Purplebricks targets mid-market America (finally)

Purplebricks launches in Phoenix and Las Vegas this week. This is on the back of its previous launches in Southern California and the New York metro area, and is the latest step in its U.S. expansion.

Why it matters: This is Purplebricks' first foray into mid-market America, the true sweet spot of its business model.

Picking the right target market

Purplebricks’ U.S. launch strategy is markedly different in terms of target markets. In the U.K. and Australia, evidence shows that the typical Purplebricks customer is at the mid-end of the market. However, the U.S. launch targeted high-end markets and customers.

In June of last year, Purplebricks CEO Michael Bruce said the average Purplebricks customer in the U.K. sold for around £240k (data on tens-of-thousands of transactions backs this up). The average house price in the UK is around £230k. 

To use Mr. Bruce’s own words, Purplebricks' success is down to "a higher concentration in the heart of the market rather than the top end where it has been extremely tough."

The story is similar in Australia. An analysis I conducted in 2017 shows similar trends in Victoria and Queensland. My analysis shows an average sale price of $415k AUD in H1 2018, below the overall market median home value.

Then we come to the U.S. According to Zillow, as of January 2018 the median home price was $229k.

Los Angeles County, Purplebricks’ launch market in the U.S., has a median home price of $583k. San Diego County, one of the next launch markets, has a median home price of $540k. And Purplebricks’ latest launch market, the New York Metro area, has a median home price of $374k.

An analysis of 150 Purplebricks listings in the U.S. shows a median listing price of $552k. All of these numbers are significantly higher than the national average (in some cases, over twice as much).

Purplebricks decided to launch in U.S. markets where the median home value is more than double the national average. That’s a completely different launch strategy than its successful international markets.

It’s like taking a budget airline that caters to price-conscious families and launching a New York-to-London route for business travelers. It might not be the right fit. And for a business very much reliant on marketing spend to generate leads, it picked two of the most expensive advertising markets.

The Purplebricks proposition challenge

Purplebricks is clearly the low cost option when compared to alternatives in the U.K. But in the U.S., that's not the case.

In the U.K., the cost savings versus using a traditional estate agent are clear: on average, a home seller saves around £2,000 (outside of London and using national median home sale prices). And yes, this fee is paid upfront regardless of an eventual sale or not.

In the U.S., however, Purplebricks’ price-point puts it right in the middle of a crowded pack (and it just raised its fee from $3,200 to $3,600). It’s less expensive than a traditional listing agent. It’s slightly less or slightly more than Redfin depending on a 1 percent or 1.5 percent Redfin fee, and it’s slightly more expensive than other fixed-fee providers like Redefy and Trelora.

And that’s just the listing fee, which is paid regardless of the house selling or not. A homeseller still needs to pay a typical buyer’s agent fee of 2.5–3 percent.

In short, Purplebricks is not the clear low-price leader that it is in the U.K. There are a number of alternatives, Redfin being the biggest. And the competitive field is big, leaving Purplebricks with a relatively undifferentiated product in a crowded field (this is also true in the U.K., but the difference is that Purplebricks is already #1 in that market).

Strategic implications

There are a number of key points to consider in Purplebricks' U.S. expansion:

• Its U.S. launch markets were not in its "sweet spot." Phoenix and Las Vegas are, which begins the true test in the U.S.
• Advertising in L.A. and New York is expensive. Expect Purplebricks to get more bang for the buck for its advertising dollar in mid-range markets like Phoenix.
• Purplebricks is operating in a crowded marketplace of low-cost and fixed-fee alternatives. It is not the least expensive option, and Redfin is a sizable competitor.

Online agent market share grows in the U.K.

As someone who studies new models that change the way we buy and sell houses, I'm naturally interested in the online agents in the U.K. Late last year, two raised significant money: eMoov raised £9 million in August and Yopa raised £27.6 million in September -- and it's having a noticeable effect on the market.

Mo Money Mo Listings

The charts below look at the total number of new listings for the top online agents, as recorded by Rightmove (and confirmed with data from Zoopla).

A few facts stand out:

• Purplebricks is very much in a dominant market position.
• Both Yopa and eMoov have seen strong gains, followed by Tepilo.
• HouseSimple is going backwards.

If we strip away Purplebricks' numbers for a moment, the "Battle of the Rest" becomes more clear.

Yopa and eMoov raised a lot of new capital and are deploying it in sustained marketing campaigns. While Tepilo hasn't raised money, it has significantly increased its marketing spend. And HouseSimple's new CEO pulled its marketing spend before a product relaunch.

The correlation here is clear: the more money spent on marketing, the more new listings. It's not rocket science, but that's the point with this model.

If we assume the inverse is also true (the less money spent on marketing, the fewer listings), it leads to a sobering conclusion: the various propositions are undifferentiated with little organic, word-of-mouth growth, or network effects. There are no repeat customers, and the models don't "pick up steam" with more people using them (think Uber or Airbnb).

Online agents -- like traditional real estate agencies and brokerages around the world -- are expensive businesses. Investors take note: there's no secret sauce in this model that changes that equation.

Market share winners and losers

While the online agents are clearly competing with each other, the real loser in this fight is the traditional estate agent. 

The chart below shows the top online agents (Purplebricks, Yopa, Tepilo, eMoov, and HouseSimple) gaining impressive new listing volumes (up 32% from January) while also growing their collective market share of the entire market. They're not taking market share from each other; they're taking it from the incumbents.

Overall new listings market share for the online agents is up from 5.7% in January to 7.1% in April. In that same period of time, the leader Purplebricks increased its market share from 4% to 4.5%.

The time period is small -- four months -- so take it with a grain of salt. Plus these figures are based on new listings, not sales. But the story is clear: the online agent market segment is growing.

Strategic implications

There are a few salient points to consider:

• Purplebricks is dominant. In April, it had 6.7 times the number of new listings of its nearest online competitor, and a massive 3.3 times the number of new listings of its top 4 online competitors combined.
• Relative to the point above, scale equals efficiency (and profits). The low-cost model only works at a certain scale. Purplebricks' lead means lower expenses on a per customer basis, likely making it the only profitable online agent.
• Money, money, money. If you want to compete in this space, you need to spend a lot on marketing. The various models are otherwise undifferentiated.
• The market is shifting. The online players are all gaining market share, and the loser is the traditional estate agent.

The race for second place is on, with several players raising and spending tens-of-millions of pounds in the market. And there is clearly room to grow market share at the expense of traditional agents. But can they make money, or is it an expensive race to the bottom?

Zillow's revenue growth slows

My analysis on Realtor.com earlier this week surfaced a particularly interesting chart on Zillow's revenue growth. The slowing growth piqued my interest, so I dug deeper into the data and strategic implications.

Zillow has been growing fast over the past few years. The company topped $1 billion in annual revenue for the first time in 2017. But the gravy train can't last forever. How big can Zillow really get?

In its FY17 annual report, Zillow had this to say about its future growth prospects: We see significant opportunity to expand our addressable market over the long term. As we dive deeper in the funnel we see more opportunity to increase the number of transactions and commissions to our partners. 

Many people think Zillow is right at the beginning of its journey, and that it is just scratching the surface of the U.S. market opportunity. However, the numbers tell a different, more nuanced story.

Sources of growth

Zillow generates the vast majority of its revenues (71%) from its premier agent program, which is essentially lead gen for buyers agents.

Other revenue streams, such as display advertising, mortgage leads, and rentals, form a small percentage of overall revenue. Zillow is very much a business centered around -- and reliant on -- its premier agent program. So it is natural to focus on premier agent revenue growth to frame the future prospects of the business.

The key question is: How much runway is left for Zillow to monetize and grow its premier agent business? Are we just at the beginning, or is the opportunity maturing?

Premier agent growth slows

Zillow's year-on-year premier agent revenue growth, broken down by quarter, shows a clear trend of slowing growth. Keep in mind this is off a large revenue base ($760 million annually) so is to be expected. But the trend is clear: growth is slowing.

The chart below shows the same metric, but with absolute year-on-year dollar growth, instead of a percentage. After running up to a high in Q2 2017, the growth rate is dropping, and Zillow is forecasting that trend to continue.

We can also look at the numbers from a full-year financial perspective. The chart below shows steady year-on-year growth in the premier agent program, but Zillow's own guidance shows that it is -- for the first time -- forecasting a slowdown in that growth on an annual basis.

Most businesses eventually reach a terminal growth rate, or a rate at which the business grows in perpetuity. At property portals around the world -- in mature markets where the leaders have effectively saturated the market -- this rate ranges from around five to 15 percent.

Zillow's premier agent program hasn't reached maturity yet, but it appears to have hit its peak growth rate. Now the question is, where will it settle?

Strategic implications: Where to from here?

With Zillow's primary revenue stream slowing, it needs to look at new revenue streams to drive future growth.

One area where Zillow is seeing strong growth is in rentals, where it saw a 124 percent increase in revenue. This is undoubtedly driven by the decision to start charging for rental listings on StreetEasy in NYC in July of last year. You can see the corresponding bump in revenue below.

In 2018, expect Zillow to begin aggressively monetizing new revenue streams. My guess would be a continued focus on rentals and back office tools (dotloop), with additional efforts around new construction and mortgages. This is relatively consistent with the strategy of its international peers.

