Opcity, lead conversion, and the journey down the funnel

Last week, News Corp, owner of realtor.com in the U.S. and the majority owner of REA Group in Australia, announced the $210 million acquisition of lead qualification service Opcity.

Why it matters: With this acquisition, realtor.com dives deeper into the lead conversion funnel in a major way. Opcity features a referral fee business model where customers are worth 36x more than a lead -- which highlights why the U.S. portals are diving deeper into the funnel.

Lead generation vs. lead qualification

Zillow and realtor.com are both lead generators. They drive traffic to their web sites, advertise real estate agents, and generate leads in the form of consumers who are looking to buy a house. This is the lion’s share of their revenues and the core of their business models.

The conversion of leads to actual, paying customers is left up to individual real estate agents, and nominally occurs offline. But this is changing.

In Zillow’s last earnings update, it shared its goal of "moving beyond lead generation and actively evolving toward being a deeper funnel real estate industry partner.” It launched a new, super-charged concierge service where Zillow sales reps qualify leads before matching them with a premier agent.

News Corp’s acquisition of Opcity is the same move: deeper down the funnel. Opcity takes raw leads, qualifies them, and then matches them with an agent. It does not charge per lead, like Zillow or realtor.com, but charges a referral fee for any leads that turn into paying customers (typically 30%-35% of a buyer’s agent commission).

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The cost per lead on Zillow ranges from $20 to $220. I estimate the average to be around $55 per lead. For Opcity, assuming a $250,000 home, a buyer’s agent commission of 2.75%, and a 30% referral fee, each customer is worth around $2,000 — or 36x higher than the value of a lead.

Providing a superior experience, to everyone

The rationale for Zillow and realtor.com to move deeper down the funnel is simple: a better experience.

In the case of both Zillow's concierge service and Opcity, consumers are able to speak to a human being faster, and are matched (not just sent) to an agent faster. Agents are matched with pre-qualified consumers, saving them time and energy. Plus the return on investment for the concierge model is far superior to simply buying leads.

At first glance the Opcity and referral fee model may seem like a bad deal. Why would an agent pay 30%-35% of their commission (around $2,000 for an average transaction) for a referral when they can buy leads for a fraction that price? 

It comes down to the math. Buying leads and converting them to customers costs an agent, on average, around $7,500 per customer -- compared to $2,000 for a customer through Opcity.

It all comes down to the conversion rate. Operating at scale and singularly focused on doing one job, Opcity and Zillow have the scale and technology advantage to convert leads more quickly and efficiently. They have call centers, teams, data, and a long list of agents if the first one contacted doesn’t answer the phone. It's no surprise their conversion rate is higher.

A big revenue opportunity

So how big is the opportunity from a revenue standpoint? (The analysis below is based on Zillow, simply because there is so much more data available, but the same logic applies to realtor.com and Opcity.)

Back in FY16, when Zillow last reported the figure, it generated around 17 million leads during the year. If we assume Opcity’s 4% lead conversation rate (between 3x-5x the industry norm of 1%) and a 30% referral fee, those 17 million leads are worth $1.4 billion in revenue to Zillow (about 50% higher than the ~ $930 million in current premier agent revenues today).

Both Zillow and realtor.com can better monetize their leads if they qualify them and adopt a referral fee structure. Realtor.com now has that option through Opcity.

Given the industry upheaval it would create, it's unlikely that Zillow would change its fee structure. Rather, it will likely approach the same commission rate through the existing premier agent program and share-of-voice bidding system (similar to Google AdWords). Zillow will get there in the end, but through a different path: by providing more value to agents and growing the revenue per lead.

Implications for real estate portals

The core of this entire model is the buyer lead, which only works in markets where there are buyer’s agents. In international markets like the U.K., Australia, and New Zealand — where there are only listing agents — buyer leads are not nearly as valuable.

A similar lead qualification service still has merit for seller leads, when consumers are looking for a listing agent (see HomelightOpenAgent, or REA Group’s Agent Finder service). But real estate portals generate significantly fewer seller leads with a lower intent.

To sum it up for portals: Pay close attention to lead qualification if you operate in a market where you can monetize buyer leads. It's a superior experience with a big revenue opportunity.

Strategic implications

For anyone involved in this sector, there are a number of key takeaways:

  • A concierge, lead qualification model provides a superior experience for consumers and agents. And for agents, it delivers a superior return on investment.
  • Real estate portals like Zillow and realtor.com can monetize qualified leads much better than raw leads. More value to agents = more revenue.
  • The recurring theme here, which I discuss often, is the importance of people in the process. Augmenting -- not replacing -- humans with technology is the winning formula.
  • Lead conversion is important! Small teams can't compete, but the larger platform plays (Keller Williams, Compass, etc) can absolutely build products (technology + people) that improve lead conversion at scale. But are they?

