The Real Estate Portal + Mortgage Conundrum

The largest global real estate portals are attempting to diversify and expand their revenue streams by offering mortgage -- with mixed success.

• Zillow, Redfin, and Australia's REA Group have all made major forays into mortgage with large acquisitions.
  
  

• Despite being technology companies, revenue growth is closely tied to employee count, and profitability (in the U.S.) remains elusive.

Dig deeper: Redfin's mortgage revenues jumped after its recent acquisition of Bay Equity for $138 million, but the overall business remains unprofitable.

Zillow's mortgage business has been unprofitable for over five years, recently spending $1.85 for every $1 in mortgage revenue.

• It even lost money in 2021, when 96 percent of mortgage firms were profitable.

Australia's leading portal, REA Group, has managed to grow a profitable financial services business by acquiring two large mortgage broking businesses.

• Financial services now accounts for six percent of REA Group's total revenue.

Behind the numbers: Mortgage growth is very much tied to people -- mortgage brokers and mortgage loan originators (MLOs).

• REA has acquired legacy mortgage businesses with hundreds of brokers -- the company currently employs more than 1,000 brokers.
  
  

• Redfin's mortgage originations jumped in Q2 2022 after its acquisition of Bay Equity and its 485 MLOs.

Mortgage business growth is tightly correlated to an increase in mortgage advisors (brokers and MLOs).

• Redfin's mortgage originations are up 10x while MLO count is up 12x after acquiring Bay Equity.
  
  

• REA's financial services revenue is up 2.8x while its number of mortgage brokers is up 2.7x after acquiring Mortgage Choice.

Broader context: The number of MLOs is an important bellwether for the ability of other real estate tech disruptors to grow in the mortgage space.

• Some companies have shed MLOs through recent layoffs (Reali, Tomo, Homie, Knock, and Flyhomes), while others have grown organically and through acquisition (Orchard and Homeward).

The bottom line: Billions of dollars are being invested to disrupt the mortgage process -- which is the path to profitability for many real estate tech companies.

• Instead of leading to greater profits, mortgage has turned into a money pit for the big U.S. real estate portals.
  
  

• And at the end of the day, the evidence is clear: it's the number of brokers and MLOs that drives meaningful business growth.

Zillow Home Loans Continues Its Unprofitable Run

Like much of the industry, Zillow's mortgage operation, which includes Zillow Home Loans, has seen a steep decline in revenue and continues to burn cash.

Why it matters: Attaching mortgage is a key component of Zillow's "Housing Super App" and future growth strategy; the longer it falters, the less likely Zillow is to achieve its long-term aspirations.

• Zillow's 2025 goal includes an additional $800 million in revenue from adjacent services -- primarily mortgage.

Dig deeper: Zillow's mortgage segment, which includes its mortgage lead gen marketplace and in-house lender Zillow Home Loans, is consistently unprofitable.

• In the first half of 2022, Zillow spent $1.85 for every $1 in mortgage revenue.
  
  

• That's a $65 million loss in the first half of 2022, and a combined loss of $180 million since 2017.

Context: The entire mortgage industry is getting hammered this year, with dropping leads, loan volumes, and revenue.

• But even before the recent slowdown, Zillow Home Loans struggled with attach rates and consistent unprofitability during boom years.
  
  

• According to this Mortgage Bankers Association study, 96 percent of mortgage firms were profitable in 2021; Zillow Home Loans was not.

The bottom line: Zillow Home Loans' path to profitability remains long, arduous, expensive, and uncertain.

• Ultimately, attaching mortgage makes a great slide on investor presentations, but is very hard in real life.
  
  

• Go deeper: Ecosystem Disruption in Mortgage Looking Exceedingly Traditional.

The Zillow & Opendoor Partnership

Last week, former rivals Opendoor and Zillow announced a partnership to provide Opendoor's instant cash offers to Zillow's audience.

Why it matters: This is a big move for both companies. It reaffirms the continued relevancy of iBuying, gets Zillow back into the seller lead game, and gets Opendoor access to its largest customer acquisition channel yet.

But, why: It's a match made in lead gen heaven.

• Zillow generates and monetizes buyer leads, but is missing a product that generates seller leads (that product is iBuying).
  
  

• Opendoor generates millions of seller leads, but it's really expensive and Opendoor only monetizes a small fraction of those leads.
  
  

• Go deeper: Building a Better Mousetrap: Zillow vs. Opendoor.

This partnership gives Zillow the ability to generate and monetize high-quality seller leads (consumers that are considering selling their home), something it lost when Zillow Offers was shut down last year.

• Historically, Zillow was only able to convert 10 percent of sellers who requested an instant offer; the other 90 percent are high-quality seller leads.
  
  

• Those leads are worth their weight in gold and can be monetized through Zillow's premier agent network (yes, I've been talking about this since 2018).

For Opendoor, this partnership represents an incredible -- and perhaps the industry's largest -- source of customer leads.

• It extends Opendoor's ecosystem partnership strategy, which includes deals with Redfin, realtor.com, and eight of the top ten homebuilders.
  
  

• The potential benefit to Opendoor is economic: lower customer acquisition costs, which were around $5,500 during the most recent quarter.

Perhaps most important, a Zillow Advisor will be the first point of contact for consumers requesting an instant cash offer.

• This effectively cements Zillow's powerful position at the top of the funnel with continued, full access to the customer.
  
  

• A Zillow Advisor will be able to discuss an instant cash offer alongside a traditional sale (seller lead), in addition to Zillow Home Loans.

Without the opportunity to upsell adjacencies, Opendoor becomes a fulfillment engine, similar to its other industry partnerships, focused on the core iBuyer transaction (buy, fix, sell).

The bottom line: This deal is both a confirmation of the relevancy of iBuying, and a continuation of that relevancy through Zillow's promotion of instant offers across its massive platform.

• It puts Zillow back in the potentially-lucrative seller leads business, and gives Opendoor access to millions of potential customers. Win-win.

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For more on iBuyers, portals, and the major shifts across the industry, check out my keynote presentation, 2022 WTF, from Inman Connect Las Vegas.

