A signaling problem in real estate transactions

Have been listening to a bunch of podcasts and reading a lot of blog posts about the venture capital / start-up space.

Don’t worry, I’m not changing fields… am just curious about other kinds of businesses and always looking for analogies and ways to improve what we do.

Core to the whole tech world is the idea of identifying an annoying problem that affects a big market and then figuring out how to solve that problem, profitably, at scale.

So, as I consume all this material about tech, I have been keeping my eyes open for these kinds of problems in the businesses I know best: doing deals and managing residential real estate.

Here’s one I have been chewing on: How does a listing broker know which buyer to trust?

Some more context: In most sales of real estate, there are several bidders offering relatively similar prices and terms. Most individuals don’t transact that often. So, the bidders are effectively anonymous from the perspective of the listing broker and the seller, who have no idea who is really serious and who is just kicking the tires.

To make matters worse, the seller / listing broker can’t be certain that a buyer has the means to close, even if she is serious about moving forward. The present methods for doing so, soliciting proof of funds and, for residential transactions, pre-approval letters from lenders, are rife with issues, from fraud (it’s easy to manipulate a bank statement with photoshop) to identity theft (do you want your bank statement emailed around to 50 different listing brokers?).

And there are real costs associated with choosing the wrong buyer. You go from having a hot-and-heavy auction, where there are loads of interested buyers and you can extract the best price and terms, to a period where a single buyer has the property tied up for an exclusivity period of ~30 days. If the buyer fails to perform, all of that momentum is lost, and it’s very likely the deal will take longer and close at a lower price than if the “right” buyer had been selected up-front.

So, that’s the problem, for anyone who cares to work on it: What can be done to help sellers distinguish real buyer from fakes?