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Natalia Karayaneva

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Changes that result from technological breakthroughs are not always positive. A couple of months ago, reading the article “Digital dystopia: how algorithms punish the poor,” which outlines technology’s ability to negatively impact the most vulnerable, made me reflect on the impact of technological innovations on the real estate industry.

With new accomplishments, there is often a wave of new problems that follow. Evolution gave humans morality as a default setting, but some individuals may display traits like greed and unethical behavior and engage in unique and creative fraud activities. When it comes to real estate, the risk of digital misbehavior becomes very real. For example, someone can steal your current property ownership; or, when you buy a house, your down payment can disappear. Everyone thinks that it will never happen to them until it does.

The Bright Side Of Tech Progress

Innovation involves new ideas or creative thoughts, and the ultimate goal is an improvement. When entrepreneurs take steps of more considerable uncertainty, out-of-the-box thinking, and experimentation, the world gets introduced to outstanding products.

According to an article featuring an interview with tech investor Ramy Adeeb, real estate was previously largely ignored by entrepreneurs and investors, as it was one of the “more antiquated” and “unsexy” industries. However, Adeeb states that companies using technology to improve real estate might be part of the “third wave” of exits. Even though the innovation in real estate has been historically slow, certain changes have happened to the industry in the last decade.

For example, Gary Gold (Hilton & Hyland’s Executive Vice President, who participated in many interesting transactions, including the nation’s most expensive mansion), remarked that the real estate transaction process involved 3-4 pages just a decade ago; now, the transaction involves 3-4 inches of paperwork, most of which homebuyers do not even read. Gary Gold believes that the most significant breakthrough of the decade for real estate was DocuSign, as the e-signature solution allowed transaction parties to execute enormous amounts of paperwork more quickly. E-signature solutions like DocuSign are supported by the NAR (National Association of REALTORS), and these products have been adopted by industry participants (including brokers and agents) for electronic purchase agreements.

Digital signature technology has freed homebuyers from wasting precious time, paper, and energy on the completion of transaction documents. The U.S. is fortunate in this sense, as other countries such as Japan and Dubai still have not adopted e-signatures for completing real estate transactions.

Other Internet innovations have brought apparent advantages to the real estate industry. Platforms that allow people to browse for properties online, such as MLSs, Zillow in the U.S., Zoopla in the U.K., and SeLoger in France, have introduced more transparency to the local marketplace.

Has Digitalization Brought Increased Liquidity Or Housing Affordability To The Homebuyer?

A while ago, I discussed the potential market recession with Gino Blefari, who is the CEO of HomeServices of America and the Chairman of Berkshire Hathaway HomeServices. During the discussion, Gino asked me, “Do you know how many homes were sold in 1998? It’s almost the same number as today, even though we added 20 million more homes in the last decade.” Thus, the volume of annual sales has been steady (at around 5 million homes), with a moderate increase due to population increase. Digitalization and innovation have not brought significant changes to the liquidity of the real estate asset class. The affordability of real estate has not increased, either. Currently, about 10% of a property’s price is still spent on transaction fees and the preparation of the home for sale (excluding renovation costs).

While digitalization has not positively affected the liquidity of real estate, it has offered hackers the ability to steal property ownership and payments more easily. For hackers, the $280 trillion real estate market has a lot of opportunities. The transparency of listings on MLSs and platforms like Zillow allows hackers to find the information that they need to target unsuspecting victims. The digitalization of transaction documents (including the utilization of e-signatures, Google Drive, and emails) has led to the opportunity for hacks and fraud, with millions of dollars lost.

Real Estate Scams, Fraud, And Bribery

Cyberfraud is, perhaps, the biggest issue in the modern digital world. According to the FBI’s Internet Crime Complaint Center, cybercrime is a billion-dollar problem that heavily impacts the real estate marketplace. Email wire fraud cost companies and homebuyers $26 billion since 2016. Additionally, this is just the tip of the iceberg, as the FBI estimates that only 12-15% of all wire fraud cases are reported. A 1,100% increase in real estate scams from 2015 to 2017 shows us the extent of the vulnerability of real estate professionals and homebuyers.