Building a Better Mousetrap: Zillow vs. Opendoor

Opendoor made over two million offers to curious homeowners in 2021, exponentially more than ever before.

Why it matters: This highlights the growing potential of Opendoor's "top of the funnel" customer appeal -- which is beginning to rival Zillow.

• Opendoor and Zillow are both in the game of attracting consumers and converting them to monetizable customers.

Dig deeper: Of the 2.1 million offers Opendoor made in 2021, it only purchased 1.8 percent, or around 37,000, of those houses.

• Based on the company's numbers, of those 2.1M offers, five percent, or 105k, represented unique "real sellers." Of those, 35 percent sold to Opendoor.
  
  

• That purchase rate has decreased over time as Opendoor has ramped up the number of offers it makes while automating the offer process.

A low purchase rate does raise questions of product/market fit.

• Based on the total offers sent out, a very small number of consumers are deciding to sell their home to Opendoor.
  
  

• But of "serious sellers," one in three ain't bad.

Yes, but: Hundreds of thousands of consumers are actively deciding to visit Opendoor to request an offer.

• Even if Opendoor doesn't buy the house, the company still touches a homeowner during their home buying/selling journey, creating an opportunity to cross-sell adjacent services (brokerage, mortgage, leads to agents).
  
  

• And, as we'll see below, overall customer conversion is on par with Zillow.

Zillow's powerful top of the funnel customer acquisition tool is its web site, which generated an estimated 21M leads in 2021.

• Of those, 1.4M were "real buyers" and 26 percent of them (360k) ended up transacting with a Zillow Premier Agent.
  
  

• That results in an overall conversion rate of 1.7 percent, exceedingly similar to Opendoor's 1.8 percent.

Zillow's dominance at the top and bottom of the funnel is clear: 10x larger than Opendoor.

• But surprisingly, Zillow, the decades-old industry heavyweight, is only 10x larger than Opendoor, which has made notable gains.
  
  

• There are variations in conversion rates throughout the funnel, but overall efficacy is nearly identical.

Remember: Zillow is optimized around home buyers, while Opendoor is optimized around home sellers.

The bottom line: With similar conversion rates, neither company has built a better mousetrap, but Zillow's mousetrap is exponentially larger.

• In terms of customer reach and the sheer quantity of leads generated, Zillow has a huge advantage.
  
  

• But with its ongoing national expansion, heavy advertising investment, and automation of the offer process, Opendoor is making significant gains -- and the growing power of its top of the funnel customer acquisition can't be ignored.

A note on data: The last time Zillow reported the number of leads generated annually was 17M in 2016. My assumption of 21M leads in 2021 is a well-informed estimate.

Zillow Goes All In on Next Gen Lead Gen

Zillow recently announced that it was moving exclusively to its success fee Flex model in two major markets, Denver and Raleigh.

Why It Matters: Zillow Flex is "Next Gen Lead Gen," featuring a 35 percent commission share and lead qualification by Zillow employees. It's the future of real estate portal lead gen -- and gets Zillow much closer to the transaction.

• In the past, Zillow has operated Flex alongside its traditional pay per lead model; this changes that.
  
  

• By going all in in two major markets, Zillow is signaling its intent to control more of the transaction in order to satisfy its goals of doubling its Premier Agent business by 2025.

Zillow's new strategy (Zillow 3.0: Back to Basics) has the company going back to its roots, doubling down on agent lead gen, and extracting more revenue from real estate commissions.

• This trend started in 2018 with Opcity, lead conversion, and the journey down the funnel.
  

• Targeting real estate commissions as a source of revenue isn't unique to Zillow; many big tech players are coming after agent commissions in a big way

Winners and losers: Next gen lead gen works for the agent partners that decide to participate in the program; those agents and brokers receive millions of leads.

• But those agents may become even more reliant on the portal as a critical business partner, giving the portal more market power.
  

• Over the long term, agents not participating in these invite-only programs will receive fewer online leads, and may be at a significant competitive disadvantage in the race to acquire customers.

What to watch: How Zillow integrates mortgage (Zillow Home Loans) and ShowingTime into its renewed Flex program.

Next Gen Lead Gen is a major trend discussed in my Real Estate Portal Strategy Handbook. Check out a free preview of the report, or this article on the topic!

Zillow 3.0: Back to Basics

Zillow's new strategy has the company going back to its roots, doubling down on agent lead gen, and extracting more revenue from real estate commissions.

Go deeper: The biggest growth driver is Zillow's premier agent business, which it plans to double by 2025. That's an additional $1.5 billion paid by real estate agents to Zillow.

• These are aggressive targets and a step-change from past growth rates, which reflect the audaciousness of the strategy -- and a clear signal of intent.

By the numbers: Zillow's core business is stronger, and more profitable, than ever, giving the company a rock-solid foundation and plenty of cash for future growth.

• Earnings in Zillow's IMT business, which includes premier agent, more than tripled over the past three years. It's the profitable engine room of Zillow 3.0.

Premier Agent saw an acceleration in revenue growth driven by unprecedented demand during the pandemic.

• But quarterly revenue growth just dropped for the first time in 18 months. The pandemic bump won't continue indefinitely.

Zillow Home Loans, its mortgage play, is another key component of Zillow 3.0.

• Like Premier Agent, revenue surged during the pandemic, but has slowed down significantly in the most recent quarter.

The pressing issue is that Zillow Home Loans is consistently unprofitable (net loss of $50 million in FY21).

• Zillow is managing to lose a lot of money in a business that others can operate quite profitably.

• The best case is that Zillow is smartly investing for the future. The worst case is that Zillow Home Loans is another Zillow Offers, beset by executional issues and overextension.

The bottom line: Zillow's 3.0 plan is centered around creating more transactions for premier agents and selling consumers adjacent services (mortgage and title).

• Creating more transactions comes down to connecting consumers and agents in such a way that Zillow earns a commission.

• That's a huge inflow of new business for premier agents, and it comes at the expense of non-premier agents.