Also expect Zillow to continue to aggressively monetize agents. By its own admission, "as we dive deeper in the funnel," is code for doing more and charging more. Zillow will attempt to increase the value of existing leads while becoming the technology partner of agencies with transaction management tools like dotloop.

Zillow's slowing premier agent revenue growth will put pressure on the business to develop and exploit new revenue streams. Expect that to be the theme of 2018.

Australia's REA Group vs. Domain

Key points

• Both businesses are growing at the same, strong rate, with all revenue growth coming from depth products.
• Domain has a much more diversified revenue stream, at the expense of profitability.
• Domain is generating 1/4 the listing revenue of REA Group, and is not having a competitive impact.
• Adjacency revenues are small, and in Domain's case, quite expensive.

Australia is home to two leading real estate portals, REA Group and Domain Group. Last month, both businesses released their half-year results.

REA is the clear market leader and one of the biggest and most profitable portals in the world (read more in my Global Real Estate Portal Report). Domain was recently spun-out from Fairfax Media and listed on the Australian stock exchange, and is now able to invest and focus on its core mission.

Growth from depth products

Both REA Group and Domain are growing strong. Their latest financial results show impressive revenue growth in their core residential listing business lines (and for REA, I'm only looking at its Australian business).

Proportionally, both businesses are growing at nearly the same rate (around 19%). This is especially impressive for REA, which is already operating on a large revenue base.

For both businesses, nearly all of this impressive revenue growth is coming from depth products. These are the incremental fees paid by vendors and agents to promote a property listing on the site. $50 million is a big number!

Over time, these depth products are accounting for an increasing percentage of overall revenue (the remainder being subscription fees).

REA is generating about 4x the revenues as Domain in the core residential real estate listing business. I've included Rightmove and Zoopla from the U.K. as an additional data point.

This number isn't changing over time. Both businesses are keeping pace with each other, almost down the the decimal point. In other words, Domain as a strong #2 in the market is not having an adverse impact on REA's ability to grow.

Revenue diversification and profitability

REA Group generates the vast majority of its total revenue from listing fees (depth and subscription), around 84%. Domain, on the other hand, generates only 47% of total revenues from listing fees.

This trend is identical to the U.K. market, where Rightmove, the #1 portal, generates 76% of its revenue from listing fees, compared to 25% for Zoopla, the #2 portal. The #2 players have diversified their revenues in an effort to grow through other avenues.

The market leaders have high profit margins (EBITDA) from the profitable listing business, while the #2 players have lower profit margins from their diversified revenue streams (which tend to be lower margin).

REA's profit margin continues to improve, while Domain's is going down as the business invests in new growth areas. The market leaders are able to continue monetizing their audience without needing to diversify. 

Adjacent services

In Australia, both REA Group and Domain have launched adjacent businesses in financial and transaction services. For REA, this represents a small, but profitable, percentage of total revenue.

Domain, on the other hand, is investing heavily in its transaction services business (which includes utility switching, loan, and insurance products -- and the last two are just getting off the ground). It's generating revenue, but is not yet profitable. In other words, it's spending $12.8 million to generate $11.1 million in revenue -- expensive!

While many in the industry talk up the opportunity in adjacency revenues, the evidence suggests a much smaller (and less profitable) opportunity -- and one that is quite expensive to get off the ground.

Strategic implications for Domain

Domain is clearly operating from Zoopla's playbook: to grow, it must diversify. However, their strategies differ. In the U.K., Zoopla fully owns all of its adjacent businessess. However, Domain prefers joint ventures, owning 50% of its comparison business, 60% of its loan business, and 70% of its insurance business.

Domain is effectively starting its loan and insurance businesses from scratch, while Zoopla acquired existing businesses. Starting from scratch is expensive and will take years of investment.

The scope of the adjacency plays also varies. Zoopla generates and monetizes leads through a comparison portal, while Domain is playing a greater role in the transaction. This is a more expensive, more uncertain, but potentially more lucrative opportunity. The key word is potentially.

Domain's foray in adjacencies should not be viewed as a sure thing. While the intent mirrors Zoopla's strategy in the U.K., the execution is materially different, with the result being far from certain.

Is Realtor.com in it to win it?

On March 7th, this report on Realtor.com owner News Corp piqued my interest. Chief Executive Robert Thomson, referring to Realtor.com, said, "Obviously we’re in a competition, long term, to be number one..."

He went on to say, “...I think it’s fair to say that we turned what was the number three company into a very strong number 2 and, depending on the quarter, depending on the metric, in some quarters the fastest growing."

Here's the thing: I don't think Realtor.com is really competing to be number one.

Growth metrics

If we look at the most important metrics, I don't see evidence that Reator.com is the "fastest growing" in any category. These self-reported traffic metrics are essentially static: Zillow has around 3x the traffic of Realtor.com.

Zillow is growing its revenue (from a larger base) considerably faster than Realtor.com.

On a quarterly basis, Zillow blows away Realtor.com in terms of year-on-year revenue growth (again, from a much higher base).

The last chart does show an interesting trend, which is slowing revenue growth at Zillow compared to rising growth at Realtor.com. But in absolute terms, during the last quarter Zillow increased its revenue by $54 million while Realtor.com increased by $17 million -- a big difference!

There's still a lot of distance between the two, but it's true that Realtor.com is trending upwards while Zillow's revenue growth is slowing.

I'm not sure I'd agree that Realtor.com is the "fastest growing" in any meaningful metric, but the last three quarters show the start of a promising trend for the business.

Is Zillow concerned?

If Zillow were genuinely concerned with Realtor.com's growing momentum, I'd expect its sales and marketing expense to increase. If Realtor.com's market share were growing, Zillow would be spending more advertising money in response.

Aside from a slight bump a few quarters ago, Zillow's sales and marketing expense as a percentage of revenue is relatively flat and trending downwards.

Serious competition for top spot?

You can't argue with the fact that Realtor.com would like to be the #1 portal in the U.S. market. But are they really in a serious competition to be #1?

News Corp has been a major investor in REA Group, the leading portal in Australia, for almost two decades. More than most, it understands the power of network effects and how expensive and futile it can be to unseat a #1 player.

So is News Corp realistically expecting to overtake Zillow in the U.S.? I doubt it. I believe it's happy to run slipstream to Zillow and operate a strong, profitable business in its own right, but remain the #2 player. Attempting to overtake Zillow would be incredibly expensive and uncertain, and the resulting marketing war would drain all profits from both companies.

News Corp would never admit this strategy (who would admit they're happy to be the runner-up?). Being the underdog and striving to overtake the market leader is a great story and good for morale, but it will probably remain just that: a story.

2018 Emerging Models in Real Estate Report

2018 Emerging Models in Real Estate Report from Mike DelPrete

This presentation is available as a free PDF download from Slideshare.

Zillow Group's FY17 Results

Zillow Group's FY17 Results from Mike DelPrete

The Opendoor Paradox: A Strategic Analysis

Last week I had the pleasure to visit Opendoor, the billion-dollar real estate disruptor, to give a presentation on emerging models in real estate around the globe. The presentation covered my two-year research into the winning models that are changing how houses are bought and sold.

There were some great questions from the audience, both on international models but also my thoughts on the Opendoor model itself. These thoughts, in addition to a number of recent conversations with investors interested in the space, led me to contemplate Opendoor’s future strategy and the complex competitive situation it faces.

The end result is what I call the Opendoor Paradox, and the premise is simple: the more successful the business becomes, the harder it will be to succeed.

Business model challenges

The business model of Opendoor and other iBuyers (those that buy houses directly from consumers and then sell them on) has a number of challenges:

• An undifferentiated product. At its core, all iBuyers offer the same basic product to consumers: certainty and simplicity. There may be price competition or various technologies to support the process, but those advantages lie in the margins. The typical consumer only cares about one thing: instantly selling their house.

• Resource intensive. The iBuyer model is expensive, and not just because it’s buying houses. To be successful, iBuyers need a lot of boots on the ground in each market they operate. These businesses are people intensive.

• No repeat customers. This is true for all of real estate, but it doesn’t change the fact that without repeat business the cost of attracting new customers is expensive. There are no economies of scale around attracting and retaining a loyal clientele. Most importantly, this levels the playing field and reduces the barriers to entry for competitors.

Competitive tension

The U.S. is big, but for whatever reason the growing pack of iBuyers have all decided to launch in the same bunch of cities. Phoenix, Las Vegas, Atlanta, Orlando -- that’s the battleground. It’s a mess of a competitive situation where they will end up spending valuable time and resources competing against each other instead of growing the market.

Markets in bold have three or more active iBuyers.

Traditional marketplace businesses have a first-mover advantage. The first to enter a market builds brand and audience, and with each day that advantage becomes harder to overcome (network effects).

But that’s not true with iBuyers. Being first to launch in a market doesn’t necessary bestow an unfair advantage.

Because of this, it’s most likely a winner-take-most market, similar to Purplebricks and the online agencies in the U.K. With a distinct lack of network effects, an undifferentiated consumer proposition, and no customer base, you end up with a healthy competitive field that, over time, is most likely dominated by one large player.

