Axel Springer goes all in on hybrid agents

How many international media conglomerates -- that own a number of leading real estate portals worldwide -- have “hybrid agents” as one of its top strategic priorities? Just one: Axel Springer.

Why it matters: Axel Springer, the $6 billion European media house, is going "all in" with online hybrid agents, through its investments in Purplebricks and Homeday. It's making a calculated bet that competing with its real estate agency customers is the best long-term strategy.

Making hybrid agents a strategic priority

Dozens of the largest real estate portals around the world are owned by a small collection of international media companies: News Corp, Schibsted, Naspers, and Axel Springer. But of them all, only Axel Springer has taken the step of investing in a potential sector disruptor: the online hybrid agent.

Axel Springer owns major real estate portals in France, Germany, Belgium, and Israel. In March 2018, it made a bold, £125 million investment in Purplebricks. The investment is notable because Axel Springer owns several top portals whose customers are the same real estate agents that Purplebricks is trying to disrupt (albeit in different markets).

Furthermore, Axel Springer is the only major international entity that has targeted online hybrid agents as a future growth priority. In its latest presentation to investors, hybrid agents are included as a top priority for the core classifieds business (which generated revenues of over €500 million in 2017).

Disrupting its biggest customers

Axel Springer's strategy offers a fascinating juxtaposition: Adding value to traditional agents by providing more services (seller leads), while "satisfying even more consumer needs" with its hybrid agents -- which directly compete with traditional agents.

Axel Springer is wonderfully upfront about its motivations. Its move into the hybrid agent space is designed to tap into a much larger revenue pool: agent commissions.

Continuing to serve your customers while entering into direct competition with them is a delicate balancing act. It's a move reminiscent of Amazon promoting its own products in direct competition with many of its sellers.

This is the nightmare scenario that U.S. real estate agents have been predicting for years. But in this instance it's not Zillow, but one of Europe's most powerful players, taking active steps to disrupt agents.

Winner take most

It's been clearly illustrated in the U.K. market that the online agent space is winner take most (market share). Access to capital is the single biggest predictor of success.

There is no first mover advantage in these markets (Purplebricks was not the U.K.'s first online hybrid agent). Rather, there is a rich first mover advantage: the business with the deepest pockets generally wins.

In this regard, Axel Springer and Purplebricks form a powerful combination. From a competitive standpoint, the most dangerous thing about Purplebricks is its investment risk tolerance. It is willing to invest tens-of-millions of dollars year after year to build market share -- incurring big losses along the way. And with Axel Springer and its deep pockets along for the journey, it's a hard combination to beat.

Strategic implications

Axel Springer and Purplebricks are quickly building a potentially insurmountable lead in the online hybrid agent space globally. There is no runner-up in the sector; it's a one horse race.

Purplebricks has proven the online hybrid model works in the U.K., and is aggressively launching in other markets. Copycats are popping up around the world. What's stopping News Corp, Schibsted, and Naspers from entering the space? It's either capital, ambition, or fear of upsetting their agent customers.

Real estate portals are moving from search engine to service engine; they are moving closer to and becoming involved in more of the transaction.

There is undeniable momentum in this direction. While not every portal is seeing success, the shift is clear -- and unyielding. Axel Springer's bet on online hybrid agents, in direct competition with its real estate agent customers, is the latest example of this evolving strategy.

2018 in Review

What a year! In 2018, I published a massive amount of insightful, data-driven analysis of the global real estate tech landscape, and started as a scholar-in-residence at the University of Colorado Boulder. I'll cover the highlights below, but first a look ahead.

Themes for 2019

Next year, my work will focus on three main areas:

• Big real estate portals aggressively launching new revenue streams in adjacent businesses, moving from search engine to service engine.

• New models continuing to gain traction, with accelerated expansion in mature markets and start-ups launching everywhere else.

• Traditional real estate incumbents around the world taking note and reacting -- some better than others.