Next Gen Lead Gen

Next generation lead generation is the most significant business model shift for real estate portals since their birth. It is the evolution towards delivering fully qualified leads with a commission share model, and it accounts for an increasing percentage of portal lead gen revenues -- while bringing them closer to the transaction.

An Emerging Global Trend

The evolution is occurring globally and targets both buyer and seller leads. The key themes include lead qualification and a commission share model (aka success fee).

Leading real estate portals around the world have made significant investments into next gen lead gen, including several large acquisitions.

The U.S. portals focus on monetizing buyer leads, while international portals like ImmoScout24 and MeilleursAgents focus on seller leads. The most effective way to reach prospective sellers is with property valuations: “What is my home worth?”

A key element of this model is that leads are qualified before being handed off to a partner agent. Leads are called directly by the portal, typically within minutes of submitting a form.

The second key element of next gen lead gen is the use of a commission share, or success fee, model. If a lead transacts, the agent pays a percentage of their commission back to the portal.

The commission share varies by market, but is generally around a third of an agent's commission. And this source of revenue accounts for an increasing share of portal revenue; realtor.com generates about a third of its lead gen revenue from the commission share model, as does ImmoScout24.

A Win for Consumers, Portals, and (some) Agents

Next gen lead gen lays the groundwork for a triple win: the promise of a better consumer experience, less wasted time for agents, and a more valuable product for portals.

The potential downside of next gen lead gen programs lie in their exclusive nature. It's not for everyone; agent networks consist of a small and exclusive group of the total agent pool.

Over the long term, the agents not participating in these programs will receive fewer online leads, and may be at a significant competitive disadvantage in the race to acquire customers. Next gen lead gen is revolutionizing the portal lead gen business model, but it only works for the agents that jump on board.

Next Gen Lead Gen is a major trend discussed in my Real Estate Portal Strategy Handbook.

• Check out the free preview of the report.

The Real Estate Portal Strategy Handbook

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The Real Estate Disruptors Serious About Mortgage — A 10x Story

Real estate tech disruptors are investing billions to build integrated brokerage and mortgage experiences. Some have more resources than others, but all have the same scaling bottlenecks. And in the end, the biggest disruptors -- and who is most at risk -- may come as a surprise.

The Bottlenecks to Scale

Each company employs licensed brokers -- Mortgage Loan Originators (MLOs) -- that occupy a critical position in securing or refinancing a mortgage. As with real estate, people remain a central component of the mortgage process, and no amount of technology, venture capital, or inspirational vision has yet to replace them.

MLOs are both a key component and a bottleneck for the iBuyers, Power Buyers, and others attempting to attach mortgage to their core services. The speed at which they hire MLOs, and the total number employed, is a reflection of how serious they are and their potential to grab market share.

Homeward and Knock, fresh off big funding rounds, are quickly growing. Newcomer Tomo is moving fast. Notably, the iBuyers remain relatively small. There is no outsize leader...until real estate portal Zillow is added into the mix.

Zillow has nearly 10x the MLOs of its smaller competitors, giving it significantly more scale and firepower for its integrated mortgage plans. Zillow is the top player...until pure play digital disrupter Better Mortgage is added into the mix.

Better Mortgage has raised nearly $1 billion in its quest to disrupt mortgage, and has nearly 10x the MLOs of Zillow. Significant firepower and scale, and clearly the top player...until industry behemoth Rocket Mortgage is added into the mix.

Ten MLOs to ten thousand MLOs. And: The number of MLOs roughly corresponds to closed loan volumes: $1.2 billion for Zillow, $14 billion for Better, and $65 billion for Rocket in Q1 2021.

Who's Disrupting Whom?

Both Rocket and Better recently announced they're hiring in-house real estate agents, which raises an interesting question about who's disrupting whom. Real estate tech companies are going after mortgage, but now mortgage is going after real estate.

These companies all have different approaches, but the destination is the same: an integrated real estate experience that seamlessly combines mortgage and brokerage. And the key execution trends are clear: in-house agents and MLOs, paired with deep discounts for consumers.

Perhaps the true takeaway is that those companies not included on the chart are the ones at risk. Whether it's being initiated from the real estate or mortgage side, both components are being smartly combined to provide an integrated, highly convenient consumer experience. The companies unable to provide that are the ones at risk.

Realtor.com Grows Agent Revenues Faster Than Zillow

Top U.S. portals Zillow and realtor.com recently released their latest financial results. Historically, Zillow has maintained a consistent 2.5x agent revenue lead over realtor.com. But in the last quarter that lead has slipped, as realtor.com grew its agent revenues much more than Zillow.

Since the last quarter, Zillow increased its premier agent revenues by $14 million, or 4 percent, compared to an increase in realtor.com's real estate revenues of $24 million, or 18 percent. These are each company's agent lead gen programs, and don't include adjacencies like iBuying and mortgage.

That's a big jump and an outsize increase in realtor.com's agent lead gen revenues. The growth is potentially driven by the expansion of the Opcity referral program, which now makes up 30 percent of total revenues.

Strategic Implications

The decline in Zillow's revenue lead may be the start of a trend, or it may be a temporary blip (which has been seen before). Quarterly results from the past three years show that the companies are still within the normal bounds of fluctuations.

While the revenue dominance between Zillow and realtor.com has remained relatively static, the total spend from agents has not. Combined, Zillow and realtor.com have managed to increase agent revenues 55 percent over the past two years, from $327 million to $507 million -- seemingly fueled by the hot market.

So while Zillow and realtor.com have yet to consistently outperform each other, they're still managing to extract more revenue than ever before from their best customers: real estate agents.

Compete Where You Can Win

In the fast moving world of real estate, it’s never been more important to define a crisp and effective strategy. A portion of my work consists of strategic consulting for a range of real estate tech businesses. That experience has taught me a lot, and I can sum up what I believe to be the single most important concept in strategy: Compete where you can win.

A three minute video of me talking about "Compete Where You Can Win."

Find Your Sustainable Competitive Advantage

All of my strategy work — from multi-billion dollar organizations to scrappy start-ups — starts with a somewhat cliche business school phrase: sustainable competitive advantage. This is what sets a company apart from others; the collection of unique attributes that allow an organization to outperform its competition.