I would expect to see more competitors launch in 2018. The market is going to get very crowded very fast. And that forms part of the paradox: the more successful Opendoor and its model becomes, the more competitors will enter the space to get a piece of the action.

The real competitive threat: incumbents

While the various iBuyers might beat each other up through tough competition in each market, that’s not the biggest competitive threat they face. The top competitive threat is the massive real estate incumbents themselves.

This forms the next part of the paradox: the more successful Opendoor becomes, the more of a threat they become to industry incumbents, which forces them to respond. The most logical response from a major player such as Realogy or Keller Williams would be to launch their own iBuyer program.

This is what Redfin has done with Redfin Now. Redfin was able to spin this test up quickly and is now able to adopt a “me too” proposition when attracting new customers. For a small amount of effort, incumbents can blunt the iBuyer proposition.

It’s a simple extension: If a consumer decides to sell their home with an incumbent, they can choose the traditional agent services for a commission, or they can sell it instantly for a fixed offer and certainty.

Make no mistake, the offer and the experience from the incumbent is going to be bad. They’re simply not set up to provide the same quality of service as Opendoor, and most likely will lowball the seller to protect their margins. But the offer will be present and it will appeal to some sellers.

The proposition from the incumbents will be poor, but it will be enough to soak up a portion of the demand in the market and take momentum away from Opendoor and other iBuyers. And if Opendoor can’t scale or if it becomes too expensive to attract new customers, it’s game over.

The more successful Opendoor becomes, the more incumbents will be forced to react, and when they do it will harm Opendoor’s growth and profitability.

Scaling challenges

Opendoor faces a number of challenges over the next 12 months. The most pressing of which is how the business scales nationally.

The previous two years have been spent proving out the model. Opendoor has been refining its processes in its two core markets, Phoenix and Dallas, trying a partnership model in Las Vegas, and just recently launched in Atlanta, Orlando, and Raleigh.

But 2018 is the big test: going national. I expect Opendoor to meaningfully be in ten markets this year. This will put a tremendous amount of pressure on the business, the management team, and the well-refined processes to see if they can all truly scale. It’s like NASA going to the moon after conducting tests in Earth’s orbit (which is exactly what they did). It’s a big step.

It will also be interesting to see how Opendoor approaches advertising. In the U.K., Purplebricks ran a national above-the-line advertising campaign (TV and radio) to build brand. That will be expensive in the U.S., but it’s a critical component to scaling the business, especially long-term customer acquisition costs. It’s also necessary to start building a moat between itself and its iBuyer competitors.

Opendoor will also face a significant challenge as it scales its people. As I mentioned above, scaling the business is resource intensive and is people dependent.

To win, Opendoor needs to provide exceptional customer service and needs to hire exceptional people. The more markets it expands to, the more people it will need. And the more people it hires, the more effort it will take to find exceptional people.

This contributes to the paradox. The larger Opendoor gets, the more difficult it will become to find quality people and maintain a high level of quality across a growing employee base -- all critical ingredients in delivering a superior customer experience.

The question of fees

Opendoor -- and its peers -- will also face ongoing challenges around its fees, both clearly explaining them to consumers and reducing them.

Opendoor needs to be price competitive with traditional real estate agents to succeed. The lower it can drop its fees, the more customers will flock its way. From the outside looking in, it appears to be doing this with the current fee structure, which happens to coincide with a noticeable uptick in activity in Q4 2017.

But more fundamentally, explaining fees is complicated. The pricing charts on Opendoor and OfferPad’s websites are long and complicated, as they attempt to explain holding costs, hidden costs, and somehow compare apples to oranges. If it takes more then five seconds to explain this to someone, you’ve already lost them.

Key strategic questions

Opendoor’s path forward is far from clear. As with all trailblazers, the future is uncertain, and in this case there are a number of threats. I believe the key strategic question -- and the area of utmost importance and absolute focus for Opendoor -- must be how to deliver the best experience possible to its customers.

Growth is key. Opendoor must reach scale for the business model to be sustainable and turn a meaningful profit. So it must venture forward aggressively, enter new markets, compete with fellow iBuyers, and be prepared to meet the incumbent’s threat head-on.

Opendoor must continue developing technology to automate the process (to improve efficiency) and deliver a superior customer experience (all-day open homes).

As it scales -- and because the business is so reliant on people -- it must attract and retain exceptional talent in each market it enters. This will be a key challenge, but not impossible. Maintaining a customer-focused culture with each new hire and each new contractor is easier said than done, but a critical task nonetheless.

And lastly, Opendoor must grow as efficiently as possible. It must continue reducing its fees and maintain its impressive operational efficiency. The holy grail would be combining the low-fee proposition of a Redfin or Purplebricks with the certainty of an iBuyer, but it may not be possible.

Growth comes with its own challenges and that is especially true of Opendoor. And as it grows, it will face the paradox of its greater and greater success bringing greater challenges to overcome. But only with great risk comes great reward.

Facebook vs. Zillow: A breakdown of Facebook’s real estate strategy and the impact on portals around the world.

Facebook has always played a supporting role in the marketing portfolio of real estate professionals: historically, agents have been twice as likely to advertise on a listing portal than on social media. For its part, Facebook has never built features that cater directly to real estate consumers and professionals. Earlier this year, that changed—signaling a shift in strategy with major implications for real estate portals.

A month ago, Facebook announced a major update to the “Property Rentals” section on Facebook Marketplace, launching a new front-end that allows mobile users to search for rentals using a variety of new filters: rental type, location, number of bedrooms, pet friendliness and more.

Facebook Marketplace’s Property Rentals

Paired with this product update are new partnerships with Zumper and Apartment List—two of the most prominent online rental platforms, which collectively receive millions of unique visitors a month—which will directly syndicate “hundreds of thousands” of rental listings to Facebook.

This is the second major step that Facebook has taken into residential real estate in three months. September saw the launch of Dynamic Ads for Real Estate, which lets brokerages and real estate websites promote live listings to Facebook users.

What do these features reveal about Facebook’s real estate strategy, and what does Facebook’s growing interest in real estate mean for portals? In this article, we’ll take a closer look at Facebook’s recent moves into residential real estate, assess its motivations and forward-looking roadmap, and discuss the implications for existing players, especially real estate portals.

Facebook and Real Estate

Facebook cemented its status as an important marketing channel for rental managers and real estate agents well before the launch of Property Rentals and Dynamic Ads. On the rental front, Facebook has long hosted groups like Gypsy Housing, home to local classified posts from individuals and small-time landlords renting their property and rental seekers seeking the perfect match. Individual landlords have been able to post listings to Facebook Marketplace since the product’s launch last fall.

But rudimentary search and lack of quality inventory has stopped rentals from really taking off on Marketplace. Though we don’t have precise data from Facebook, this qualitative observation is reinforced by the continued growth of informal housing groups.

On the sale front, real estate agents have used Facebook to build local awareness of their services or conduct targeted promotion of their listings, taking advantage of relatively slim competition to generate strong ROI. When Inman News surveyed agents on their use of Facebook this past September, one agent noted that she once spent $750 on a listing ad that generated six contracts and “hundreds” of leads.

Another agent reports that his average cost per lead from Facebook is around $5, comparing favorably to an average of $100 per lead from Zillow—although that cost per lead has jumped sixfold over the past three years as more agents bid for ad inventory. In general, Facebook has delivered high ROI to agents, but only for those willing to manually upload listings, optimize ad creative and nurture leads over a longer time horizon. 

Even without the benefit of any features specific to real estate, Facebook has already captured substantial mindshare among agents, with a September 2017 report by research firm Borrell Associates suggesting that agents are “more likely to buy ads on social media than all other forms of digital media, including listing portals.”

Assessing Facebook’s New Real Estate Features

The revamped Property Rentals section and Dynamic Ads for Real Estate seem like simple optimizations at first blush, but their impact will be substantial.

On the rental front, the product refresh and accompanying listing partnerships are game changers. Syndicating listings from established rental sites—and improving the user experience for renters—will make rental search far more useful on Facebook, attracting users who will ultimately incentivize more landlords to post inventory directly to Facebook.

Facebook isn’t settling for feature parity with powerful incumbents like Craigslist, encouraging landlords to post 360° photos to provide a better sense for what a listing is like.

Facebook is smart to focus on rentals, which are an ideal entry point into residential real estate because competition is fragmented: there is no MLS or single source of truth for rental inventory. By supercharging its network effect through listing syndication and user-side tweaks, Facebook has a shot at replacing Craigslist as the most comprehensive database of rental listings in America.

On the sale side, the launch of Dynamic Ads for Real Estate makes Facebook a far more powerful tool for real estate agents.

Facebook’s Dynamic Ads for Real Estate product

Until now, agents could only target broad audiences, capturing leads with less intent than users actively surfing a real estate portal for homes. By allowing brokerages to upload a catalog of live listings and target users based on their past interaction with specific listings, Facebook lets agents market to users who directly demonstrate affinity for their homes for sale, which should improve lead quality and ROI.

Facebook’s Real Estate Strategy: All About Inventory

What do these new features have in common? Both incentivize suppliers of real estate inventory—property managers and landlords on the rental side, agents and brokers on the sale side—to upload more listings to Facebook.

