Commercial vs. Residential Real-Estate: A Race to Automation

Video Killed the Radio Star, Right..?

In this post I want to talk about a topic which concerns the longevity of Professionals in the real estate industry. I am referring to the impending obsolescence of the so-called middlemen in the business or in transactions. technology so far has taken the real estate industry to new heights but has yet had unintended and consequential effects on real estate brokers in the residential industry. 

Discount brokerages, virtual offer platforms and completely digitized mortgage companies have completely changed the face of the industry as a whole and how transactions are handled. 

As technology continues to advance as well as artificial intelligence becoming exponentially smarter every year with more capabilities, I see this as a trend that will continue in the residential sector of the real estate industry. However, the juxtaposition of that is that I firmly believe that commercial real estate agents, loan officers, and loan brokers will sustain business for a longer period of time than their residential counterparts.

Let's Dive Into Why I think That Is

If we start at the very core principles of what technology is good at, then we can successfully derive why the industry is in the state that it's in.

I say this because residential Brokers and residential loan officers/bankers constantly have to perpetuate and their value proposition to potential clients in order to win business over all of the technology-driven discounted platforms that are currently available for consumers choose.

Going back to the heart of the matter, which is technology, we can conclude that technology has the upper hand when dealing with monotonous and repetitive structures that don't require creative or flexible thinking. 

Now, this is where the problem lies. For the most part a lot of residential transactions are structured in a rather simplistic way and there are only a handful of scenarios that can be or predetermined beforehand.

This is why the companies have quit technology on the Forefront of the transaction and put the people involved in the background. However, we all know that this isn't true, but this is what is happening and it will continue to develop and become more advanced as these companies further innovate there are processes to replace more and more people in the transaction pipeline.

As a loan officer, I can look at it from the perspective of financing. These big companies have broken down the process in such a way that they detail every step and have found a way to automate these steps and remove a person from the equation. For residential transactions, they are quite cookie-cutter scenarios.

By this I mean all of the loan officers and bankers do the same process to take a mortgage application, how to calculate qualifying income, how to calculate debt to income ratio, how to verify employment, and to verify the value of the asset they are financing.

Obviously, this is by no means an exhaustive list of all the different facets of a real estate transaction or financing request in the residential space. There are obviously much more complicated scenarios, however, I've decided to take the most common scenarios because that is what these technology-driven companies are targeting.

The Flip Side

Now, let's take a look at a multifamily real estate transaction. By its very nature, a commercial real estate transaction is far more complicated than a residential transaction. Again, I am not making a hasty generalization, I am just looking at the majority of transactions. Certainly, there are some residential transactions that could be more complex than certain commercial transactions.

Using a multifamily scenario as an example, we can look at just how many factors are involved and what type of analysis and creative thinking is required to execute a deal of this level. 

From the very beginning, an investor will have to seek out different financing options for debt and potential partners for cash to close (in exchange for equity and/or other agreement). Just those two topics alone could probably boast enough content for 10 more blog posts.

Let's say an investor puts a property under contract, the next steps after that are due diligence. Due diligence by itself is a beast, wherein an investor has to analyze the myriad of different variables within the transaction to make sure and verify that the deal will meet their investment criteria (you want no surprises).

Going through the entire process of a commercial real estate transaction is outside of the scope of this post, however, I wanted to bring to light just how complicated a commercial transaction can be. In addition, every single commercial deal is going to be it's own time-consuming project that will take an entire team to analyze, execute on, and close.

Now, which of these processes do you think is easier to automate? John and Jane Doe who collectively have made $100,000/yr for 4 years in a row on a w2 salary and want to buy a single family house, or John Investor who wants to buy a cash flowing 16 unit building? No question that you can automate bits and pieces of a commercial transaction, however, that is simply not the point.

It is obviously much easier to automate simple transactions and simple processes because that's what technology excels at and that's what these companies have capitalized on.

In conclusion, I believe the trends that we see in the residential real estate industry will continue and residential real estate brokers, loan officers, and bankers will have to continue to hone their value proposition and make sure they explain that to potential clients, so that they can win deals and sustain business in the rapidly changing environment where the tech companies continue to shake things up.

On the flip side, I believe strongly in the sustained business of commercial real estate professionals and the extreme value they can bring to a deal considering the complexity of the transactions and the creative thinking required to structure these types of deals.

Explain your confident stance in the comments. I would love to hear your thoughts, opinions, critiques, and suggestions for future content.