If you work for a real estate portal or lead generator and want to capitalize on the lead conversion opportunity, I can help. I currently advise a select number of real estate portals on an exclusive basis (to avoid competitive issues). Drop me a line if you’re interested in exploring the opportunity for your market.

Analyzing the top portals' financial results

Over the past month, a number of the biggest real estate portals around the world have released financial results: Zillow Group, REA Group, Domain, News Corp, Scout24 Group, and Trade Me.

Why it matters: While the results themselves are fairly dry and self-congratulatory, it does give a glimpse into business performance. When viewed as a whole, the results show a number of interesting trends, and give me a chance to highlight the insights behind the numbers, and the numbers behind the story.

Revenue growth comparison

Overall revenue growth sets the foundation for this analysis, and it's quite varied around the world.

The Australian portals are seeing exceptional growth due to the magic of vendor-funded marketing. In the U.S., both Zillow and Realtor.com are starting to slow down, with Zillow investing in adjacent revenue streams. And in Germany, ImmobilienScout24 sees a positive result after a period of relative flatness.

What blows me away, however, is the massive result in Australia. REA Group and Domain recorded huge revenue gains, and nearly all of it from depth products.

The growth strategy isn't rocket science. REA Group generated $100 million in additional revenue by selling bigger photos.

It's worth noting what is driving the revenue growth in each market: more customers, or a higher average revenue per advertiser (ARPA). In the case of REA, Domain, and Trade Me Property, it is all ARPA, which are customers (agents and home sellers) paying more for each listing. However, IS24's revenue growth is entirely driven by an increase in customers and flat ARPA.

In other words, the portals in Australia and New Zealand are fully penetrated but can still raise prices. In Germany, IS24 is struggling to increase revenue per customer, but still managed to sign up more customers over the past six months.

In my latest report, The Future of Real Estate Portals, I introduced the following portal value curve. In essence, it states that product development is becoming more expensive, delivering less value to customers.

The key takeaway is where the revenue growth is coming from: low effort, high value products that promote agents and properties (essentially larger photos displayed more prominently). That's where the big gains are coming from.

The higher-effort products (predictive analytics, lead qualification, etc) aren't a significant contributor to revenue.

Catching the leaders

On a recent call with an investment analyst, we discussed the opportunity for a runner-up portal to overtake the leader. Can Domain take market share from REA in Australia? Can Realtor.com catch up to Zillow in the U.S.?

The evidence suggests that the answer is a resounding no.

The data from the past two years shows an uncannily steady state between the leading and runner-up portals in both markets.

In the core residential listings business, Domain has remained at 27% the size of leader REA. Both business are growing at the same rate; nothing is changing.

In the U.S., the runner-up portal, Realtor.com, has actually lost a small amount of ground when it comes to growth. Zillow is growing revenues faster.

In the important realm of traffic and consumer eyeballs, Zillow and Realtor.com have remained constant for the past three years. Even with all of the hoopla against Zillow for raising prices in NYC, agent revolts, and increased pressure by Realtor.com, it hasn't meant a thing in terms of overall traffic and revenue numbers.

There's a big difference between a catchy headline and the facts of a situation. Always look for the facts.

Mixed results in adjacent revenue streams

The final area of interest is around portals' expansion into adjacent revenue streams. If you follow my work, you know this topic is of particular interest to me. You may read more of my thoughts, specifically around Zillow, in my analysis of Zillow's Strategic Shift.

The question is no longer whether real estate portals are expanding into adjacent revenue streams, but how they are doing it. There are a variety of strategies at play, with vastly different results.

In Australia, both REA Group and Domain are expanding in different ways. REA bought a mortgage broker in 2017, Smartline, while Domain has launched a trio of new services (mortgage, insurance, and utility switching) via joint ventures. The financial results couldn't be more different.

Both business units are generating decent revenues (more so in the case of Domain, because the overall revenue base is smaller), but only one is profitable. REA's acquisition of an existing business running at scale is returning immediate profits, while Domain remains in the start-up zone of continual (and significant) investments: $27.1 million in FY18.

A deeper look at REA and Domains' mortgage products highlights one final observation. Both are quite similar: well-integrated on the listing pages, a robust loan calculator, and then...

Spot the difference? REA's (top) call to action is a phone number, while Domain's (bottom) call to action is the start of a long online form (without even the first field pre-populated like it was on the calculator -- shame!).