The fundamental competency of an advertising platform is surfacing the right product or service (in our case, inventory) to the right consumer at the right time (in our case, transactional intent): in other words, identifying a consumer’s need and offering a relevant solution. With more than two billion users between its various products, Facebook is one of the few platforms that already has the right consumer in its grasp—and its real estate strategy targets the other pieces of the equation.

Listing inventory is the bedrock of Facebook’s strategy to capture market share in real estate ad spend. Even if Facebook had perfect knowledge of a consumer’s intent to rent or buy a home, it can only monetize that intent if it has a “product”—a listing—to display.

Accumulating a greater volume and variety of real estate inventory has another major benefit: by giving consumers more opportunities to interact with real estate, Facebook learns more about their preferences and intent, which enables more effective targeting. For example, Dynamic Ads for Real Estate already helps agents automatically target consumers who have visited their websites and browsed their listings. But a strong rental platform allows Facebook to add another powerful targeting tool to the mix, letting them advertise to folks searching for rentals with demographic characteristics that also make them likely buyers.

The more precise targeting options available to agents, the stronger a case Facebook can make to brokers that they should syndicate listings directly to Facebook. This is when things get interesting: if enough agents use Facebook real estate ads in a given market, we can even imagine progressive MLS boards—who have been eager for more leverage against the portals—syndicating listings directly to Facebook.

This presents the billion dollar question: will Facebook attempt to compete directly with real estate portals? We don’t believe Facebook wants to launch map-based real estate search, or turn the Marketplace into a fee-generating product for rental and sale listings. In the short run, Facebook is laser focused on improving its advertising product for real estate professionals and capturing a higher proportion of ad spend from portals.

Things could get worse for portals in the long run. We discuss this in greater detail below, but as Facebook accumulates more inventory and learns how to precisely mate those listings to consumer needs, it may be able to leapfrog map-based search entirely by using natural language queries from the homebuyer and precise algorithms to match users with the perfect home for them.

This won’t happen for years, but inventory would make it possible—and as we’ll discuss below, cultivating and protecting proprietary inventory is one way that portals can fight back.

The Impact on Portals: Competition for Premium Spend

The primary impact of Facebook’s move, in the short- to medium-term, will be increased competition for premium ad dollars from real estate agents. In the U.S., 70 percent of Zillow’s revenue comes from real estate agents, and the trend extends to each major international market.

Facebook’s entry into real estate advertising represents clear and direct competition for this premium spend. Real estate agents will have another top-tier platform to spend money on to generate additional branding for themselves, generate leads, or promote the homes they are selling. Premium spend usually has no upper limit; agents can spend as much as they want to promote themselves or their listings.

Zillow Reacts: Premier Agent Direct

Facebook launched its Dynamic Ads for Real Estate product last August. Two months later, Zillow announced a partnership with Facebook and “Premier Agent Direct,” an advertising product that pushes ads directly to Facebook.

Zillow’s reaction is straight-forward: the move gives it a seat at the table. With Facebook’s potential competition in the space, Zillow has decided the best way to stay relevant is to embrace the new Facebook advertising product and offer it to its existing customers.

Zillow’s Premier Agent Direct product

At the time, Zillow said it “wasn’t just buying ads and reselling them.” In reality, that’s exactly what it’s doing, but with the benefit of using Zillow’s user data to improve relevance and targeting. Zillow has assumed the role of a middle man. Agents can go directly to Facebook to spend their ad dollars, or they can continue spending with Zillow and get exposure on Facebook. It’s a win-win where Zillow stays relevant, Facebook generates ad revenue, and agents maximise their exposure across multiple channels.

Each option has its own benefits. Buying ads directly from Facebook gives agents more control and highlights their brand, compared to a co-branded experience through Zillow.

For Agents: Buying from Facebook vs. Buying from Zillow

The Two Key Strategic Pivot Points

Facebook’s entry into real estate will illuminate two key strategic pivot points, around which the Facebook vs. real estate portal competition will focus.

The first strategic pivot revolves around the user experience, pitting search vs. match. The current consumer experience on real estate portals is focused around searching and browsing. Visitors scan a map, enter search criteria, or browse through featured listings. It’s the equivalent of flipping through a glossy magazine or scanning the pages of a newspaper classified section.

The very nature of the Facebook product lends itself to matching experience. Real estate listings will be targeted to consumers based on what Facebook knows about them (in the same way it already targets advertising). This targeting is among the most sophisticated in the business given the amount of information Facebook knows about its users. The majority of Facebook users won’t be searching for real estate; they will see real estate presented to them.

The second key strategic pivot is all-of-market vs. some-of-market. Real estate portals maintain their reputation as the best place to find a home because they have all of the inventory available in the market. When a consumer is searching for a new home, they want to look where all of the properties for sale are available.

Facebook’s marketplace strategy, on the other hand, is not predicated on having all of the available real estate listings. At least for the foreseeable future, the listings available will be those uploaded by its advertising clients. So while the consumer experience on Facebook will target and match listings  directly to visitors, it won’t represent the entire market of possible houses for sale.

This leaves a competitive opening for real estate portals. As long as the portals have a greater inventory than Facebook (which we believe will be true in the medium-term), their benefit to consumers is clear. Do you want access to all of the market or only some of the market?

Strategic Options For Real Estate Portals

Facebook represents a clear and present danger for real estate portals around the world. It’s here, it’s growing, and it’s coming to eat your lunch.

Competitive Advantages: Facebook vs. Real Estate Portals

We believe a response strategy should center around the following:

• Focus on providing value to agents. Deliver utility throughout the value chain and offer a more complete solution. Agents who get red-carpet treatment, free call center service, and unique online products will be less likely to defect. Ultimately the game is about delivering ROI, so push hard to deliver more value to your customers.
   
• Act local and leverage your sales team. Real estate is national. Real estate portals have the local knowledge, relationships, and brand that are necessary to thrive in the market. By building your local indispensability to the market you compete in an area where Facebook cannot.
   
• Sell Facebook’s ad product. Adopting Zillow’s strategy is controversial. Consider that Facebook already has an ad product for real estate agents, it already demonstrates good ROI, and agents are already spending money on the platform. In five years, will that still be the case, or will Facebook simply go away? We’re betting that it’s here to stay, and it will only get bigger, with or without the cooperation of real estate portals. So get on board while you can and leverage your local muscle to sell Facebook’s offering to your customers.
   
• Explore "match." If and when the buyer experience moves toward a matching experience, have a product that matches buyers with homes. Don’t be left flat-footed if consumer preferences change.
   
• Don’t compete on social. If you’re considering how to compete with Facebook through social products, you’re naively barking up the wrong tree. The absolute last thing you should do is compete with Facebook where it is strongest.

Concluding Thoughts

Facebook’s deeper move into real estate—both in rentals and for sale listings—represents an opportunity for agents and brokerages and a strategic threat to a range of existing businesses. For real estate portals in particular, the first battleground is agent premium spend. Facebook is giving agents a new, powerful choice for where to spend money on leads.

This situation poses a dilemma for real estate portals. Do they cooperate with Facebook as “frenemies,” as Zillow has done, or do they work to stifle Facebook’s momentum at all costs?

It is our belief that Facebook is here to stay in real estate, and will continue providing a positive ROI to agents looking for leads. In the near term, real estate portals need to take action to cement their position as the best place to advertise properties for sale and for agents to generate leads. The good news, for portals, is that they have a fighting chance.

This article was written by Mike DelPrete and Sib Mahapatra. Mike DelPrete is a strategic adviser and global expert in real estate tech. Connect with him on LinkedIn. Sib Mahapatra is an entrepreneur and real estate tech enthusiast based in New York City. You can reach him on LinkedIn.

The Opendoor Machine: 4 numbers you need to know

Opendoor, the real estate startup that purchases homes directly from sellers, leads the pack of a new breed of real estate tech companies. It continues to innovate and improve the experience of buying a selling a home, and as the analysis below shows, is making significant improvements to its business model as it continues to grow.

150 percent

I believe Opendoor’s ultimate metric of success is how many homes it sells. More than just buying homes (which anyone can do with enough money), the successful completion of Opendoor’s business model requires it to re-list and sell the homes it buys.

So it should come as no surprise that the first key number -- 150 percent -- is the growth in homes Opendoor has sold in 2017 compared to the same period last year. This is in its two biggest markets, Phoenix and Dallas.

The year-on-year growth is driven by Dallas, which came online in September of 2016. Entry into new markets will drive Opendoor’s overall growth. Over the same time period, Phoenix experienced a 55 percent increase in home sales.

The more recent growth in home sales has been driven by the Phoenix market, where Opendoor is selling a median average of 130 homes per month over the past three months, compared to 90 homes per month for the preceding three months.

After a big bump in Q1 of 2017, home sales in Phoenix are tracking in-line with last year.

However, there is a notable uptick in the number of homes purchased by Opendoor in recent months. Given that, we can expect a corresponding uptick in sales for the rest of the year and into early 2018.

13

This is the median average number of “prep days” between when Opendoor buys a home and subsequently lists it for sale. This is based on 50 recent transactions in Phoenix and Atlanta (where Opendoor recently launched).