A typical wire fraud scheme involves a hacker who gets ahold of a property’s agent email information from MLSs or Zillow. The bad actor monitors the progress of the transaction from the email communication or by browsing for public links of transaction data on Google Drive, Dropbox, and the like to get other details. Many people suspect that there are internal people in the industry feeding the data to hackers. On the day of the sale, the con artist mimics the closing agent or title company and uses a fake email address to send an email with wrong payment instructions. Sometimes, the hackers send the instructions to agents, and agents send these instructions to their customers. The money gets wired somewhere else.

Another case is title fraud, which is not covered by title insurance in 99% of the cases. Real estate is becoming a digital asset where proof of ownership is evidenced in the form of a database record instead of a physical document or a physical occupancy of a dwelling. Thus, the current framework provides an opportunity for hackers to get access to property ownership digitally. Some cases even involve the illegal transfer of ownership on a title registry level. In the U.S., if a hacker aims for a change of property ownership for an individual who is deceased and does not have heirs, then the change will typically be unnoticed. In developing countries, one can bribe an IT specialist and obtain full access to property registries. From there, property ownership can be transferred. For example, the Bulgarian registry stopped working in 2019; as per the official sources, some data was presumably altered, and there were no backups. Unfortunately, cases like the ones mentioned are hard to detect and fight in court. Although some individuals manage to obtain justice, the majority of these cases, especially those involving deceased individuals, are often left undetected.

Furthermore, attacks on the U.S. counties’ operation systems, which store sensitive data, are becoming a new norm. The recent Baltimore ransomware attack is just one example that highlights imperfections in the modern digital framework.

In 2019, I asked a number of tech-driven brokerages in the U.S. on whether they feel worried about cyberattacks. Unsurprisingly, the majority of them responded, “Yes.”

Privacy Issue In Real Estate

The abuse of consumer data by corporations is nothing new. In real estate, both realtors and consumers complain about the issue. Some real estate agents criticize data ownership by companies like Zillow. There are homeowners whose information is publicly traded on sites such as infoUSA.

It is frightening that anyone in the U.S. can find information such as your name, your phone number, and your email address by merely looking up your home address on some websites. While such search algorithms can be useful for realtors for lead generation, publicly exposing private information is a privacy violation.

Hopefully, with the California Consumer Privacy Act, consumers will have more control over their data. If so, the market dynamics will change. In one of my previous articles, I shared some thoughts on how data can be controlled and how data verification and storage can become additional income sources for real estate professionals in the future.

What’s Next?

Due to the risk of fraud, the NAR strongly recommends that its 1.4 million members choose very secure technological solutions and avoid using emails for closing transactions. In fact, the organization’s website directs readers to “never trust wiring instructions sent via email.”

The situation with cyber risk might improve. An increasing number of market participants, including the U.S. NAR, are starting to understand that new protocols are needed to address the digital dystopia that the current real estate industry faces. NAR’s CEO Bob Goldberg stated, ”NAR has a strong commitment to furthering technology that ensures the security of the real estate transaction, protecting all parties.”

Technological advancements such as blockchain and decentralized governance, AI-powered tools, object and voice recognition tech, VR, and AR will give rise to the next generation of changes in real estate.

New decentralized methods of managing the Internet, online communities, and transactions will evolve. In the context of property ownership frameworks, distributed ledgers are proving their efficiency, as they are immutable records that are recognized in the courts of many U.S. states. Immutability is achieved with the decentralized nature of blockchain. According to Kuba Jewgieniew, the CEO of tech-driven brokerage Realty One Group, “Blockchain will provide a more streamlined and secure process to our industry, especially with title and settlement services.”

Despite all of the skepticism revolving around blockchain, no one can overlook the real use and real application of this technology in the real estate field. If you follow tech topics, a decentralized Internet was the topic of the last two seasons of HBO’s Silicon Valley. Additionally, decentralized governance is part of Mark Zuckerberg’s long-term focuses for 2020 and the following decade. During my conversation with proptech-focused venture capitalist Arnie Sriskandarajah at Round Hill Ventures based in the U.K., Sriskandarajah said, “Blockchain is still nascent, but we see the potential that it has on the industry, especially on how real estate is traded. It can advance leasing and sales transactions.”

Many real estate market participants believe that blockchain tech is one solution that can help the industry fill the cyber trust gap. The key to building something “trustable” is to use blockchain as a part of the algorithms and programming languages.