This highlights the importance of consumer psychology in transactions of this magnitude, a topic I recently wrote about in How Psychology is Holding Back Real Estate Tech. REA recognizes the importance of actual human beings in this process, and puts them front and center.

If you have an interest in Zillow's recent acquisition of a mortgage brokerage, look no further than REA Group's Australian acquisition to see how it might play out. Purchased over a year ago, the business is profitable, generating good revenue at good profit margins.

Strategic implications

These latest financial results highlight a few key takeaways:

  • Revenue growth is still primarily driven by core premium products that increase exposure for agents and property listings.
  • The runner-up portals are staying in the runner-up position. There is no data to suggest they are catching the leaders in their markets (this shouldn't be a surprise).
  • Launching into adjacent revenue streams is not a sure thing. Initial investment is very high with no guarantee of success. There are a number of different paths to take, and the initial evidence suggests acquiring existing businesses is the most effective strategy.

How Psychology is Holding Back Real Estate Tech

I was recently on the opening panel at Inman Connect, where the topic was the future of real estate. The conversation centered around the role of technology in the real estate transaction, and the future role of agents (watch the full video).

When I think about the modernization of the industry and technological adoption, my position is that what’s holding us back is psychology, not technology.

It's the psychology, stupid

The big U.S. real estate incumbents can’t stop talking about technology. Each week brings a new announcement about plans for new tech platforms, investments, and initiatives. And while industry gurus love to talk about the impending perfect storm of technology that will revolutionize the industry, I think they’ve got it wrong, and are repeatedly missing a key point.

That key point is human psychology, and the principle is loss aversion. In cognitive psychology and decision theory, loss aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains: it is better to not lose $5 than to find $5. (Read more about loss aversion on Wikipedia).

In other words, consumers will prioritise avoiding costly mistakes over making (or saving) more money. 

It’s relatively easy for technology to disrupt high-frequency, low-value transactions. The risk (or potential loss) is low, both due to the small value of the transaction and the frequency with which it occurs. Think services like Uber, Airbnb, and Netflix.

On the other end of the spectrum, it is more difficult to disrupt low-frequency, high-value transactions with technology, because the potential loss from a mistake is so much greater. People typically go to specialists to help with these transactions: divorce lawyers, investment bankers, and expert consultants.

A real estate transaction, by comparison, is off the charts: it is ultra low-frequency, ultra high-value. The potential loss that occurs from making a mistake is huge.

The psychological desire to engage a specialist in these high-value transactions is loss aversion at work. People are willing to pay top dollar to secure a form of insurance on the transaction; someone to hold their hand through the process. Even when cheaper, tech-focused alternatives are available.

It's not technology holding the industry back, it’s psychology. And no software platform, artificial intelligence chatbot, or mobile app is going to change that.

The role of technology

When it comes to real estate, technology has a dual role: making agents more efficient, and providing a better customer experience. It’s not about replacing agents or removing the insurance of having a specialist involved.

This is where the incumbents — with their regular announcements of big technology plays — are at a disadvantage, and the newcomers have the advantage.

It's the businesses that are built from the ground up around efficiency that have the advantage. More efficient agents means less agents. For a big incumbent to make this change would require an entire retooling of the business, and firing a massive amount of staff and agents. It's too disruptive, and classic innovator's dilemma.

The best way to illustrate this point is agent efficiency: how many deals a typical agent closes each year.

Compass, for all its talk about using technology to make agents more efficient, has yet to demonstrate a significant impact. On the other hand, businesses built from the ground up that utilize technology to improve agent productivity are seeing dramatic gains in efficiency: a 7x improvement at Redfin and a 10x improvement at Purplebricks in the U.K. That's exponential improvement vs. incremental improvement, and is the real eye-opener in the industry.

Strategic implications

Successful new models in real estate understand the key point: smartly combine people and technology. They understand of the role of technology (efficiency and experience), and the role of psychology.

Investors and entrepreneurs assuming that tech will disrupt the real estate industry in the same way it has with low-value, high-frequency transactions are taking a myopic view. It's psychology holding us back, not technology.

If you're interested, be sure to check out the video from the full panel discussion (around 25 minutes) from Inman Connect 2018.

A Deeper Look at Zillow's Instant Offer Numbers

Zillow's Q2 financial results include some insight into its Instant Offers business and traction to date, but the data is five weeks old. Let's take a look at the most updated data; it's more interesting.

All of the data below is for Phoenix, is based on public records, and is accurate as of August 8, 2018 (yesterday).

A quickly growing business

Zillow announced that it bought 19 homes during the second quarter (through June 30). The current total is 62. That's an additional 43 homes purchased in July and the first week of August. A good ramp up.