Opendoor Prep Days

Impressively, this number is down from a median average of 20 days when I last did an analysis in December of 2016. That’s a 35 percent improvement! To quote that earlier analysis, “...given that Opendoor generally borrows 90 percent of the purchase price and is servicing that debt, time is money!”

That earlier analysis also predicted that a “battle-tested and efficient flip process” was one of three sources of competitive advantage for Opendoor. This improvement reflects strides made in Opendoor’s operational efficiency. It is clearly standardizing its operations and learning from past success and failures on big and small levels, to truly become a home flipping machine.

And it’s not just in Phoenix, Opendoor’s first market. It’s newest market, Atlanta, is on track just as impressively. Looking at 20 transactions shows a median average of 11 prep days. That’s a great start.

Most importantly, this shows that Opendoor’s growing operational efficiency is a transferable competitive advantage between markets. This is a critical ingredient for national expansion.

41

This is the median average number of prep days for Opendoor’s top competitor in the Phoenix market, OfferPad. This is based on a selection of transactions in July, August, and September.

It clearly shows that OfferPad is holding homes longer than its competitor -- over three times as long!

OfferPad Prep Days

In a world where time is money, this represents a significant business model and financial disadvantage for OfferPad. The longer it holds homes, the higher its holding costs.

It’s not clear what’s driving this number. Could OfferPad be spending more time and money fixing up houses before flipping them?

Regardless of the answer, the comparison of prep times between Opendoor and OfferPad illustrates stark differences in their respective business models. Opendoor aims to flip houses as quickly as possible with a super efficient process. OfferPad either has a different model, or is still working on optimizing its operations.

7.4 percent

All businesses need to make money, and Opendoor is no exception. Outside of charging homeowners a fee for its services, the second way Opendoor makes money is the difference between what it buys and sells a home for. This difference is the gross margin, and in Q3 of 2017, Opendoor’s gross margin in Phoenix was 7.4 percent.

Gross margin is a top line number (hence “gross” and not “net”), meaning it does not include the numerous costs associated with holding, repairing, and reselling a house.

What’s notable about this number is that it’s up considerably over the past year. My previous analysis in December 2016 showed a gross margin of 5.5 percent, and a comparison to Q3 2016 shows a gross margin of 5.6 percent.

This data is based on all publicly recorded transactions, so it’s not just a selection or a sample.

So Opendoor has managed to increase its gross profit on each home it sells by about 30 percent. We can speculate that this is in line with its recent strategy of lowering the fees it charges to homeowners. If it can make a bit more on each home and charge homeowners a bit less, it all evens out in the end.

Final thoughts

Working through this analysis highlighted a few key takeaways.

First off, Atlanta is off to a good start. The average number of prep days is strong and the gross margin is in-line with the more mature Phoenix market. It’s still early days, but this shows that Opendoor is able to transfer its honed operational efficiency to new markets, which is a requirement if it’s going national.

Secondly, Opendoor won’t achieve its goal of being in 10 markets by the end of 2017. Expansion is slower than originally thought. With over 100 employees in Phoenix alone, perhaps the Opendoor model is more time consuming and resource intensive than originally thought?

Lastly, and I believe most importantly, Opendoor continues to grow. The customer proposition is resonating with consumers in increasing numbers. The business model is being refined. And Opendoor is learning as it expands into new markets.

This new model of buying and selling homes is not going away. The entire industry can learn from the likes of Opendoor and the growing number of competitors that are popping up. Consumers are being increasingly drawn to new models that improve the customer experience of buying and selling a home.

A note on data: this analysis is based on MLS records, listings from Opendoor’s web site, the Maricopa City Assessor’s public property records, public records sourced from Redfin, and The Cromford Report, a specialist web-site monitoring the Greater Phoenix housing market. If you’re researching Opendoor and on the hunt for data, check out the iBuyer Analysis Pack.

Zoopla's FY17 Results: Key Takeaways

Zoopla's FY17 Results: Key Takeaways from Mike DelPrete

Purplebricks USA: One Month In

Purplebricks, the online agent that has seen massive success while battering the incumbents in the U.K. market, launched in the U.S. about one month ago. Let’s take a deeper look at its launch, its tactics, the numbers, and its next targets.

The Model

The business model in the U.S. is similar to the U.K. and Australia (where Purplebricks also operates): Purplebricks charges a listing fee of $3,200, plus the typical compensation paid to buyer’s brokers (typically between two and three percent). Sellers must pay the fee either upfront or at closing, regardless of whether their home sells.

Purplebricks also works with homebuyers, paying a $1,000 rebate out of the buy-side commission toward closing costs.

The Customer Proposition

Pre-launch, the customer proposition for the U.S. market was the key question for me. Given that in the U.K. there are only listing agents and no buyers agents that Purplebricks needs to work with, the customer proposition is simple and straightforward: agents are bad, and Purplebricks is the alternative.

That approach would not fly in the U.S. market because it would end up alienating the industry and the important role of buyers agents in bringing prospective buyers to properties for sale.

So, Purplebricks launched its U.S. campaign (check out the commercials) with a slightly diluted message focused on two key themes: saving money, and a simpler, faster process. Time will tell if the message resonates with consumers in the same, effective way it has worked successfully in the U.K. market.

Like in the U.K., the key to the model is spending big money to raise consumer awareness and generate leads. This spend is not simply online, but typically overweight with above-the-line campaigns on TV and radio. As you can see from the recruiting message below, Purplebricks are planning to spend nearly $2 million per month on advertising -- quite a large number for one market!

The Numbers

It’s only been one month. Every new business starts small, and each new real estate agency starts with one transaction. The numbers are small, but it’s important to set them as the foundation for future growth.

At the core of Purplebricks’ business are the local property agents, called Local Real Estate Experts in the U.S. After one month in the market, Purplebricks currently has 24 licensed agents operating in the launch market in Los Angeles, California. This compares to over 650 local property experts in the U.K., and over 100 in Australia.

After one month of operation, Purplebricks U.S. currently has 12 listings, nine of which are for sale, and three of which are pending. Of its 24 agents, nine agents have one active listing each. Sixteen agents currently have no listings.

Yes, in isolation 12 is a small number, but remember that this is a new business. Getting a new listing every 2.5 days isn’t bad for a new entrant in its first month. But let’s see how it grows from here.

Next Targets

What’s next for Purplebricks in its expansion across the U.S.? A Californian expansion, namely San Diego, Fresno, and Sacramento.

What to Watch?

Going forward, these are the key strategic areas to watch:

• The numbers: listing volumes and number of agents. This is the ultimate metric to gauge whether the huge investment ($60 million) in U.S. expansion is paying off.

• Customer proposition: keeping a close eye on the marketing message to consumers, to see if it's resonating or needs to adapt to the U.S. consumer.

It’s still very, very early days for Purplebricks in the U.S. market. But take them seriously: Purplebricks is a large, serious, international player with plenty of momentum and experience, with deep pockets. It may not revolutionize the real estate market overnight, but it will have an impact.

2017 Global Real Estate Portal Report

2017 Global Real Estate Portal Report from Mike DelPrete

This presentation is available as a free PDF download from Slideshare.

Why investing in OnTheMarket is a horrible idea

I’ll cut right to the chase: OnTheMarket, the online property portal challenging Rightmove and Zoopla, does not offer more value to consumers compared to the existing alternatives. It serves no purpose and investing in such a business would be a horrible idea.

The power of network effects

The fully understand the case against OnTheMarket, we need to start with the concept of network effects. Simply put, network effects is the phenomenon whereby a service becomes more valuable when more people use it (Facebook is a great example).

Online marketplaces such as Rightmove and eBay are classic examples of businesses that benefit from network effects. The more people that use them -- buyers and sellers -- the more valuable the service becomes. If you’re selling something, you want to advertise to the biggest audience possible. And if you’re looking to buy something, you want access to the largest selection possible (think Amazon).

Businesses that have the benefit of network effects -- again, marketplaces and social networks are the best examples -- are incredibly difficult to displace. Because even if a new entrant’s product is objectively better, a smaller audience of potential buyers and sellers equals an inferior proposition. If you’re holding a garage sale, would you rather sell to an audience of 100 people or 1,000 people?

Providing value to users

As I’ve previously written in The 2 Principles of Startup Success, a new venture needs to provide more value to users than the other available options. If we use Clayton Christensen’s framework of “jobs to be done” as a basis (booking a flight, hailing a cab, keeping track of customers, or buying groceries), then the value of the new needs to exceed the value of the current.

Value can be defined many ways: cost, utility, and convenience are fairly standard measures. The value is what the user perceives and experiences on an individual basis, not what the provider thinks. Value originates with the user, not the new venture.

If you must explain your value, it’s not as great as you think.

If the value of the new is relatively close to the value of the current, you enter what I call “The Grind.” This is the unenviable position where you need to convince customers of the value you provide. As Jeff Jarvis eloquently states in What Would Google Do?, if you must explain your value, it’s not as great as you think.

The customer proposition of property portals

The value that property portals provide to consumers is straightforward:

• For buyers: access to the largest inventory of properties for sale (tracked as the total number of listings)

• For sellers: advertise your property to the largest collection of potential buyers (tracked as the total number of visitors)

Why OnTheMarket is a horrible investment?

