Real Messenger. “They are not going to let those portals become the bottleneck or their entry point” into the market.
Backed by Douglas Elliman’s Fredrik Eklund and $20 million in expected development capital, Real Messenger markets itself as “the agent’s MLS,” a place where brokers can post listings without complying with MLS and RLS rules such as those prohibiting off-market properties.
The app also allows agents to connect with each other across markets and set up profiles to generate followings, as they would on Instagram.
Ma said the social layer is what will allow it to add value to the market if brokerages and listing portals begin vying for exclusivity, should MLS’s lose their power.
“We don’t stand in between the listings and the leads, and that’s fundamentally different from all portals around the world,” Ma said.
In the wake of the verdict, Ma is calling for agents to use #AgentsForAgents both on and off the platform to advocate for the importance of brokers on both sides of the transaction.
He added that startups in general are more nimble and will be able to adapt to a shift in the ecosystem much more quickly than the established players.
“The current portals are not going to pivot right away. They are still taking buyer’s agents’ revenue right now,” Ma said. “But we can start off with that thing or system already, and by the time it’s time for them to change, it might be too late.”
Startups’ uphill battle
Though some startups are optimistic about their odds for success, finding a path forward is a tall order for small companies.
For one, venture capital funding for startups is drying up in the U.S. and abroad. In the first six months of the year, startup investments were cut in half, and over 400 companies haven’t raised money since 2021, CNN Business reported.
In the real estate services segment, venture capital funding hasn’t come close to numbers reported last year, according to data from Pitchbook.
In the first 10 months of 2023, companies in the sector have raised just one-fifth of the total that such startups closed in 2022. Deal count is also down: Only 90 deals have closed this year, versus 166 in 2022 and 176 in 2021.
In the proptech world, the biggest platforms are “very hard to unseat,” said Kael Goodman, president and CEO of Marketproof, a new development data analytics company.
The concepts behind the latest round of proptech startups can be replicated by companies like Zillow, Redfin or Opendoor, Goodman said. If they can’t copy them, those companies can and will likely buy them.
“I wouldn’t overstate [startups’] opportunity,” Goodman said.
Narodny maintains the newest firms have an advantage.
He dismissed the idea that reigning proptechs could move fast enough to execute startups’ ideas before losing market share.
“We think real estate is daunting by design, and I think these lawsuits are really bringing that to light,” Narodny said. “[This lawsuit] could very well be wind in our backs.”
Correction: This story has been updated with the full name of Real Messenger.
Read more
Residential
New York
REBNY, 26 NYC resi firms hit with antitrust suit
Residential
National
Sitzer/Burnett verdict could trigger foreign model, “race to the bottom”
Residential
National
Meet the lawyer who crushed the brokerage industry