Of those 62 homes, 10 have sold, with the remainder either under contract, for sale, or coming soon.

Zillow is purchasing more expensive homes than its iBuyer competitors in Phoenix (Opendoor and Offerpad). The average purchase price for the 62 homes Zillow purchased is $324,000, 25 percent higher than Opendoor.

It's worth noting that the median purchase price is materially higher than the estimates being used by analysts and what was suggested in Zillow's Q1 announcement, $257,000.

For the iBuyer model to work, the home must be sold for more than its purchase price. I call that price appreciation. As a percentage, the price appreciation on the 10 homes Zillow has sold is 3.3 percent.

But because Zillow is purchasing more expensive homes than its competitors, when translated to a dollar value the amount is about equal to Opendoor at $9,600 per home.

Keep in mind that this number is not the net profit per transaction. It does notinclude any of the costs associated with buying and selling a home, including agent fees (which are considerable), buyer concessions, finance, holding, and repair costs.

Moving fast

The 10 homes Zillow sold moved very quickly. The sample size is small so it shouldn't be used as an assumption for the business at scale.

Having said that, of those 10 homes it has taken an average of 20 days to get a contract, and an additional 22 days on average to close. These sales are not indicative of long-term numbers. They are quick sales by definition so they have unusually low times on market.

Strategic implications

A few takeaways to keep an eye on:

  • Zillow is ramping up fast, buying 43 homes in the last five weeks. It's serious.
  • Zillow is buying more expensive homes than its competitors and what the market predicted. It's still early days, so let's see if this changes over time.
  • As a dollar value, price appreciation on the ten homes sold is in line with expectations and local competition.

Real time data

You may have noticed the market reacting strongly to Zillow's Q2 announcement, which contained five-week-old data. If you're a serious investor and don't want to live in the past, drop me a line.

Zillow's Strategic Shift

Zillow announced its Q2 financial results today, along with the acquisition of a mortgage broking business.

Why it matters: This is another big move that signals Zillow's clear intent to get closer to real estate transactions.

A major move into mortgages

In my opinion, the most interesting part of today's announcement is Zillow's acquisition of a mortgage broker, Mortgage Lenders of America LLC.

Why? Two reasons:

  • This is exactly the same move REA Group pulled off in Australia last year when it acquired the mortgage broker Smartline (both businesses even have roughly the same number of employees).
  • In addition to its Instant Offers program, this is another huge example of Zillow moving closer to the transaction in a big way.

Closer to the transaction

In my latest report, The Future of Real Estate Portals, I provide a strategic framework for how to think about portals expanding into new businesses. There are two ways: getting involved in more of the transaction, and getting closer to the transaction.

There are two big examples of real estate portals making big moves to get closer to the transaction: Zillow's Instant Offers program, and REA Group's acquisition of mortgage broker Smartline.

Zillow's announcement today is yet another major -- and not unexpected -- move in that direction. That's a big deal; it's a clear signal of intent and strategy, and one that no other portal is matching around the globe -- yet.

A strategic shift

What we are seeing is the result of a strategic shift at Zillow, likely started in 2017, and now moving full speed ahead. It is an intentional move to get closer to the transaction is all areas of the business, and move away from simply being a marketplace that connects buyers and sellers. 

As I mention in my report, it is a move from search engine to service engine. And it's a move to larger revenue pools. Zillow's existing mortgage lead gen business generates about $4 per lead. Mortgage origination can generate hundreds to thousands of dollars per customer.

It is a big move. While all the iBuyers talk about providing mortgage solutions to streamline the process, no one has purchased an existing mortgage broker. This isn't testing the waters; it's jumping straight in and hoping for the best.

Premier agent growth as catalyst 

I believe one of the big drivers of Zillow's strategic shift was the slowing growth of its flagship premier agent program. As I've written about in the past, it is naturally slowing down.

To Zillow's credit, with slowing growth in its main revenue driver, it did two things:

  • Made the aforementioned strategic shift to get closer to the transaction through Instant Offers and Mortgage lending.
  • Made significant investments into its premier agent program to improve lead quality and value to agents.

The first action opened up new areas of growth. The second arrested the decline and stabilized the premier agent program.

Strategic implications

There are a number of key takeaways from Zillow's latest move:

  • Moves to get closer to the transaction are people-intensive. At scale, Zillow's Instant Offers will have hundreds of employees on the ground. Mortgage Lenders of America has around 300 employees. Unlike a classic marketplace business, these new growth areas are expensive and low margin.
  • This is going to happen everywhere. Expect every major real estate portal to get deeper into the mortgage and finance space.
  • Zillow is not standing still. Its business today looks quite different than it did 12 months ago. Does yours?