In the world of real estate tech, Zillow has its massive consumer audience, Compass has its deep pockets, Keller Williams has its scale, and Realogy has its brands.

Clearly identifying a sustainable competitive advantage — a company’s strengths — is an important first step in an effective strategy. The critical second step is leveraging that competitive advantage directly against a competitor’s weakness or a market opportunity — competing where it can win.

Case Study: Compass

Perhaps the best case study is Compass. Its competitive advantage was capital ($1.5 billion in VC funding), which it used to gobble up market share.

The competitive weakness that Compass exploited was a traditional brokerage’s inability to compete on capital. Competitors couldn’t match Compass’ commission splits, signing bonuses, or marketing support. Unlike its competitors, Compass didn’t need to worry about being profitable, and the company leaned heavily into this strategy to recruit agents and grow its market share. Compass played a game that it, and it alone, could win.

Compete Where You Can Win

What truly sets yourself or your business apart from others? What can you offer that no one else can, and how can you leverage it against your competitor's weak points? It’s senseless to go up against your competitors where they are strongest (although many still try).

Anyone in real estate, from disruptor to incumbent, behemoth to startup, tech company to individual agent, can effectively compete in today's quickly changing market. It all comes down to being smart about understanding your strengths and competing where you can win.

Zillow, Power Buyers, and the Challenge of Attaching Mortgage

In 2018, Zillow set itself lofty goals when it entered the mortgage business. Three years later, Zillow's actual performance is far, far below its predictions, highlighting how difficult the mortgage space is, not just for Zillow, but for every real estate tech company targeting mortgage as a lever for growth.

Setting High Expectations

Zillow's 2018 Annual Report, released after Mr. Barton assumed the CEO role, clearly set out the company's 3–5 year goals in mortgage:

Mortgages Segment

• Zillow Home Loans achieves a 33 percent attach rate to Zillow Offers, up from zero in 2018.

• Zillow Home Loans originates more than 3,000 loans per month, up from nearly 4,000 MLOA loan originations in all of 2018.

The 33 percent attach rate to Zillow Offers is down from the lofty 75 percent attach rate quoted earlier by Mr. Rascoff in Zillow's 2018 second quarter earnings call:

"So for anybody who is wondering why we just bought a mortgage lender, just to hit some of those numbers again, at a mere 10,000 homes sold a month from Zillow Offers, a 75% attach rate gets to over $800 million a year of revenue opportunity for mortgage origination.”

Three years and over 10,000 homes bought and sold later, the reality is a mortgage attach rate to Zillow Offers of less than 1 percent.

(Zillow and Opendoor's attach rate is based on the markets where the service is live.)

Zillow's goal of originating 3,000 loans per month, or 36,000 in a year, remains highly aspirational. Loan originations actually took a step backwards in 2019 before rebounding in 2020 due to the pandemic and record low interest rates -- but are still less than 20 percent of Zillow's original goal.

It's worth noting that proportionally, Zillow's purchase volume (versus refinance) has steadily declined from 97 percent in 2018 to 31 percent in 2020 (and down to 10 percent in Q1 2021). The growth in Zillow Home Loans is being fueled by refi.

The Rise of Power Buyers

Ironically, Zillow is attaching more mortgages to Opendoor-owned homes than it is to Zillow-owned homes. Just let that sink in.

This bizarre fact underscores how difficult it is to attach mortgage to an iBuyer home for sale; most prospective buyers are already pre-approved. It's too late in the buyer journey to introduce and attach a new financing option.

Which is why the smart money is on companies -- I call them Power Buyers -- focused exclusively on attracting buyers earlier in the process with products like cash offer and buy before you sell. Examples include Homeward, Orchard, and Knock, and initiatives like Opendoor's Cash Offer and Zillow's video tease of it helping a Zillow Offers seller secure financing for their next purchase.

There are a multitude of companies attempting to sell mortgage and other adjacent services to their customers in an effort to increase profits. For the time being, the Power Buyers are in the lead with mortgage attach rates approaching 80%, with the iBuyers pivoting their models to catch up. Zillow's experience shows that it's a long, slow road, requiring big investment, patience, and a smart, consumer-first approach.

Zillow and realtor.com Battle for Traffic and Revenue Growth

According to the latest company results, it appears that Zillow's longstanding traffic lead over realtor.com is diminishing. In an industry where metrics like this move slowly if at all, it's fascinating. But it's also insignificant in terms of competitive advantage and revenue uplift -- and may simply be an artifact of pandemic browsing patterns -- but it does reveal a deeper truth around portal monetization.

Zillow's traffic advantage hasn't changed in years -- consistently hovering at three times the average monthly visitors compared to realtor.com. However, beginning in Q1 2020, that lead begins to erode.

The timing suggests that this is likely a result of the pandemic. Perhaps Zillow has less upside, while realtor.com is benefiting from more consumers willing to visit multiple sites to see all available inventory in a high-demand, low-supply market.

A Corresponding Revenue Uplift

Across the board, the increase in portal traffic has resulted in an increase in revenues. Like Zillow, realtor.com experienced an unprecedented pandemic bump in lead gen revenues -- the first time in years.

But in this case, a rising tide lifts all boats. Both companies experienced a proportionally identical increase in lead gen revenue; Zillow's revenue lead remains unchanged at 2.5 times higher than realtor.com.

The data above is an apples-to-apples comparison of each company's lead gen business: Zillow's premier agent vs. realtor.com's "real estate" revenues.

Strategic Implications

As I outlined in a recent analysis on challenger portals, there is a non-linear correlation between market share (traffic) and value (in this case, revenue). Time and again, it's "winner take most" for the #1 portal.

What I find fascinating is that despite all of the activity of the major portals, the monetization ratio has remained constant. Like the speed of light, there's an immutable law of portal monetization at play with an upper limit, unchanged despite:

• realtor.com's $210 million acquisition of Opcity

• A new CEO and senior management team at realtor.com

• Zillow launching Zillow Flex and qualifying leads

And it's not just the U.S. In Australia, the top two portals have a similarly static monetization ratio despite years of intense investment and competition.