2018 Highlights

Three huge reports

I released three reports: the 2018 Emerging Models in Real Estate Report (33k views), the 2018 Global Real Estate Portal Report, and the Future of Real Estate Portals.

Zillow and iBuyers

I conducted a deep analysis of Zillow's strategic shift, how Zillow and Opendoor are controlling the consumer journey, and the billion dollar seller lead opportunity.

Disruptive new models

Looking broader, I asked if Compass really is a tech company, and
analyzed online agent consolidation in the U.K. and how psychology is holding back real estate tech.

Strategy consulting

I've worked exclusively with the world's leading and most promising real estate tech companies and portals (you know who you are, and thank you), conducting strategy reviews and ongoing advisory work.

Keynote presentations

From San Francisco to Oslo, Dubai to Berlin, I've delivered top-notch insights in person to the biggest companies and leaders in the field. Read some testimonials.

University course

I started teaching real estate tech at CU Boulder, with amazing industry guest speakers from companies like Trulia, Opendoor, UDR, Open Listings, ATTOM Data, and more.

Investments in real estate tech

During the course of 2018, it's been my pleasure to join world class investors like Axel Springer, Kleiner Perkins, Stereo Capital, Lightspeed Ventures, Breyer Capital, and Schibsted Media as a personal investor in or advisor to real estate tech companies Zumper, Fastfox, Kodit.io, Tall Poppy, and AirDNA.

An exciting year ahead

I'm looking forward to exploring new opportunities and applying my expertise to new challenges in the year ahead. I'll drive myself to continue to be -- in the words of one of my readers -- "the most reliable source for data-driven, strategic insights in the industry."

My Proptech CEO Summit Presentation

It was my pleasure to present at the invite-only Proptech CEO Summit in San Francisco, hosted by former Trulia execs and current venture capitalists, Paul Levine and Pete Flint. There were over 100 proptech CEOs present, including Glenn from Redfin, Eric from Opendoor, and many others.

I want to share my entire presentation from the event, in addition to highlighting a few key points.

PropTech and PropPsych

The first point deals with the critical role of human psychology in real estate transactions, and the concept of loss aversion (for more, check out How Psychology is Holding Back Real Estate Tech).

Human psychology is the single biggest obstacle to mainstream adoption of new technologies in real estate. The point I made in my presentation is this: every venture capitalist should be asking proptech start-ups how they are going to address loss aversion.

And the inverse is true: each startup should clearly explain how its product or service is designed to minimize loss aversion in consumers.

Building the technology alone is not enough. Real estate tech companies need to assure consumers their product is just as "safe" as the status quo. PropPsych is just as important as PropTech.

Solving problems with money

The second point relates to the massive amounts of money flowing into the ecosystem. To quote Glenn Kelman, "If we can afford to lose money for five years, how can we ever make money?"

The biggest players in the space -- Opendoor, Purplebricks, and Compass -- have raised hundreds of millions to over a billion dollars each. The next tier of start-ups have raised tens of millions of dollars each.

But none of these companies are actually doing something new; they're doing what's possible with massive amounts of capital.

Yes, there are novel aspects of the business models that allow these business to realize gains in efficiency, or provide a superior customer experience. But all are underpinned by massive amounts of capital.

The reason that Compass can buy market share, Purplebricks can generate tons of leads through advertising, and Opendoor can buy thousands of homes is access to vast amounts of capital.

My presentation

Attached below is a link to my presentation on Slideshare (you can also download the PDF). Unlike my numerous industry reports, this is designed to be delivered in person. But hopefully it helps you and your business.

Global Trends in
 Real Estate Tech from Mike DelPrete

Purplebricks' H1 2019 Results

Last week, Purplebricks released its half-year financial results. The top line results include an overall group loss of £27.3 million for the period, with a slight reduction of its full-year revenue guidance. But the top line numbers don't come close to telling the full story (hint: it's not as bad as it sounds).