In addition to immutable records and automation using blockchain-based smart contracts, AI can add a level of automation to transactions. For example, machine learning can help with quickly finding errors in non-compliant documents in one transaction. Image recognition is used by some startups to evaluate homes’ prices. AI can determine what is inside a house, and algorithms can analyze property prices instantly; in fact, the tech-driven brokerage Compass is working on AI tools. Kuba Jewgieniew admits, “AI is a must-have.”

Whether these new advancements in emerging technology will bring new cyber problems to the real estate industry is questionable. On the positive side, as per Gino Blefari, “We are getting to a point where property buying will not be as stressful for homebuyers.” Ultimately, a home purchase is one of the most important transactions in an individual’s life, and there are plenty of tech-driven innovators that are eager to deliver a better consumer experience.

Author: Natalia Karayaneva

Source: Forbes: The Decade’s Digital Dystopia In Real Estate: What Is Next?

In 2018, the U.S. housing market increased its value by $1.9 trillion, bringing the total market size to $33.3 trillion, with an annual sales volume of $1.7 trillion. With fees around real estate transactions that can consume up to 10% of the property sale price, the size of the new dynamic sector that I will write about below can total up to $170 billion per year (with technology eating $100 billion of it as per venture capitalists). Obviously, half of the fees are going to realtors, who are very much needed to guide consumers. However, 2.5% of the commission that is received by the agent is not going to the pocket of a hardworking person; part of it goes to the brokerage, which needs to verify every single transaction. Additionally, agents cover the costs of things such as tools, insurance, and marketing. The other significant part of fees goes to the bank and title company, which also have to verify the transaction and process the closing, often manually. These businesses have a lot of expenses. Even more, due to the lack of data integrity, work is often repeated by these participants.

Currently, there is an evolving trend. A new wave of proptech (property technology) is rising, where real estate intersects with fintech (financial technology).

Until this year, software-only-based proptech companies failed to attract enough venture capital. It is because, unlike asset- and labor-intensive companies such as WeWork, proptech firms could not get rapid revenue growth. One example is Redfin. VCs in Silicon Valley loved the idea of disrupting realtors; however, Redfin struggled to obtain revenue and growth as per VCs’ expectations. Thus, it turned into a brokerage.

Currently, a proptech startup in the residential space can only make money if it turns into one of the following market participants that charge the most in transaction fees:

  • Mortgage Provider,
  • Brokerage,
  • Escrow/Title Company.

We do not know how drastically technology will shrink the roles of traditional real estate market participants in favor of automation or change their roles. However, certainly, many traditional real estate service providers will not look the same way that they look today.

So, what is the next big thing in proptech? Why is the new wave of real estate innovation attracting so much attention?

Automation, The Emerging Real Estate Tech Trend

According to Paul Levine, formerly the President at Trulia and currently a venture capitalist with Sapphire Ventures, the past was all about the Internet-enabled businesses. We have seen Zillow, Realtor.com, and Trulia innovate on the front end of the transaction. As for the back end of the property sales process (including financing, closing, home insurance, etc.), Levine stated at Proptech CEO Summit 2019, “To me, [the real estate transaction itself] is a 10x bigger opportunity than the opportunity that Trulia and Zillow and others sort of got so far.” At the 2019 Las Vegas Inman conference, he also noticed that automation of the transaction process is potentially a $100 billion opportunity.

Venture capital is warming up to the real estate transaction process itself. One opportunity resides with businesses innovating within the closing process. In the future, these closing process innovations will allow real estate to take part in the e-commerce arena.

We are now approaching a new era of transaction automation, and we are seeing specific trends leading to this point. E-signatures are now the industry norm in the United States. E-recording and e-notarization are also becoming new industry standards. Of course, there is also a downside of digitalization that should be mentioned: the increasing financial losses due to cybercrimes. Reported losses were $1.4 billion in 2017 and $2.7 billion in 2018, in effect nearly doubling over one year.

Recent technological advancements on the transaction end can change the game for high-value assets like real estate. Ideally, the payment and ownership transfer should happen simultaneously. In the world of traditional shopping, you make your Amazon payment, and you receive your new pair of shoes in the mail. Amazon makes the model work by acting as a trust layer. If your shoes do not arrive, Amazon covers the losses. For high-value assets such as real estate, if the exchange could happen automatically, there is no need for trust layers, and then real estate could become a part of the e-commerce marketplace.