At its extreme, this suggests a sort of monetization nihilism -- that nothing matters. Product improvements, senior management changes, business model shifts, global pandemics, and nine-figure acquisitions are, in the end, meaningless in terms of portals outperforming each other. There's a premium for being #1, and it just doesn't change.

What Zillow's Results Reveal About Its Momentum Towards Zillow 2.0

The coverage of Zillow's latest results is fantastically uninspiring. Lots of big numbers, devoid of context. But when the dots are connected they reveal a rich story about the business's evolution to Zillow 2.0.

Perhaps most impressively, Zillow just had its third consecutive profitable quarter! For a business that's basically operated at a net loss since inception, this is a noteworthy achievement.

The move towards profitability is driven by Zillow's premier agent program -- the engine room of the company -- which is firing on all cylinders and back to impressive growth (fueled by record-breaking demand during the pandemic).

On an absolute revenue basis, Zillow's premier agent program has set a succession of all-time record quarters for the past 12 months. Zillow is generating more money from its premier agent program than ever before, which is especially noteworthy after the program ground to a halt in early 2019.

Zillow's iBuyer business is back to growth mode, purchasing and selling houses at pre-pandemic levels, and still operating at a loss. But the net loss per home has dropped to its lowest level yet, a reflection of improving economics at scale.

Last week I looked at the Ecosystem Disruption in Mortgage, and how global leaders Zillow and REA Group have spent hundreds of millions of dollars expanding into mortgage through the acquisition of broker-heavy, 20 year old traditional businesses -- and not technology companies.

Zillow's mortgage business continues to grow, but it is being driven by refinancing (90%), and not new purchase (10%), business. To fully believe the one-stop-shop Zillow 2.0 narrative, new purchase volumes should grow in the future.

But while overall mortgage revenues increased, the business remains unprofitable. This is another sign that mortgage is hard, difficult to scale profitably, and tough to "reinvent" with technology. Like the Zillow Offers business, Zillow Mortgage appears to be another high revenue, low margin operation.

The evidence reveals a business -- in my humble opinion -- that is still in the early innings of reinventing real estate. Zillow is clearly benefiting from the current red-hot real estate market, with its premier agent program leading the charge and funding the evolution to Zillow 2.0.

But the promise of new, adjacent services is still an aspirational goal. The various pieces are being built, but still need to be assembled in a credible way that reinvents the transaction at a meaningful scale. Momentum is on its side, and Zillow's evolution continues.

Portal Wars: CoStar vs. Zillow, Boomin vs. Rightmove

Across the globe, there are efforts underway to unseat leading real estate portals. In the U.S., commercial real estate behemoth CoStar has spent over $400 million to acquire residential listing portals Homes.com and Homesnap. And in the U.K., start-up Boomin is raising an additional £25 million to directly compete with Rightmove.

The primary value a real estate portal provides its customers is exposure to the most potential homebuyers and homesellers. In the U.S., Zillow's traffic lead over CoStar's recent acquisitions is astronomical.

Homeowners want to advertise their biggest asset in the one place buyers will definitely look. Zillow is that place: From a traffic standpoint, Zillow has a reach 23 times larger than Homes.com, making it exponentially more effective and valuable.

Attempting to directly compete with market-leading real estate portals is an incredibly difficult proposition, with success unlikely. The unique challenges include:

• Incremental gains in market share don't equate to incremental gains in value.

• Getting listings is the easy part. Building traffic is hard.

• Product differentiation means little. The main value to users is reach.

The CoStar Strategy

CoStar doesn't need to unseat Zillow to build a valuable business. Zillow's customers are real estate agents -- premier agents -- that pay Zillow for leads. However, Zillow only works with about five percent of real estate agents in the U.S., leaving a large addressable market for CoStar to tap into.

The narrative that CoStar is attempting to compete directly with Zillow is simply that: a story designed to rile up agents and generate buzz. The actual battle isn't about consumer eyeballs; it's about a real estate agent's wallet.

Strategic Implications

The challenger portals are succeeding with the easy bit: securing listings. Traffic is the hard part.

Through the years, the top portals have maintained their lead against billion-dollar, multinational media organizations (Zillow vs. realtor.com, IS24 vs. Immoweb), industry-backed, publicly listed upstarts (OnTheMarket vs. Rightmove), private-equity backed #2's (Zoopla vs. Rightmove), and publicly listed competitors (Domain vs. REA Group). Hundreds of millions of dollars have been thrown against the top portals for years with no effect on their dominant position whatsoever.

Past evidence shows that it is exceedingly unlikely that this new batch of challengers will dethrone the top portals. The smart challengers understand this game and how it’s played; not trying to overtake the leaders, but instead building a viable business on its own merits.

A Deeper Dive

Check out the articles below to dive deeper into the massive advantages that incumbent portals possess and the challenges around trying to disrupt them.

• Millions More Buyers: A Real Estate Portal’s Competitive Advantage

• Why incumbents can't beat Zillow (and the power of network effects)

• Why investing in OnTheMarket is a horrible idea

• A Real Estate Portal's Path to Market Power (A Zillow Case Study)

Ecosystem Disruption in Mortgage Looking Exceedingly Traditional

Last month, Australia's #1 real estate portal, REA Group, announced the $244M acquisition of mortgage broking business Mortgage Choice. This is the latest move by global leaders Zillow and REA Group to spend hundreds of millions of dollars expanding into mortgage through the acquisition of broker-heavy, 20 year old traditional mortgage businesses -- and not technology companies.

Real estate portals are moving closer to the transaction, and there is a battle brewing in adjacent services. For portals, it's a path towards revenue growth and a seamless customer experience. For new models like iBuying, it's the only path to profitability.

But: mortgage is hard. The underlying economics demonstrate how difficult it is for portals to grow these businesses. Financial services is still a small segment of REA Group's entire business, representing less than three percent of total revenue. It is, however, profitable, with margins just under 40 percent. But overall revenue growth has stalled and moved backwards since the acquisition of Smartline.