Why it matters: Purplebricks' core U.K. market continues to grow and is meaningfully profitable, proving that the model works. Key performance indicators in its other three markets reveal a deeper story of investment, growth, and challenges.

Continued growth in the U.K.

The popular narrative is seductive, but factually incorrect: With massive losses at Purplebricks and the demise of online agent Emoov (which, by the way, was not the second largest online agent in the U.K.), the entire online agency business model is near collapse. Not quite.

Purplebricks is an international collection of businesses at various stages of growth. In the U.K., Purplebricks' most mature market, it continues to grow revenues and operating profit. At maturity and scale the business model absolutely works; there is no evidence to support otherwise.

Yes, growth is slowing in the U.K. But at nearly 80,000 instructions per year it can't be expected to keep growing at historic rates. The key is that even in a challenging economic climate, growth continues.

Bumpy ride in Australia

While progress in the U.K. is consistent and positive, Purplebricks' Australian operation has endured a turbulent year. Senior management changes, a business model pivot, and its fair share of negative press has resulted in a "bump in the road" over the last six months.

Revenue growth is up year-on-year, but down from the previous six months, with a corresponding hit in operating profit.

One data point does not make a trend, so all eyes are on the next six months as Purplebricks executes its Australian turnaround plan with a new team and new pricing strategy.

Deep investment in the U.S. market

Purplebricks continues to invest heavily in its U.S. rollout. Over the past six months, it has spent over $20 million on sales and marketing across seven States -- more than double what it spent last year.

Purplebricks managed between 1,200 and 1,400 instructions in the U.S. over the past half-year, or around 200-230 per month. The cost per instruction has dropped from around $21,000 to between $14,000 and $17,000 (each instruction is worth $5,205 in revenue to Purplebricks).

At the current rate, Purplebricks will need to go from 200 to 650 instructions per month to reach breakeven with its sales and marketing costs, and to 1,000 instructions per month to reach profitability.

To achieve profitability, Purplebricks will need to get all of its launch markets performing well, not just L.A. One example is the lackluster performance in Phoenix, as I wrote about last week.

Marketing efficiency

At its core, Purplebricks is as much an advertising company as it is a real estate company. The business model relies on a massive marketing expenditure to generate leads for its network of agents. Thus, one of the most important metrics for the business is marketing efficiency.

For every £1 spent on marketing, Purplebricks generates revenues of £3.60 in the U.K., £0.92 in Australia, £0.36 in the U.S., and £4.38 in Canada (Purplebricks' Canadian acquisition was a fantastic deal).

Strategic implications

The core Purplebricks business model -- and profitability at scale -- is sound. The market failure of smaller players, or the fact that Purplebricks is deeply investing in new markets, doesn't diminish that fact.

From a competitive standpoint, the most dangerous thing about Purplebricks is its investment risk tolerance. It is willing to invest tens-of-millions of dollars year after year to build market share -- incurring big losses along the way. If you're a traditional real estate agency, or a listed company, are you willing to do the same?

Trade Me's private equity adventure

In recent weeks, Trade Me, New Zealand's leading classifieds and marketplace portal, has received two, multi-billion-dollar buy-out offers from private equity firms.

Why it matters: There is a growing trend of private equity getting involved in portals around the world, which allows these businesses more freedom of action as private companies -- but with significant change.

Private equity and portals

Trade Me is New Zealand's leading portal, with property, automotive, and jobs classifieds and a general marketplace business. I worked there as head of strategy between 2012 and 2016.

British firm Apax Partners and American firm Hellman & Friedman have both offered around $2.5 billion NZD for the business, a 25 percent premium to the existing share price.

This news follows several other examples of private equity getting into the (property) portal business:

• General Atlantic acquires a majority stake in Hemnet, December 2016.

• Silver Lake acquires Zoopla for £2.2 billion, May 2018.

• General Atlantic invests $120 million in Property Finder, November 2018.