Critically, OnTheMarket is a bad investment because it doesn’t provide value to users. There is no compelling reason for consumers to use the product compared to the existing alternatives (Rightmove and Zoopla).

Exhibit #1: OnTheMarket has a fraction of the total number of properties for sale

According to excellent research conducted by Exane BNP Paribas, OnTheMarket has around 5,700 agency customers, which is a fraction of the existing players (see the graph below). In fact, this number is down from 6,300 customers when last reported in 2016.

Earlier research conducted by MyOnlineEstateAgent showed that OnTheMarket had around 36 percent of the listings of Rightmove and 50 percent of the listings of Zoopla.

Looking at one region today, Bristol, shows 2,945 listings on Rightmove, 1,940 listings on Zoopla, and 659 on OnTheMarket. The market leaders have between 3x and 4.5x the total number of listings as compared to OnTheMarket, a non-trivial difference!

So: OnTheMarket has considerably fewer for sale listings than the existing alternatives.

Exhibit #2: OnTheMarket does not have the most visitors

In 2016, this story on EstateAgentToday discussed the relative traffic numbers of the major property portals. In it, OnTheMarket.com reported April traffic of 7.25 million visits, compared to Zoopla attracting close to 50 million average monthly visits to its website and mobile apps, while Rightmove receives more than 120 million visits each month.

In other words, the market leader, Rightmove, has over 16 times the traffic -- also known as potential buyers -- than OnTheMarket. Where would you want to advertise your home for sale?

The following charts from Similarweb show the same story (albeit with slightly different numbers, as web tracking is more an art form rather than a science). The market leaders have anywhere from 10 to 20 times the traffic of OnTheMarket -- and it’s not changing.

Web Site Visitors: Rightmove (orange) vs. OnTheMarket (blue)

Web Site Visitors: Zoopla (blue) vs. OnTheMarket (orange)

So: OnTheMarket has exponentially fewer visitors (potential buyers) than the existing alternatives.

Exhibit #3: OnTheMarket’s user interface doesn’t offer any advantages over the alternatives

In the same EstateAgentToday article linked previously, OnTheMarket’s CEO commented: “We have provided consumers with an alternative search platform which is clean, clear and responsive… There are no third party adverts cluttering the pages and the properties are displayed in the best possible light.”

He posits that the user interface of OnTheMarket provides a superior experience compared of the alternatives. Let’s take a look.

I’ll let you make your own judgement call, but from my perspective the user interfaces are basically identical: clean, simple and intuitive. I don’t see a massive value-add in what OnTheMarket is providing. If OnTheMarket was providing a superior experience, perhaps we would expect its web traffic to be increasing?

According to OnTheMarket, another value add they offer consumers is the ability to set up property alerts to be automatically notified of new listings. But both Rightmove and Zoopla also offer this functionality.

So: OnTheMarket offers, at best, an undifferentiated product compared to the market leaders, providing no additional value to users.

Why does OnTheMarket exist?

All of this begs the question: why does OnTheMarket exist? According to its CEO, it provides an “alternative search platform” for consumers. Which is really no answer at all.

OnTheMarket launched in 2015 to challenge the duopoly of Rightmove and Zoopla in the U.K. market. It was founded by a broad consortium of traditional real estate agencies who didn’t appreciate the market and pricing power enjoyed by the existing portals.

So: OnTheMarket’s reason for existing is to the benefit of existing estate agency owners and shareholders. Along the way, it forgot that it needs to provide actual, legitimate value to users other than an unnecessary “alternative search platform.”

Is OnTheMarket a good investment?

Rule number one in launching a new venture is to provide actual value to your users. It’s impossible to succeed without that key component.

On the verge of its IPO where it is seeking to raise around 50 million pounds at a valuation of between 200 million and 250 million pounds, you have to wonder who would be foolish enough to invest in the venture.

OnTheMarket provides no additional value to consumers. Investing in a business that serves no purpose and adds no value for its users is a horrible idea.

Disclosure: I am not an investor in nor do I have any financial relationship with any of the businesses mentioned in this article. I simply can’t stand bad ideas.

Transparency and bias in the face of disruption

Imagine getting an opinion on the Netflix business model from Blockbuster, or from a firm that worked closely with Blockbuster. Would there be an inherent bias, and would you trust it?

When industry incumbents are rocked by disruption, they fight back. Those who have a vested interest in the status quo will reveal their biases in an effort to fight the future and preserve the past, working to shape public opinion to their advantage.

The battleground we’re reviewing today is the U.K. real estate industry. The particular cast of characters is familiar: Countrywide, the incumbent; Purplebricks, the disruptor, and Jefferies, the investment bank in the middle.

Investment banks and transparency

This article centers on Jefferies, a well-respected investment banking firm that, among other things, provides deep industry knowledge across a number of sectors to investors.

The firm often pops up in media coverage of Purplebricks, the disruptive online estate agency, due to its coverage of the business. Its first detailed analysis of Purplebricks pulls no punches with this opening:

“Whether people buy or sell their homes through Purplebricks, we don't recommend that they buy shares in the company. The numbers in the business model look very attractive, however it is our view that they don’t add up.”

Purplebricks is commonly viewed as the top competitor to Countrywide. Its rise in market share and market cap coincides with the decline at Countrywide (for more, see Traditional vs Tech: How the U.K.’s biggest real estate incumbent is reacting to digital disruption).

When Jefferies is quoted about Purplebricks in the media, it is usually critical, ranging from a blistering attack on Purplebricks’ sales performance and finances to suggesting Purplebricks should be viewed as more of a gamble than a property services firm.

Jefferies also puts out deep analysis notes on particular businesses with recommendations to buy, hold, or sell that business’s stock. Here’s the one that kicked off its coverage of Countrywide in 2013.

Interestingly, Jefferies counts Countrywide, the largest estate agency group in the U.K., as a corporate client; it was named sole broker to Countrywide in June 2013, soon after the firm was refloated by its private equity owners. This fact is never mentioned in any media coverage of Jefferies’ thoughts on Purplebricks, and is contained in the fine print in its reports (page 113 of 117 in the Countrywide report linked above).

This type of conflict of interest is not unique to Jefferies and is well understood (and regulated) in the finance industry. Firms such as Jefferies are legally required to declare any potential conflicts of interest, especially when reports and recommendations are issued for corporate clients.

The potential and reality of bias is well documented across numerous research papers. In “Inside the 'Black Box' of Sell-Side Financial Analysts,” the authors sum up their findings:

“Whereas issuing earnings forecasts and stock recommendations that are well below the consensus increases analysts’ credibility with investing clients, it can also damage analysts’ relationships with managers of the firms they follow.”

And in “Conflict of Interest and the Credibility of Underwriter Analyst Recommendations,” the researchers conclude that:

“ … Stocks that underwriter analysts recommend perform more poorly than “buy” recommendations by unaffiliated brokers prior to, at the time of, and subsequent to the recommendation date. We conclude that the recommendations by underwriter analysts show significant evidence of bias. We show also that the market does not recognize the full extent of this bias.”

Stock recommendations

One way an investment bank or broker provides value to investors is by issuing stock recommendations. These typically come in three flavors: buy, hold, or sell.

The following chart summarizes Jefferies’ stock recommendations in the real estate field for three-and-a-half years between August 2013 and March 2017. The three corporate clients of Jefferies (Countrywide, LSL, and Zoopla) are listed on the left, and three direct competitors of those clients are listed on the right (Rightmove, Foxtons, and Purplebricks). This chart plots the total duration of the recommendations in days. The results are illuminating.

Jefferies issued twenty separate “buy” recommendations for its corporate clients, spanning over 2,000 days, while issuing none for their direct competitors. It issued five separate “sell / underperform” recommendations that spanned 700 days for direct competitors of its corporate clients.

Meanwhile, the sustained positive stock recommendations for Countrywide and LSL corresponded with massive underperformance (a 71 percent and 52 percent drop in stock price), while the negative stock recommendations for Rightmove and Purplebricks corresponded with a big gain in stock price (60 percent and 88 percent respectively). Investors would have lost a lot of money if they had heeded Jefferies’ advice.

The data, pulled directly from Jefferies and covering 38 data points over that three-and-a-half year period, raises questions about whether Jefferies favors its corporate clients and may indeed be biased in its research.

Jefferies’ recommendations in a wider context

To further understand Jefferies’ position on Countrywide, I’ve added a time-based dimension. The following analysis focuses on a key period between March 2015 and June 2016. It was during this defining 15 months that Countrywide’s prospects slanted noticeably downward while Purplebricks continued to grow and floated on the London Stock Exchange.

The chart below highlights that period of time with the stock recommendations of Jefferies (in red) and seven other investment banks and brokers (in dark blue): Goldman Sachs, Credit Suisse, Panmure Gordon, Numis, Citigroup, Peel Hunt, and Barclays. (The data sourced for these other brokers is from Broker Forecasts and may be incomplete, but tells a clear story).

Countrywide Stock Performance (2013 - 2017)

During this 15-month period, Jefferies made or reiterated a buy position on Countrywide on five separate occasions.