By comparison, Zillow's mortgages segment (which includes Mortech and its mortgage lead gen business, in addition to the Mortgage Lenders of America broking business), has seen strong revenue growth but is much, much less profitable.

Zillow acquired Mortgage Lenders of America (MLOA) in June 2018, which was followed by a modest revenue uplift. However, it appears the driver of FY20 growth was the pandemic and record low mortgage rates in the U.S.

Zillow's mortgage business was unprofitable leading up to the MLOA acquisition, and subsequently became much more unprofitable. It wasn't until the massive growth during the pandemic that the segment eked out a profit.

The evidence suggests an underlying business that is expensive to run and difficult to make profitable. Getting adjacent services right and running a successful mortgage broking business -- and in REA Group's case, growing it -- is hard work.

For all the money being invested in this space and the hype around a digital ecosystem, it's noteworthy that the real estate portals see their path to growth via traditional brick-and-mortar brokerage businesses, and not high-flying, scalable tech solutions. Mortgage is not an industry that can be disrupted with technology alone.

Strategic Analysis: The Top Threat to Real Estate Portals

Real estate portals occupy a dominant position across the industry. Jealous of that power, potential competitors have long tried to challenge the status quo, with limited effect. But now a new threat emerges that, while still a long shot, possesses the greatest potential to disrupt the dominant position of the portals.

The Competitive Strength of Portals

Real estate portals benefit tremendously from network effects, which is the key factor that gives them unprecedented market power and an impregnable moat to repel competition.

Network effects is the phenomenon whereby a service becomes more valuable when more people use it. Online marketplaces and social networks such as Facebook, eBay, and Craigslist are classic examples of businesses with network effects.

Businesses that have the benefit of network effects are incredibly difficult to displace. Even if a new entrant’s product is objectively better, a smaller audience of potential buyers and sellers results in an inferior consumer proposition. Sellers want to advertise to the biggest audience possible, and buyers want the largest selection possible.

Real estate portals like REA Group in Australia and Zillow in the U.S. have a dominant competitive position because they have millions more buyers than any other platform. This key attribute, enabled by network effects, results in leading portals easily maintaining their leadership position against well-funded competition.

The Rise of Exclusive Content

In the past, various competitors have tried a variety of strategies to displace the dominant portals: product differentiation, massive media spend, brokerage alliances, and more. But time and again these strategies have failed.

There is one significant risk -- an achilles heel -- to portals: they don’t control their inventory. Disintermediating the flow of listings to the big portals, through exclusive content, is their greatest threat.

To illustrate this concept, look no further than video streaming services. Netflix, Disney+, Amazon, and AppleTV are investing billions into creating exclusive content. And this content -- available on only one streaming platform -- is the key differentiator that draws consumers to the service.

When it comes to browsing for real estate, consumers want access to all of the available inventory. If a certain portion of listings are held off-market, available exclusively on another platform, consumer eyeballs will naturally follow.

More than any other strategy, exclusive content has the potential to draw consumer eyeballs away from the dominant portals. But ultimately, while the move is pro-disruptor and anti-portal, it is also potentially anti-consumer, putting the benefits of a company ahead of consumers.

Industry Fragmentation and Consumers

For consumers, exclusive content creates a fragmentation of the search and discovery process. It forces buyers to visit more than one site, with no direct benefits. For sellers, it fragments and artificially reduces the number of possible buyers.

The only beneficiary is the portal disruptor -- the organization creating and promoting the exclusive content. By bringing more consumers directly to their web site, it creates a realignment of power from the portals to the disruptor.

What real estate portals brought to the market was transparency: easy access to all available listings. In the U.S., they democratized the search process by eliminating the information asymmetry between consumers and real estate agents. Fragmenting inventory across multiple platforms is a step backwards into the dark ages of real estate, where consumers no longer have easy access to all available listings.

Case Studies

The following case studies illustrate examples of exclusive content being leveraged to break the monopoly powers of portals. And some portals are fighting back, directly and indirectly, by promoting themselves as the most effective place to advertise a home for sale.

There are three case studies of real estate portal challengers attempting to disrupt the top portal: two large brokerages, and one challenger portal. The analysis concludes with a case study of what one top portal is doing to push back against exclusive content.

Case Study: The Challenger Portal

OnTheMarket is an upstart, industry-backed portal meant to challenge the dominance of Rightmove and Zoopla in the U.K. It launched in 2015 and has faced a slow, uphill battle to achieve relevance.

One of the legs of its strategy is around exclusive listings: “thousands of new properties a month, 24 hours or more before they are advertised on Rightmove or Zoopla.” According to OnTheMarket, this amounts to between 2,500 and 10,000 properties each month.

The strategy is credited with increasing the portal’s traffic, but after years its traffic is still a fraction of the dominant portals in the market. It has helped the challenger portal grow and build relevancy in the market, but has done nothing to dent the dominance of Rightmove.

Case Study: The Traditional Brokerage

Howard Hanna is the fourth largest brokerage in the U.S., with over 100,000 transactions closed in 2019. In June of 2019, it launched the Find It First program, where new listings are available only on the company’s web site, HowardHanna.com, for a set time before being published on the multiple listing service.

The service launched in an effort to increase traffic to the company’s own web site by leveraging exclusive content not available anywhere else; a fact highlighted by the company.

The benefit to potential home buyers is clear: register on HowardHanna.com to receive updates on exclusive content before they are posted anywhere else. The benefit to sellers is less clear. As the company says, “...it creates an urgency for their property to be offered first to highly motivated buyers, who are most likely to bring an offer.” But the pool of buyers is a fraction of the entire market: 2.1 million visits in July 2019 compared to over 700 million visits on Zillow.

Howard Hanna’s program offers another benefit for sellers, which is less about exclusive content and more a ding at Zillow’s business model: prospective buyers should be connected directly with the listing agent, who knows more about the property than anyone else. The benefit to consumers finding a property on HowardHanna.com first is that a connection to the listing agent can be made directly, without any intermediaries.

But the program is small. In September 2020 there were less than two dozen listings across the Northeast and Midwest. In February 2021, with over 20,000 listings in the Northeast, only 13 Find it First properties were found.