Slowing growth

Since its public debut eight years ago, Trade Me has grown revenues 100 percent and net profit 39 percent.

Revenue growth has slowed over the years, especially recently, in a story reminiscent of Rightmove's growth dilemma.

The stock price has seen a steady rise with its ups and downs, but has been relatively flat since 2017.

In August of 2018, Trade Me announced a special dividend to return $100 million in capital to investors. This comes on top of the normal dividend, which represents around 80 percent of profits. Returning capital at that scale can be a signal that the company has run out of ideas.

Many businesses believe it is more beneficial to reinvest profits to improve efficiency, expand reach, create new products and services as well as improve existing ones, and further separate themselves from competitors.

Like Rightmove, Trade Me is in a difficult position. With growth slowing, it is less likely to make big investments for fear of depressing earnings and upsetting investors. It's a delicate, public-company balance. Enter private equity...

Upside potential, with change

Private equity invests in businesses for one and only reason: to make money. It's clear that these P.E. firms have evaluated Trade Me's business and believe there is significant upside potential under new ownership and management.

But significant growth comes with significant change. When Silver Lake acquired Zoopla in the U.K., nearly the entire executive team was let go as part of the restructuring. It's the same story in Sweden, when General Atlantic appointed a new management team after acquiring a majority stake in Hemnet.

Strategic implications

If consummated, a private equity takeover of Trade Me would have a number of implications for the business, competitors, and the entire online ecosystem:

• A private ownership structure will allow Trade Me to be more aggressive, focus on longer-term opportunities, and be less sensitive to a stock price that focuses on short-term earnings growth.

• Private equity firms demand a return on their investment, and this transaction will be no exception. Expect costs to be trimmed, earnings maximized, and a more aggressive posture on pricing and monetization.

• If you're competing with Trade Me, expect a dramatically different business to emerge that's tougher, less conservative, and more willing to throw its weight around.

Trade Me has long had a friendly, home-grown feel in New Zealand. New owners -- and new demands on the business -- may change the equation.

Purplebricks struggles in Phoenix

I had high hopes when Purplebricks launched in Phoenix earlier this year. It was the first U.S. market in the "sweet spot" for the Purplebricks proposition. However, the latest numbers show quite modest traction: 75 listings and 26 sold properties over five months.

Why it matters: This data presents a healthy counter-balance to Purplebricks' rapid, national expansion. Launching in a new market is very different than gaining meaningful traction in a new market.

Mid-market America

In July, I analyzed Purplebricks' FY18 results. The analysis highlights the massive investment the business made with its U.S. launch, with an effective cost per listing of over $21,000.

There's also the question of if Purplebricks launched in the wrong markets. Southern California and the New York metro area are expensive markets, while the data clearly shows the Purplebricks proposition resonating with mid-market customers. Phoenix is that market.

After a slow start, Purplebricks is averaging a few dozen new listings per month in Phoenix. With a listing fee of $3,600, that's around $75,000 in revenue for November.

Purplebricks is also struggling to recruit and retain brokers in Phoenix. Agent numbers are stagnant, and the average number of listings per broker is two. If we assume a broker is paid $1,000 of the $3,600 listing fee, that's a very low effective annual pay package. (Broker numbers can be tracked on the Arizona Department of Real Estate web site.)

The right market

I still believe Phoenix is the right market for Purplebricks. The 75 Purplebricks listings are right in line with the median average for the Phoenix market (Maricopa County), which is a positive sign. This -- not more expensive markets -- is the sweet spot for the fixed-fee proposition.

Growth is the name of the game

The U.S. real estate market is undergoing significant change. New (and existing) players like Redfin, Compass, and eXp Realty are rapidly growing market share -- at the expense of traditional incumbents.

All of these players, including Purplebricks, have raised massive amounts of capital to grow market share. Growth is measured in tens-of-thousands of new listings.