The concept of automatic exchange works for high-value assets like real estate, because the ownership is represented by a document and not the asset itself, unlike the pair of shoes delivered to your address. (In the last part of this article, I will explain how automation of the real estate closing process is possible.) Now, let’s review why venture capital has not backed this idea in the past.

Venture Capital In PropTechPROPY INC.

Venture Capital In Proptech

Reasons for the delay in transaction innovation lie in the current maturity of the market and in how venture capital operates. Over the past decade or so, new real estate startups have mostly entered the space in the three niches mentioned above: brokerage, mortgage provider, or escrow/title company. There are many examples of such companies. For instance, Redfin aimed to build tech and disrupt realtors. However, to make money and raise the next round, Redfin had to become a brokerage. iBuyers (such as Opendoor, which was founded by Keith Rabois and Eric Wu, Properly in Canada, and Knock) buy houses to resell. These iBuyers are practically tech-driven flippers and enforce transaction automation as participants of the deals and thus are able to charge as brokers. Companies like Better.com made their way as digital mortgage lenders. Divvy Homes is another mortgage tech startup with a different business model. Other startups like Modus and JetClosing have escrow or title licenses and thus can charge as title/escrow companies while they use technology to provide digital experiences for their customers.

Many pure technology SaaS companies in the real estate industry were working without extensive venture capital for a while. For example, Snapdocs, a SaaS company that helps mortgage providers make the closing process faster and more transparent, was founded in 2012 and only now in 2019 sees high growth and the series B round of financing by VCs (which is typically done in 2-3 years). Similar stories are found in the histories of companies such as Notarize, RealScout, Glide.com, Disclosures.io, and DocuSign (which initially focused on the real estate vertical). Due to venture fund structures and LP expectations, investors need to back technical solutions that provide faster returns on technologies with almost immediate mass adoption, which is often not the case with real estate technologies.

Recently, however, we have noticed venture capitalists waking up to the potential of automating the real estate transaction process. For example, in a TechCrunch survey, Connie Chan from Andreessen Horowitz expanded on the current real estate tech market and the lack of technology to support the real estate process by questioning, “Yes, we turn to Zillow or Redfin when searching for a home to buy or rent, but what about everything that happens before and after that?” Additionally, Brendan Wallace from Fifth Wall stated, “I would characterize the last five years as being an ‘Age of Enlightenment’ for major real estate owners, operators, and developers.” Indeed, recent investments such as those from Sequoia Capital and Founders Fund for Snapdocs, as well as those from NFX and 500 Startups for Modus, prove that the ‘Age of Enlightenment’ is here.

The Future Of Real Estate Solutions
New technologies like machine learning and smart contracts reinvent the transaction beneficially. Shortly, automated real estate transaction will become the new industry standard. The improvement will result in far greater ease and consumer security. Furthermore, it will reduce the busywork that so frequently typifies the realtor’s job.

Let me dive into how exactly technology can make a change in the real estate closing process and create an “Amazon”-like experience. Today, automatic exchanges of money and property ownership are possible with smart contracts that are based on blockchain technology. These smart contracts do not replace traditional paperwork. Instead, they ensure that the connections happen between the digitized paperwork, wire payment, and ownership transfer. Of course, the use of blockchain technology alone is not the key to transaction automation. Transaction automation is a complex task that may involve a number of other technologies, such as e-signatures, e-notarization, and cloud solutions.

The application of relevant tech innovations, such as settlements on smart contracts and e-signatures, allows for the possibility of automating all steps within the real estate property closing process. It means that when the payment is released, the ownership is passed on to the buyer in the same step.

With all stages of the process guided by advanced technology, buying a property can become a pleasant experience. Tech-driven brokerages like Compass, eXp Realty, and Keller Williams Realty are working on improving the experience by investing in proprietary technology. However, the technical solutions that will thrive in the future will be brokerage-agnostic and title-company-agnostic.

Whether or not the incumbents mentioned earlier in this article will be replaced is unclear. However, what is certain is that the real estate industry is becoming more technology-intensive rather than labor-intensive, opening up a $100 billion opportunity for innovators (as per VCs participating in the 2019 Las Vegas Inman conference). Venture capital is warming up to those who are focusing on creating technical solutions to automate routine transaction processes, opening doors for job opportunities that support the new real estate technologies, and ensuring cybersecurity.

Author: Natalia Karayaneva

Source: Forbes: How Automation in Real Estate Became A $100 Billion Opportunity. Who Will Be Disrupted?

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