Case Study: The Tech-Enabled Brokerage

Compass is the fifth-largest brokerage in the U.S., with over 80,000 transactions closed in 2019. As mentioned in my 2019 strategic analysis of the business, Compass has an active history of promoting exclusive listings, either coming soon or private exclusives.

What sets Compass’ exclusive content strategy apart from others is its traction and promotion. Compass is not shy about promoting exclusive listings on the compass.com web site: it’s featured on the header and is highlighted immediately below the search bar.

All search results pages highlight private exclusive listings, which are only available to home buyers that contact a Compass agent. The fact that there are more listings that can be shown is dangled in front of consumers in a very prominent way.

Clicking through for more information on private exclusives makes it clear that to see more, you need a Compass agent. The additional listings are not available on “home search websites.”

The concept of a private exclusive listing is not new; what’s new is the degree of in-your-face marketing applied to the program by Compass. In comparison, consider Sotheby’s International Realty, which has no mention of nor listings of private exclusives or coming soons. Sotheby’s is not leveraging the power of exclusive content, while Compass is -- in a big, aggressive way.

That fact is sprinkled throughout the Compass web site, subtly and overtly. On the search results filter page, visitors are reminded that a large amount of listings are “only on Compass.”

The value proposition for home buyers (which, by the way, are how the U.S. real estate portals monetize their traffic) is quite clear: exclusive content not available anywhere else.

The value proposition of a coming soon listing for home sellers is less specific: increase exposure, generate buzz, and deliver market insights. Again, all to a smaller audience than what the national real estate portals deliver.

With regards to the seriousness of Compass’ program, the numbers paint a clear picture. According to compass.com, in September of 2020 Compass had over 17,000 listings nationally -- with over 2,800 as exclusive content (either Coming Soon or Private Exclusive). These 2,800 listings (16 percent of Compass’ total inventory) were only available on compass.com or via a Compass agent; none were on Zillow.

And the percentage of listings exclusively on compass.com is increasing. As of February 2021 there were around 12,000 Compass listings nationally, with 2,800 “only on Compass” -- or 23 percent. Nearly a quarter of Compass’ listings are exclusive content. In one of Compass’ biggest markets, San Francisco, 504 out of 913 total listings were exclusively on Compass, a massive 55 percent.

The concept is perhaps best illustrated in Compass’ own words, through this LinkedIn post by a Compass agent. Note the key phrase: “I have inventory on our platform that will never get listed on Zillow or Redfin. Get a Compass agent...or miss out.”

Case Study: The Incumbent Real Estate Portal

REA Group operates the dominant Australian portal, realestate.com.au, which also happens to be the world’s most profitable real estate portal. The team at REA understands the value of network effects, and has built marketing campaigns around having “Millions More Buyers” than the competition.

REA faces a challenge in the Australian market: property owners that wish to sell their homes “off market.” Similar to Compass’ exclusive listings, these properties never get advertised on a national property portal, and reach an audience through existing networks and word of mouth.

REA has met this challenge -- and the associated risk to its market-leading position -- head on with a series of direct-to-consumer TV advertisements.

The rhetorical message to consumers is clear: why would you not advertise your biggest asset in the one place buyers will definitely look?

Power Moves

The move towards exclusive content is about power. The organizations affecting this change are companies looking to grow revenues and maximize profits. The benefits of a potential shift in consumer eyeballs will accrue to these for-profit companies, at the expense of real estate agents and consumers.

There may be a short-term benefit for real estate agents, by reducing their reliance on a national portal, but that reliance just shifts to a different company. And it is that company, and no one else, that becomes the distributor of consumer eyeballs and leads to agents. The power remains with a company, and not with an agent.

Ultimately, the consumer may be the biggest loser. The creation of new advertising channels, especially in markets outside of the U.S., means that homeowners will need to pay an additional fee to advertise on those new channels. And, in the words of Compass, if listings “never get listed on Zillow or Redfin,” millions of potential buyers may never see them, which could lead to less demand and a lower price for a property, a cost paid for by homeowners.

Generating and publishing exclusive content appears to be one of the most effective possible strategies against the portals’ dominance. It is a relatively new, active battleground in the evolving war for the future of real estate. But as these billion dollar behemoths battle for supremacy of the real estate industry, with agents as their unwitting pawns, consumers may be left paying the price.

Zillow's Brokerage News and the 2 Megatrends of Real Estate Tech

Zillow recently announced that it was hiring its own agent employees to service its iBuyer business. At face value, the news is a relatively small shift, but is a clear reminder of several megatrends occurring in real estate tech.

An Unsurprising Move

If Zillow's announcement caught you by surprise, you haven't been paying close enough attention. For years, real estate portals around the world -- including Zillow -- have been moving closer to and getting involved in more of the transaction.

Zillow's move is a logical next step in this journey. Bringing agents in-house, as opposed to relying on a network of partners, moves Zillow closer to consumers and closer to the transaction. This megatrend -- which has been slowly occurring for years -- is covered at length in my 2018 Global Real Estate Portal Report. 

Ignore At Your Own Risk

With this latest news, some are suggesting that traditional agents fundamentally ignore it and focus on their own business. In other words, don't worry about the competition -- in this case, Zillow -- and just focus on providing the best service possible to your customers and clients.

That strategy is only half right. Ignoring what Zillow is doing brings its own peril; just ask travel agents and video store owners (both industries that Mr. Barton has had a hand in disrupting).

For the traditional industry, sitting still is not an option. To quote my State of the Industry presentation from January 2020:

The industry is moving so slow you can look around and think nothing is changing (or get caught up in the hype and think everything is changing). That’s why now – more than ever before – is the time to stay informed, understand the scope of change, and react appropriately.

Agents as Employees

Zillow's move is a clear reflection of a megatrend in real estate: agents as employees. Hiring agents as full-time, salaried employees (a model pioneered by Redfin) provides a number of benefits, all centered around greater control:

• A consistent consumer experience

• Greater operational efficiency

• Better economics

The benefit is perhaps best illustrated by Redfin's agent efficiency, a metric that consistently stands out among its brokerage peers.