Phoenix is just one market out of several in the U.S. where Purplebricks has launched. In its first eight months, Purplebricks had 582 total listings nationally. After five months in Phoenix, 75 total listings is a comparative drop in the bucket. If Purplebricks wants to make a dent in the U.S., these numbers need to be in the hundreds and thousands.

Another data point: A quick check on Zillow shows 288 active listings for Purplebricks (primarily in California); it had 289 back in June. By comparison, Opendoor grew from 721 to 3,163 active listings in the same period.

Strategic implications

Purplebricks' success in the U.S. market is not assured. Raising a lot of money doesn't guarantee success. And an organic pathway to growth takes large amounts of time, patience, and capital.

Execution of this model is very much market-specific, and a lot of hard work. The business model scales linearly with people; technology is just an enabler.

Zillow's billion dollar seller lead opportunity

Last week, Zillow announced its latest financial results, and the stock dropped 25 percent (losing $2 billion in value). But the story everyone is missing is the Zillow Offers iBuying business, and the huge potential of seller leads.

Why it matters: Last week I was quoted on MarketWatch saying, “If you’re thinking about Zillow doing iBuying and you’re not thinking about seller leads, you’re thinking about it the wrong way.” Seller leads are the real billion dollar opportunity.

Slowing premier agent growth

Here's the reason why Zillow's stock tanked 25 percent last week, in one chart:

Zillow's premier agent program accounts for over 70 percent of its revenue, or nearly $1 billion. Growth is slowing down. I'm not sure why this surprised anyone on Wall Street; I've been writing about it since early this year (Zillow's revenue growth slows and Zillow's strategic shift to iBuying and mortgages). I believe it's the primary reason Zillow has aggressively expanded into adjacent businesses.

The value of seller leads

Zillow's iBuyer business continues to grow, and the latest results crystalize the opportunity in seller leads.

Zillow says that since launch, nearly 20,000 homeowners have taken direct action on its platform to sell their home. Of those, it has purchased just about 1 percent of homes (around 200). That leaves about 19,800 leads who remain interested in selling their homes.

If Zillow simply sold those leads at $100 a pop, they're worth nearly $2 million.

But the real opportunity is giving those leads to premier agents in exchange for an industry-standard referral fee, about 1 percent, if the property sells (similar to the Opcity business model).

Here's the kicker: Zillow claims about 45 percent of consumers that go through the Zillow Offers funnel end up listing their home. That's a high conversion rate reflective of a high intent to sell; about 10 times higher than Opcity's conversion rate.

Assuming a 1 percent referral fee, a $250,000 home, and a conversion rate of 45 percent, those 19,800 leads are worth $22 million in revenue to Zillow, almost all profit.

Compare that to the estimated profit of its iBuyer business (1.5 percent net profit), which, on 200 houses, is $750,000. The value of the seller leads is worth almost 30 times the profit from flipping houses!

Total addressable market

Zillow says that based on its current purchase criteria, if Zillow Offers were available in the top 200 metro areas in the U.S., sellers of nearly half of the homes sold in 2017 across the entire nation would have been eligible to receive offers from it to buy their home directly. That equates to around 2.75 million homes annually.

Last quarter, Zillow said that it received offer requests from around 15 percent of the total for-sale stock in the Phoenix market. Interestingly, that number increased to 25 percent in September and 35 percent in October. That's a reflection of the strong lead generation power of Zillow Offers across its various web properties.

Based on these numbers, if Zillow goes national (200 metro areas) and sees 35 percent of the for-sale stock, it would receive 962,500 offer requests each year.

The billion dollar opportunity

Taking the latest numbers, which have been validated to the tune of 20,000 offer requests over five months in two markets, the total opportunity becomes clear with a national rollout.

Seller leads can be a billion dollar business for Zillow if you believe the current numbers. Even if a national conversion rate is lower, or the % of for-sale stock fluctuates, it's still worth several hundred million dollars in revenue annually.

Should Zillow even buy houses?

