The internet is so interesting and fun that I can’t believe it’s legal.
I’ve been stuck on episode 5 of Pluribus for over a month now because YouTube and X are so good at feeding me fascinating videos.
Last night alone I learned that Turkey has a surprisingly strong military (9th strongest), that there are three different kinds of crude oil (light sweet, medium sour, heavy sour), that America’s finally removing millions of tons of plastic from the ocean, that the tallest Tsunami wave was over 1,700 feet (Alaska in 1958 – and a small boat rode out it’s crest!), that the 1883 Krakatoa eruption created a tsunami that made 2004’s look like a mere ripple, that a brown bear could beat up a tiger or lion, that an African lion can beat a Siberian tiger, that a T. rex would easily beat an elephant, and that prime Mike Tyson could beat a chimpanzee (chimps aren’t as strong as we think, and Tyson’s head shots would take one out).
But my favorite videos involve the rise and fall of business empires like this particularly fascinating one: The rise and fall of CarMax: 32B giant to business failure?!
The lessons are huge, and some of us should take serious note.
CarMax was founded in 1993 by Circuit City execs – with a brilliant plan to sell used cars (a business with a very poor reputation) by offering: transparent pricing; no haggling; 125-point quality inspections; and money-back guarantees.
It took them a while to hone their model (a lesson in itself, as all businesses like this take longer to perfect than people realize), and they finally earned a profit after 7 years.
After that they killed it…until the world changed.
The biggest change was millennials becoming the biggest segment of car buyers.
Millennials, unlike boomers, did an average of 14 hours of research online before buying a car – making it very hard for any used car company to confuse them into paying too much (which is how many used car dealers make their money).
In addition, millennials are the first Amazon/e-commerce generation – and they want to do everything online – without haggling, or ever engaging anyone face to face, or going to a store (two things CarMax still required).
Enter Carvana.
Carvana copied CarMax’s quality guarantees and no-haggling policy, but they are also 100% online with a better interface and no stores/much lower overhead.
As a result, Carvana’s cars are 10% cheaper than CarMax’s, and Carvana (after a few growing pains of its own) is now kicking the snot out of CarMax.
Things are not looking good for CarMax either because they are stuck with their legacy model overhead.
I am omitting much from the fascinating video above – so I still recommend watching it.
Who Should Be Terrified by This Turn of Events?
Mortgage lenders of course. Borrowers perceive mortgage loans as commodities – even though that is ridiculous now that there are literally hundreds of different loan programs and thousands of guidelines (FHA, USDA, Jumbo, Non-QM, Hard Money, No Ratio, Bank Statement, DSCR, Rehab, Construction, HELOC, Bridge Loans, Guaranteed Backup Offers, etc.).
Be that as it may, millennial and Gen Z borrowers still want the same things: transparency, no haggling, ease of use, and no face-to-face meetings.
Our industry has been evolving in that direction for some time, but it remains far too difficult to get a mortgage, and the terms and options are too confusing (just the way the industry likes it 😊).
But, as AI and new technology make the task of getting mortgage financing easier and more transparent, you can bet a Carvana of mortgage lending will surface at some point.
Such a lender will have minimal overhead and offer nearly instant pre-approvals with paper-thin margins (very low rates) – with the hope of making money on volume alone.
This of course has been tried numerous times already by all kinds of lenders as far back as the late 1990s. But regulations and the complexities of the industry prevented those models from working (deals blew up constantly, borrowers could not get their questions answered, agents complained about communication, etc.).
Technology will solve many of these issues, and hybrid models will evolve with very low overhead, with tech doing most of the work, and with very smart loan advisors able to step in and answer questions or address problems when necessary.
We saw this play out to some extent in the early 2000s when some lenders mastered algorithmic lending, and we’re seeing it play out now in the second mortgage space with lenders that use AI and 2,500 data points to instantly underwrite.
Long story short: legacy lenders, mired in overhead, will be a world of hurt.
Real estate agents seem much safer to me, as Carvana models have been tried dozens of times in real estate and have failed every time.
While buyers still shop and research online – haggling remains necessary in real estate for price discovery (figuring out what a property is worth at any given time), negotiations and potential issues are often too complex for technology to take over, and buyers very much want a trusted guide to help them with such a major transaction.
