“You can observe a lot just by watching.”
–Yogi Berra
David Ricardo was born in the late 18th century, and along with Adam Smith was one of the most influential early economists, pioneering the term “comparative advantage.” A plumber is more productive at plumbing; a locksmith is more productive at locksmithing, and thus trade between them makes sense versus each learning (or “producing”) the other’s profession even if, say, the plumber is better at both plumbing and locksmithing (for more on this, a good primer). Corporations take this one step further, harnessing the talents of many individuals to hopefully create a pooled comparative advantage.
From the vantage point of “comparative advantage” — a term first coined in 1817 — let’s look at real estate. There are 2 million licensed real estate agents in the United States. In Washington state, as an example, the mode number of transactions per real estate agent per year is 0. That’s right, 0. In some areas of the country, the median is also 0. So if you pick a random real estate agent, the chances of them having transacted 0 homes in the last year is above 50%. Would you hire a plumber who hadn’t fixed a toilet in years, or a lawyer you hadn’t argued a case in years? And remember that there are many, many specialized components of a real estate transaction.
The brokerages that exist in this space typically don’t aggregate the good agents or bad agents or subdivide work. They are almost franchise networks, wherein a real estate agent uses, say, the Coldwell Banker or Keller Williams brand, resources and back-office to try to carve out a position in the world and build an individual book of business.
In the future — and increasingly the present! — we will buy and sell our homes from a company, due to the laws of comparative and technical advantage. It doesn’t mean that agents will go away, but the experience will be a full stack one. A negotiator will negotiate. A financing expert will help finance. Data collection, advertising, and pricing will be algorithmic — all things better suited for experts than a jack of all trades. And so on and so forth — the real estate agent’s tasks will be unbundled and then rebundled under the framework of a company that applies each task against the rule of comparative advantage. People laughed at Henry Ford for pushing an assembly line versus craftsmanship, but it turned out that Ford automobiles were vastly more reliable. Ford today has 200,000 employees, and you can imagine the disarray if each of them built and sold their own cars based on individual experience.
This is why I’m excited to announce our investment in FlyHomes. FlyHomes started off as a boot-strapped business built by two Northwestern Kellogg friends who have proven to be incredible entrepreneurs. In addition to understanding that the future of real estate is to employ comparative advantage, they started layering on more advantages that simply cannot be offered by an individual broker nor even by a brokerage.
Arguably the most exciting advantage that FlyHomes has introduced is the cash guarantee — in supply constrained markets such as Seattle, FlyHomes will actually buy the house for you, and then you have 30 days to get a mortgage and effectively buy it back. FlyHomes isn’t just helping you buy the house; they’re actually buying the house. In a market where each seller gets 10 offers and tends to prefer the “all cash” one, FlyHomes has a huge benefit for a buyer. And given the massive complexity of the mortgage market, the ability to abstract away the painful mortgage process from the already anxiety-producing process of finding a house is incredibly valuable.
Not surprisingly, customers love it. Buying with FlyHomes gives consumers a vastly better experience — and a much better chance of winning/buying the house they want — than competitors. David Ricardo would be very proud, and so are we!
