Redfin Throws Down the AVM Gauntlet

shutterstock_330851393All franchises must now scramble to pick it up

Before the end of 2016 nearly every real estate franchise and large independent brokerage will offer an automated valuation model (AVM) on the internet, but the vast majority will have very little impact in the marketplace for two reasons.

First is that it takes 3-5 years’ of research & development, and perhaps a $20-$50 million investment, to create a truly useful and unique AVM launched nationally. Besides Redfin no other real estate company has been doing this. The franchises and large brokerages have nothing innovative to offer.

Redfin is going to leverage their expensive and time consuming R&D into greater market share—all at the expense of other brokers, but not Zillow. They are now in the top four internet site club—the four aces of internet portals, and is the only real estate company in that group.

Thus all other brokerages will be scrambling to purchase valuation software from those who hold AVM technology.

Zillow will be happy to share their AVM, but you have to stamp their logo all over you website and link back to their website from yours. It seems doubtful the franchises and large independents want that.

This leaves brokers begging Corelogic, Black Knight, and Onboard Informatics to configure their existing AVMs into a private label automated valuation systems for them. ReMax uses something from and Berkshire Hathaway’s automated valuation comes from Collateral Analytics. Everybody else now scrambles to license third-party software to match them.

Perhaps this is NAR’s big chance to recapture the hearts of disillusioned brokers by private-labeling an automated valuation from the RPR project. Maybe only the big-shots of upstream will receive such an offer?

But here’s where all of this effort becomes a terrible waste of time and resources. Just as everyone now populates their websites via the IDX/RETS feeds, and therefore they all look and function pretty much the same, so it will be with repurposed third-party AVM offerings.

When everyone offers pretty much the same technology no one gains any advantage in the marketplace. The large brokerages are spending money to stay just as antiquated as they are now—they’re spending a lot of time and money to survive, to feed the status quo—but not creating a unique advantage in the marketplace.

Secondly it is very often the case that the first-mover in a disruptive technology holds a strategic lead that followers never catch up to. This is the case with Zillow’s AVM.

When Zillow launched the first ever public accessible automated valuation model a decade ago it took them from an outsider startup status to market dominance. No broker owned site has ever come close to catching them. So it is with the risk-takers who succeed: they attain a dominance copycats never reach.

With Zillow’s latest iteration of their AVM potential sellers can now customize their value by choosing pre-filtered sold homes. Brokers are already a decade behind Zillow’s first AVM; they will not be able to compete with this latest tool for another five years. This is because most MLS’s do not allow brokers to provide potential sellers the chance to build their own valuation using MLS data. Brokers are relatively fifteen years behind Zillow’s technology. Zillow owns the buyers; Zillow owns the sellers.

In his book The Innovator’s Dilemma Clayton Christensen demonstrates how the first innovator introducing a disruptive technology obtains and keeps their market dominance, often for decades. Those companies attempting to copy or match the true innovator never reach the same status in the marketplace. The imitating competitors struggle to survive and a substantial percentage typically drops off of the radar.

The market leader then spends all of their time, money, and effort creating sustaining technologies—those that offer improvements to their systems, but never upset their current strategy or customers.

Zillow is there now. Their AVM innovation pushed them to market dominance. Even Realtor, with greater volumes of home data and coverage, holds less than fifty percent of Zillow’s market share.

You now see Zillow offering incremental improvements, greater conveniences and vertical tools—sustaining innovations, all supporting their key customers—the individual brokers producing the top 20%-30% of sales results.

This is fine; this is exactly how every market leader proceeds after capturing dominance. But this is exactly each leader’s key weakness according to Christensen.

Companies that used a disruptive technology to become the leader then focus all of their efforts to sustain their advantage, to keep their core customers happy. Christensen calls this the Innovator’s Dilemma: the leading company does everything it should to keep their key customers happy, while no longer striving to disrupt the marketplace.

This leaves the opportunity open for a small, often unknown company to introduce to the market an innovation upending the market leader. Depending on your perspective it’s a virtuous—or vicious cycle, and has been occurring regularly in every market since mankind began trading and selling goods and services.

Zillow did this to brokers, including NAR and the largest franchises and brokerage companies. Now brokers are the small, unknown entities within the real estate internet marketplace. It’s the brokers who must be the disruptors to remove the king from his throne. Or their inaction will allow another outsider to do this. It’s in your hands.

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