Citigroup was the only other broker to issue a buy recommendation during this period, but only maintained it for one month. For the other brokers, there were a total of three downgrades and one upgrade (from sell to hold).

While Jefferies maintained a positive outlook on Countrywide during a challenging period, the peer group of investment banks and brokers clearly saw things differently. While seven brokers maintained hold recommendations, Jefferies stands out as the only broker to maintain a positive buy rating during this time -- over 15 critical months.

Why we should care

Everyone has biases. Even Jefferies addresses this in its reports:

“Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report.”

There’s a reason banking firms are heavily regulated and legally required to highlight potential conflicts of interest: transparency. Whether it’s an investor looking for stock advice, a consumer reading the news, or a homeowner considering options to sell their home, they deserve transparency.

Jefferies is often at the center of debates around Purplebricks, with its detailed analysis and public opinions, and is presented as a knowledgeable and objective source. What my analysis shines a light on is not Jefferies’ knowledge of the real estate space (its analysis is comprehensive), but rather its objectivity.

Objectivity is especially important for new, disruptive business models. When evaluating new businesses, the public deserves to be fully aware of where they get their information from. Even seemingly objective sources may be biased.

Jefferies declined to comment for this article.

Stock charts courtesy the wonderful Financial Times and stock recommendations pulled from Broker Forecasts. My own personal bias is towards truth and transparency. Neither myself nor any associated entities have any business relationships with any firms mentioned in this article.

Built Not to Last

I want to build a business that won’t last.

In the world around us, many things come to a natural conclusion and end. Then why do we expect businesses—and all of their component parts—to last forever?

Imagine a business founded with an end date. After two years, the stakeholders come together, ask what the company would look like if they founded it today, and then form that company. The new business retains the good elements, sheds the bad, and moves forward with a fully-committed team.

By introducing an end to its constructs and practices, a business forces itself to evolve to the best possible design. It meets customer needs with a proactive, forward-looking operating structure, and not one rooted in the past. 

The problem of inertia

Research shows that most companies allocate the same resources to the same business units year after year. A review of over 1,600 U.S. companies between 1990 and 2005 found that inertia was the norm, with one-third of the businesses allocating capital almost exactly the same as in previous years.[1]

Studies have shown that anchoring—a form of cognitive bias where previous information influences decision making—contributes significantly to organizational inertia.[2] But the problem extends beyond budgets and resource allocation. Business leaders are also anchored to last year’s business practices, org charts, marketing messages, role definitions, technology initiatives and sales practices. That anchoring leads to incremental thinking year after year.

In their 2008 book Nudge, Richard Thaler and Cass Sunstein discuss the idea that choice architecture, or the design of environments in order to influence decisions, leads to both good and bad outcomes. Defaults are the building blocks of this architecture.[3] A default option is the option the chooser will obtain if he or she does nothing.

The push to evolve often goes against the grain of corporate culture, where the default path is maintaining the status quo. Change is uncertain, uncomfortable, and many times unprofitable. As Larry E. Greiner states in “Evolution and Revolution as Organizations Grow,” management problems and principles are rooted in time. Attitudes become more rigid, more outdated, and more difficult to change. While business leaders must be prepared to dismantle inefficient structures, evolution does not occur effortlessly.

More often than not, a businesses default path—the one taken if no decision to the contrary is made—is to continue without change. But what if the default path forced an ending?

The evolutionary concept

Evolution is the process of heritable change over time, whereby advantageous traits are preserved and bad ones rejected.[4] This process occurs over multiple generations—which is key. In nature, this means organisms need to have an end. When applied to the business world, it means business practices and constructs also need to have an end to evolve.

This intense feedback cycle creates an efficient system of improvement over time, which produces the best possible design for the current environmental conditions.

When a new product is launched, business unit created, or team started, it is designed with a start in mind, but rarely an end. By default, it’s assumed that it will carry on forever (or until specific but unspecified action is taken to modify or end it). 

Evolution is a powerful concept that results in improvement over time. Bringing this concept to work in practice requires two key principles:

• Define an end date up front. Whether it’s a business, business unit, product, marketing plan, sales plan, or a staff position, create an end date at inception and only bring people along who are comfortable with the journey. Something can’t evolve when it continues on indefinitely.
• Change the default. On the specified date, the default action becomes an ending. It’s not a review, discussion, or theoretical exercise. It ends, and if it’s decided to continue on, a new structure is born. A rebirth occurs with a forced ending, and with this we keep the good, ditch the bad, and end up with the best design possible.

4 ways businesses can put evolution into practice

1. Reinvent the business

The fundamental, key concept in this process is asking the following question: “If we were to start a company that does [whatever the company does] today, how would we do it?” Then start that company. (In the unlikely event that the answer is “exactly how we’re doing it now,” you’re not trying hard enough!)

By definition, the new business will be the one that is best designed and best positioned to succeed in the market at that time. Old practices that don’t work need to be killed, quickly and completely.

SpaceX started as an answer to the question, “If we were to launch a space flight program today, how would we do it?” In a classic illustration of the Innovator’s Dilemma, it led to significantly improved designs, processes, goals, and systems that the incumbents weren’t capable of undertaking—at a significantly lower cost.

2. Hire employees for fixed periods of time

Sports teams hire athletes for a fixed period of time. They do this because an athlete’s skills and the team’s needs vary over time. What works today might not work in three or five years. Are the needs of a business so different? 

It’s unrealistic to think that a business’s needs are going to remain constant for several years. It’s equally unrealistic to think that an employee’s skills, abilities, and desires will also remain constant.

As much as possible within the local labor laws, a business should only hire employees for fixed periods of time. At the end of that term, the business should reevaluate the position and the candidate to ensure the best possible fit.

A manager should ask the following key questions:

• Is the job that needs to be done exactly the same as it was 12 or 24 months ago?
• Is this position still needed?
• Is the person the right fit for what we need today? 

3. Rotate senior managers

The CEO—and the entire leadership team in general—sets the tone and pace of the organization. Their leadership will impact the company more than anything else. That’s why they should be replaced on a regular basis (think of it as term limits rather than being fired).

In practice, this means signing all senior managers and executives to fixed-term contracts. At the end of that term—just like a fixed-term employee—the business should reevaluate exactly what’s needed in the position and then conduct interviews to make sure it ends up with the best possible candidate for the job.

A less extreme version of this, especially if a business has great talent it doesn’t want to lose, is to rotate senior managers between different business units. Large companies like GE use this system to force evolutionary thinking while keeping great talent inside a business. The concept also works with employee rotation as a form of retention and renewal. (For more on senior manager rotation, see “Rotate the Core” on the Harvard Business Review web site.)

Huawei, the largest telecommunications equipment manufacturer in the world, has a rotating CEO system. Three deputy chairmen act as the rotating CEO for a tenure of six months each, while sitting on a board of seven with four standing committee members. The system, inspired by U.S. presidential elections, is a great example of evolutionary thinking principles in practice.[5]

4. Implement zero-based budgeting

Zero-based budgeting is a process that allocates funding based on opportunity and necessity rather than history. As opposed to traditional budgeting, no item is automatically included in the next year’s budget by default. It’s a powerful concept that, when properly implemented, can liberate a business from inertia and entrenched thinking.[6]

It is the mindset shift, and not necessarily the methodology, that makes zero-based budgeting an effective tool. It resets the discussion in favor of actively thinking about ways to make things better (forward-looking) rather than asking why it is the way it is (backward-looking).[7] Compared to other cost-cutting measures, the focus is squarely on what activities and resources are needed in the current environment.

Zero-based budgeting is a process that can work in any sized company, at any stage of growth. While it may be challenging to implement, when done correctly it successfully reduces organizational inertia and incremental thinking through a more accurate expenditure of resources. (For more on implementing zero-based budgeting in your organization, see “Five myths (and realities) about zero-based budgeting” on the McKinsey & Company web site.)

Concluding thoughts

New Zealand’s national museum, Te Papa, is ranked as one of the world’s best. It is currently undertaking a renewal program of all of its major exhibitions. It’s not simply an update with incremental change, but a total reimagination where leadership effectively asks, “If we were to have an exhibit about [whatever the current exhibit is] today, how would we do it?” By specifically ending the current exhibits, museum staff are forcing an evolution that is not anchored to the status quo.

The way businesses think about strategic planning leads to incremental thinking and incremental results. Instead of being a passive observer to change and evolving by incrementing, businesses should adopt a more proactive posture and force endings. There are many changes that any sized business can make to effectively force evolution and stay relevant in a changing, fast-paced world. It all starts with defining an end.

Footnotes

[1] See Stephen Hall, Dan Lovallo, and Reinier Musters, ”How to put your money where your strategy is,” March 2012.

[2] See Dan Lovallo and Olivier Sibony, “Re-Anchor Your Next Budget Meeting,” March 2012.

[3] See Daniel G. Goldstein, Eric J. Johnson, Andreas Herrmann, and Mark Heitmann, ”Nudge Your Customers Toward Better Choices,” December 2008.

[4] See Ker Than, “What is Darwin's Theory of Evolution?,” May 2015.

[5] See David De Cremer and Tian Tao, “Leadership Innovation: Huawei’s rotating CEO system,” November 2015.