Full-time, salaried agents also lead to higher attach rates for services like mortgage and title. Next-gen brokerage models like Orchard and Homie, which also employ agents, are seeing mortgage attach rates of 80+ percent. This is only possible with an integrated end-to-end experience, powered by employees, and not a loose confederation of independent contractors.

Zillow and Redfin are not alone. Other disruptors like Opendoor and Offerpad are hiring agents for new brokerage services. With the exception of Compass (who is stuck in the matter), all of the largest real estate disruptors are moving in this direction -- that's nearly $35 billion in enterprise value pushing in this direction. It's a megatrend that's possible, but not advisable, to ignore.

Covid-19's Effect on Global Real Estate Portal Revenues

Earlier this year I outlined the ways in which the world's leading real estate portals were reacting to the pandemic, including significant customer discounts. The results are in, and the revenue impact to portals is quite varied.

Taking a Hit to Revenue

Top of the list is Rightmove, the U.K.'s leading portal, which saw a massive 37 percent drop in revenue for the first six months of 2020 compared to the same period in 2019. That's ten times greater than any other portal. The others saw more modest revenue drops of a few percentage points, with some, like Germany's ImmoScout24 and The Netherlands' Funda, managing to grow revenue.

In absolute dollar terms (and in local currency), Rightmove again tops the list, with revenues dropping a massive £38 million year-over-year. Zillow lost a substantial $15 million, but from a much larger revenue base ($450 million vs. Rightmove's £105 million in H1 2019).

Rightmove as the Outlier

The evidence clearly shows Rightmove as an outlier, while other portals managed to weather the Covid-19 storm relatively unscathed. Why?

One critical component of the answer is the severity and length of lockdown. My earlier research (featured in this Financial Times article) highlighted the U.K. as having one of the most restrictive lockdowns around the world, with a correspondingly severe drop in new listing volumes.

The second critical component is business model. Australia's portals generate most of their revenue from vendors, not agents. The U.S. portals generate revenue from selling buyer leads. Rightmove generates revenue from agents advertising houses for sale -- and if new listings drop 90 percent, there are 90 percent fewer houses to advertise.

A combination of the U.K. lockdown's severity and length, coupled with Rightmove's business model, made it especially susceptible to Covid-19. It was forced to offer its customers deep discounts for many months while the lockdown was in effect.

The pandemic affected all real estate portals -- but not equally. The more severe the lockdown, the more significant the revenue drop. 

A Note on Data Sources

To create a true apples-to-apples comparison, the data used is from the period beginning January 1 2020 and ending June 30 2020. The six months reveal a complete picture of the start, middle, and recovery from the pandemic and associated lockdowns.

The data is from each portal's residential real estate segment: Zillow's Premier Agent revenue, realtor.com's real estate revenue, Scout24's residential real estate revenue, Rightmove's agency revenue, REA Group's Australian residential depth and subscription revenue, and Domain's residential real estate revenue.

What Happens When Two Top Real Estate Portals Merge?

Zillow and Trulia in 2014. Immowelt and Immonet in 2015. When massive real estate portals join forces, it is for one reason: market power. These mega-mergers of leading real estate portals highlight the power of market dominance through greater reach, greater pricing power, and accelerated revenue growth.

Germany: Immowelt and Immonet

In 2015, Axel Springer brought together Immowelt (IW) and Immonet (IN), the #2 and #3 real estate portals in the German market. The combined entity managed to increase ARPA (average revenue per advertiser) 40 percent over the following two years, with only 5 percent customer churn -- a noteworthy achievement.

The merger allowed the combined entity to nearly double the pace of ARPA growth from €6/quarter pre-merger to €11/quarter post-merger.

The key to Immowelt's success was a strategy of forcing customers to adopt a more expensive DUO bundle (one contract, two portals), whereby listings appear on both sites. After 18 months, an impressive 85 percent of customers had adopted the DUO bundle, rising to 99 percent a year later -- all with minimal customer churn.

In 2018, Immowelt began converting customers to a more expensive DUO5 (five listings) bundle. Over the subsequent two years, customer churn increased to 19 percent while ARPA growth remained high at 33 percent.

Supercharging Zillow's Revenue Growth

The merger of Zillow and Trulia was the catalyst for strong revenue growth at the combined entity. In the two years following the merger -- and after consolidating the revenues of both businesses -- revenue increased a massive 52 percent.

In the case of Zillow and Trulia (and similar to Immowelt and Immonet in Germany), post-merger revenue growth was driven by ARPA and not an increase in paying customers. In the year following the merger, and after the customer bases were consolidated, the number of paying customers dropped by 11 percent while ARPA increased 42 percent.

The merger increased the market dominance of the combined entity, and allowed Zillow to increase its pace of revenue growth over the following three years.

The slope of the line -- the increase of revenue coming into the business, not as a percentage, but in absolute dollars -- materially shifted post-merger. Pre-merger, Zillow added an average of $5.9 million in new revenue each quarter; post-merger it averaged $9.6 million.

(And just for fun, here is realtor.com's corresponding revenue growth after its acquisition by News Corp in 2014, adding an average of $2.8 million in new revenue each quarter. There's a premium to being the market leader.)

More Money, More Value

The mergers allowed both groups to materially grow revenue, primarily through ARPA increases, at an accelerated pace.

While prices did increase after the mergers, it came with a corresponding increase in customer value. The combined entities were able to deliver more exposure and more leads for their customers. Zillow's increasing ARPA was closely matched by an increase in leads.

While ARPA increased 42 percent in the year after the merger, it was coupled with a 48 percent increase in total leads and an 11 percent decline in customers. The net result was a drop in the average price per lead.

Zillow's customers were paying more, but they were paying more for increased value.

The case was similar in Germany. Internal research showed that, on average, customers that advertised on both sites saw the number of leads per listing more than double. Customers were paying more, but were deriving more value.

The merger of two real estate portals consolidates market and pricing power within one organization -- allowing it to quicken its pace of growth. But in the cases above, an increase in prices was accompanied with a corresponding increase in value, arguably a good deal for customers and consumers.