Is Real Estate Innovation-Poor?

Perhaps sparked by Peter Thiel and Max Levchin’s impending book talking about the dearth of innovation in the US, we have thought critically about innovation in real estate.  Not surprisingly, we have been left to conclude that the industry as a whole is innovation-poor.  Let’s think about this for a second.  We humans have been building shelter since the dawn of man, yet in spite of the fact that its considered by most as a basic need (you know…food…shelter…water) we have been doing it the exact same way since we started.  That is, we still build brick by brick in a very labor intensive way.  Now let’s not be too harsh on the beleaguered industry because there have been some attempts at innovation on the physical/construction front.  Two come to mind.  First, are the manufactured or prefabricated varieties that we see proliferating suburbia.  One of the more notable of these is Warren Buffett’s Clayton Homes.  Second are the manufactured and insulated paneling that some label is SCIPs or other similar terms.  These are ready-made walls that are supposedly at the cutting edge of sustainability because of their energy efficiency. 

When we move from the physical property to other areas like the transaction, listings, search, mortgages, and financing, we are still very archaic.  While there have been the notable successes like craigslist, Zillow, and Trulia, we still have a ways to go.  If you don’t believe me, then I challenge you to rent an apartment in Manhattan on a $2000/month budget.  Let us know how much fun you have.

In the process of thinking of why this is, we have developed two potential reasons why this is the case.  First, the age of entry into the real estate business is higher than most other industries.  I mean, when was the last time you heard of a guy flipping properties that was in his early 20s?  Unless he’s a front-man for his rich father, this is rarity.  People typically get into the property either by accident or after other careers.  The reason for this is obvious in that property is capital-intensive.  As such, you either need a lot of money and a nice credit profile – both take some time to accrue.  So, given that people get into property later, the people that are active in the property business are not the ones that grew up with the internet.  Therefore, these aren’t the ones thinking about the challenges on the business side of the industry and how the Internet can solve them.  Second, the inefficiencies in the industry give way to middle men like brokers (some, not all, of which we can proudly label as scumbags).  Since these individuals’ livlihoods are tied to property markets being broken and not transparent, they lack the incentive to try to solve these industry problems.  As a matter of fact, many of the innovations in real estate involving the internet have centered around methods to make brokers’ and property managers’ lives easier.  (Smarter Agent, Rent Juice, and the Real Page suite come to mind). 

So where does this leave us?  On one hand, it seems natural that technology will become the fulcrum on which the real estate transaction rests.   Here, the roles of middlemen will be diminished just like the travel agent’s role has nearly become obsolete.  On the other hand, it can maybe be argued that given the complexity of property and the heterogeneity of various units, things will be inefficient for the near future.  We here at Kwelia are betting on the former.  As a matter of fact, we’re not only betting, but we’re actively working diligently to ensure that happens.  Who is with us?

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