[6] See Zero-Based Budgeting: Zero or Hero?, Deloitte 2015.

[7] See Matt Fitzpatrick and Kyle Hawke, “The return of zero-base budgeting,” August 2015.

iBuyer Market Update: Opendoor and OfferPad in Phoenix

iBuyer Market Update: Opendoor and OfferPad in Phoenix from Mike DelPrete

Are you researching iBuyers like Opendoor and on the hunt for data? Do you work at a consulting or venture capital firm? Check out the iBuyer Analysis Pack.

Purplebricks' FY17 Annual Results: 5 Key Observations

Purplebricks' FY17 Annual Results: 5 Key Observations from Mike DelPrete

Zillow: Killing the golden goose?

Over the past week, real estate has been dominated by news of Zillow Group’s Instant Offers. The new program, which allows prospective home sellers to receive instant offers on their homes, has been covered across the industry, with the reaction – as one would expect – largely negative.

A thought-provoking article in VentureBeat rhetorically wondered whether Zillow could “Uber-ize” the hundred-billion-dollar real estate brokerage business. The author claims that Zillow is well-positioned to disrupt the industry and capture an even larger share of the brokerage market.

All up, there’s an immense amount of interest related to Zillow disrupting or displacing the traditional real estate industry structure. It’s a huge opportunity, but one fraught with risk.

I’m going to approach this situation from two angles: my own time as head of strategy for a publicly-listed, multi-billion dollar business, and what the data tells us.

Instant Offers: offensive, defensive, or opportunistic?

The key strategic question in all of this is whether Instant Offers is an offensive, defensive, or opportunistic move by Zillow?

If Instant Offers is an offensive move and amounts to Zillow’s first salvo against the real estate industry, it’s a strange one. It’s just too far removed from the endgame of displacing real estate agents. The risk doesn’t match up with the reward.

Or, perhaps it’s a defensive move against the rapid rise of Opendoor and its growing list of national competitors. With Opendoor raising over $300 million U.S. and valued at more than $1 billion U.S., it’s difficult to ignore. But, even a disruptive operation such as Opendoor still needs to sell houses, and those houses will appear on Zillow. And with a two-percent market share in the Phoenix market, it still has niche appeal – not exactly an existential threat to Zillow.

So, the most likely answer is that Instant Offers is an opportunistic move by Zillow. It wants to capitalize on the growing consumer demand for instant home offers, and sees it as a potential new revenue stream, whereby it can collect and monetize seller leads.

This fits well with Zillow’s existing business model: It continues to operate as a marketplace, monetizes leads, and sells those leads to real estate agents. It’s a natural extension, rather than a radical disruption.

Real estate websites versus agents

Real estate websites around the globe have the same problem: a love-hate relationship with their biggest customers – real estate agents. The top sites are fighting a constant battle to extract more money from their customers through regular price rises and value-added services.

On the other hand, real estate agents pay the sites for advertising, exposure, and leads, because of the clear return on investment, but do so begrudgingly and with a sense of fear. Most agents are afraid of these sites gaining too much power, continually raising prices, and perhaps even replacing them with an online-only offering.

So, while real estate sites are best positioned to disrupt the real estate industry by displacing agents, they’re also the least likely to do so, because agents are their biggest customers and source of revenue.

Case in point: The Trade Me Property price rise. While I was at Trade Me, New Zealand’s dominant horizontal, we initiated a modest price rise for agents. It was a change from an all-you-can-eat model with a flat subscription fee towards a pay-per-listing fee. It was not well-received.

Real estate agents across New Zealand were angry. They did not take kindly to a price rise and organized themselves around our rival and No. 2 on the market, the industry-owned RealEstate.co.nz. The impact was a material narrowing of the traffic gap between both sites – arguably the most important performance indicator for a real estate website (see Network Effects for more on that). 

Source: Properazzi

Trade Me Property’s traffic lead went from five times to three times the traffic of the No. 2 rival, a huge drop. Increasing prices for real estate agents – let alone disrupting them – isn’t easy.

(Zillow’s traffic is approximately three times higher than its top competitor in the U.S., namely Realtor.com.)

I believe there are a number of critical preconditions for a real estate website to truly disrupt real estate agents:

1. A monopoly on traffic. Ideally, there is no major No. 2, but if there is, the top site needs to have a massive traffic advantage.
2. Revenue diversification. The less reliant the site is on revenue from agents, the better able it will be to withstand a revenue hit.
3. A strong brand. It should be well-known in the market and be seen as a leader in the field, the equal of any strong brokerage.
4. Online tools to disintermediate brokers. A site needs to offer all the tools and capabilities that a brokerage offers, including CRM, document signing and management, marketing and promotional tools, lead capture and management, and inventory management.

Revenue diversification and risk

Most real estate platforms capture their revenue from agents. Whether spending their own money to promote themselves or buy leads or spending their vendor’s money to advertise a property, the agent controls the purse strings.

In the case of Zillow, around 70 percent of its revenue comes from real estate agents. While not surprising, it’s still a big number that reflects a poor level of diversification. Furthermore, as we can see below, that number as a percent hasn’t changed over the past four years. Zillow does not look like a business trying to diversify its revenue.

Zillow fully believes it is at the beginning of its journey, not the end. It sees plenty of runway left to grow its revenue even higher as more spend goes online. And the numbers prove it: revenue grew 31 percent from FY 2015 into FY 2016, higher than any of its global peers.

In other words: Zillow is making a ton of money with its current business model and sees plenty of growth left. Why put that at risk and kill the goose that lays the golden eggs?

We can also see that Zillow’s revenue share from agents is on par with its global peers. Most of the major players illustrated above receive between 65 percent and 75 percent of revenue from agents. 

Zoopla, the single exception, has taken a proactive strategy to diversify its revenue streams away from agents. In 2015, it acquired uSwitch, a price comparison business, for £160 million and the acquisitions have continued at a brisk pace since then, all in an effort to expand along the value chain and become a one-stop-shop for consumers and real estate professionals.

As opposed to Zillow, Zoopla looks like a business that is diversifying its revenue streams. With that clear strategy in place, revenue diversification has followed.

Of all the major real estate websites in the world, Zoopla is best positioned from a revenue diversification standpoint to disrupt the industry.

Given what we know about its strategy and what the data shows us, I consider it unlikely that Zillow is making moves against the industry. The existing business is just too lucrative with plenty of growth left to put it all at risk.

Rather, Instant Offers is about giving consumers choice, expanding the existing lead marketplace, and a new source of revenue with seller leads. It’s also just a test.

Zillow is not well-positioned to make a big move against the industry. Its revenue is not diversified and there is a strong No. 2 on the market.

Regardless, Instant Offers should be instantly interesting to all of the major real estate websites around the world. It’s capitalizing on a pro-consumer offering that can make these sites more valuable to consumers around the world. I guarantee many – myself included – will be watching this test with great interest.

Purplebricks shows good momentum in Australia; appeals towards lower end of market

Purplebricks launched in Australia in August 2016. Last week's trading update piqued my interest in its market traction in Australia, which led to several interesting observations. All data is publicly available from the top property portal in Australia, realestate.com.au.

To begin, let's look at overall market traction. The chart below shows the number of houses sold each month (as reported on the portal).

There is clear, continued growth in its two launch markets, while NSW is off to a promising start. The overall numbers are still low, but there's a promising and unmistakable upward trend in all markets.

Purplebricks currently list 26 LPEs (Local Property Experts) in Queensland, 20 in Victoria, and 12 in NSW. Given the monthly sales figures above, we can calculate an approximation of many properties each LPE is selling per month.

NSW is quite new, so it makes sense that the ratio is lowest there. But in the two, slightly more mature markets, you can see that each LPE is selling between two and two-and-a-half properties each month.

At the time of writing, there are 346 properties listed for sale in Queensland, 196 in Victoria, and 83 in NSW. Given the same LPE numbers, we can plot out the total number of current listings relative to LPEs.

There are a number of factors that could influence these numbers. It could be a reflection of average time on market; perhaps there are more listings per LPE in Queensland because it takes longer for properties to sell. Or it could be a reflection of timing; it may take several weeks for a new LPE in NSW to become fully productive with acquiring new listings.

The real magic will be in seeing how these ratios change over time, so stay tuned!

Looking at the listed sale prices of just under 500 properties gives us a look at what segment of the market the Purplebricks proposition appeals to. The chart below shows clear clustering in Queensland, where Purplebrick's median sale price is $493,000, below the overall market median home value of $655,000.

Likewise, sale prices in Victoria are also well clustered around a slightly higher median sale price of $530,000, compared to the overall market median home value of $826,000.

As is clearly evident from the two charts above, the median home values in both Queensland and Victoria are higher than Purplebricks' median sale price. A reasonable conclusion would be that the Purplebricks offering and proposition currently appeals to the (slightly) lower end of the market in Australia.

Is it true that owners with high value homes are still more comfortable using a traditional real estate agent (even though they could proportionally save more on commissions by using a service such as Purplebricks), or is it still early days with Purplebricks building trust in a new market?

Regardless, it's clear that the proposition is resonating with a growing number of consumers. Next stop: The U.S. market.