Tuesday, November 6, 2012

Death By a Thousand Paper Cuts: The Way We Buy and Sell Houses Is Begging for Disruption

It takes approximately 30-60 days to buy a house with a mortgage in the United States, if everything goes well. Closing in three weeks is possible but will stress everyone out and is not encouraged.

But why? What is so hard about buying a house that the whole process takes so long? In my experience, there’s not one thing you can point to. It’s just that there’s a lot of separate people involved and they all take a little bit of time. When you add it all up, it takes a month or two to close.

Death by a thousand paper cuts, as they say.

for sale

When you consider how messed up our housing industry has been for the last few years I think it’s incredible that not much has changed already. By some accounts, I’d say it’s actually worse (I’ve heard that buying a short-sale or foreclosure takes even more time).

I firmly believe that by the year 2020, this is all going to be different. By then, a significant share of the market will be available for purchase in under seven days, with some unoccupied houses ready to change hands in a single day. I’ll explain.

I see two straightforward reasons why I think this is inevitable:

  1. The market is poised for a shakeup.
  2. There’s money to be made.

The market is craving disruption (Zillow was just the beginning). It is bloated with a surplus of homes and sellers everywhere are anxious. As so many sellers are taking losses on their homes, they’re starting to challenge the conventional 6-7% commission routinely paid to the real estate agents. The feeling that the Internet sells houses more than agents is, in my opinion, increasingly difficult to ignore.

I have no doubt that a stellar agent can certainly add value to the process, but I' humbly suggest that for the majority of transactions going on today, they are not doing enough to justify their cost. Buyers are savvier than ever with resources like Zillow available on our phones. It’s to the point where I don’t want an agent involved if I can help it.

And we’re talking about big money. The cost to sell/buy a house is outrageously expensive by almost any measure and I am (wildly) asserting that there’s a lot of margin in the transaction.

Suppose you’re selling your home for $150,000 and you have 10% in equity ($15,000). If you use agents to facilitate the transaction, they’re going to take up to 7% ($10,500). And you’ll probably pay another $2,000-$4,000 at closing (not counting what the buyer is paying to close!).

Suddenly your equity has vanished! And what’s worse, this doesn’t translate into equity for the buyer, either—it’s going to third parties involved in the transaction. And that doesn’t even factor in the fact that it takes months to find a buyer and a month or more to close the deal.

If you could buy or sell a house in less time, for half the fee, I think you’d be interested. That’s where someone clever is going to seize on an opportunity and make a killing.

I hope it happens soon.

I have some rough ideas for how it could work, too…


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