Given the value of the seller leads, should Zillow even be in the business of buying houses? Yes, if it wants a credible product for consumers. The real question is: What proportion of houses should Zillow actually buy?

Zillow's "big picture" is 5 percent national market share, which equates to buying around 10 percent of all offer requests (it is currently buying around 1 percent of offer requests). At a 1.5 percent net margin, that's around $1 billion in profit.

But to reach that scale, Zillow would need to spend $68 billion to purchase 275,000 houses annually. Assuming an average holding time of 90 days, it would need a credit line of $17 billion to fund the effort. Big numbers.

A more realistic target would be to only purchase around 1 percent of requests. Nationally, that would be 27,500 homes, which is only around double what Opendoor is currently doing, so it's feasible.

In any case, the point is clear: Zillow doesn't need to actually buy and sell a lot of houses for this model to generate significant profits for the company in a national rollout.

Strategic implications

Zillow is a lead generation machine, and its recent foray into iBuying is no exception. 

If you're in the industry and your value proposition to agents is seller lead generation, there's a new game in town. Zillow will be able to generate a massive volume of seller leads with higher intent than almost any other source. If successful, this will have significant implications across the industry.

Further analysis

If you're looking to dive deeper into the world of iBuyers, consider the following:

• iBuyer Business Model Overview and Analysis: all of my free research and reports on the iBuyer space.

• iBuyer Intelligence Briefing (Recording): a 60-minute conference call I conducted on the latest iBuyer news, key insights, and strategic implications for the real estate industry.

• Phoenix iBuyer Report: the only source for accurate, timely iBuyer market data for Phoenix. Available as a monthly subscription.

Mobile contact form analysis

Inspired by a recent talk on the importance of mobile experiences, I've conducted an analysis of the mobile contact forms for the big real estate portals. These are the forms that turn visitors into leads.

Why it matters: Mobile is huge. My research of the top real estate portals shows that, on average, 70 percent of leads come from mobile. Mobile contact forms should be optimized to be as efficient as possible.

Notable UX highlights

Pre-selecting checkboxes is a real-world example of behavioral science (specifically nudge theory) in action. In the U.S., Zillow and realtor.com take different approaches to encourage (or discourage) users to request additional financing information. Overseas, Propertyfinder, PropertyGuru and Otodom do the same when it comes to signing users up for property alerts.

Trade Me has the unique distinction of having the easiest and most difficult mobile form. On the positive side, it is the shortest form from my survey, simply asking for a message. On the negative side, it requires users to sign in to send a message. Luckily, almost the entire population of New Zealand is a member of Trade Me, but in the case of a new user (or someone who isn't logged in), this introduces a significant form completion hurdle.

The more required fields, the more difficult to complete a form. I know Germans can be formal at times, but does salutation really need to be a required field for ImmoScout24?

Redfin has split its form across three screens, each quite simple. But the additional effort to click a submission button three times instead of one, plus additional page load time, adds significant (and unnecessary) overhead.

Hemnet has decided to do away with forms all together and simply list an email address, leaving communication entirely in the user's hands!

Mobile usage

Many thanks to the portals that were willing to share their data with me (both anonymously and on the record). The collective intelligence is a benefit to all!

The percentage of leads that come from mobile (native app or mobile web) varies greatly: from 40 percent in Poland (Otodom) to 91 percent in Singapore (PropertyGuru). 

The biggest markets average somewhere in the middle: around 65 percent in the U.K. (Zoopla) to 72 percent in Australia (Domain).

On average, around 70 percent of all leads come from a mobile device, underlining the importance of a smooth mobile user experience.

User experience best practices

Best Practices for Mobile Form Design is an incredible resource for designing simple and effective mobile forms. Looking at the mobile forms from this survey, there are several best practices to remember:

• Avoid dropdown menus (dropdowns are especially bad for mobile).

• Don't slice data fields (when asking for a first and last name).

• Mark optional fields instead of mandatory ones (don't use asterisks).

A number of real estate portals do a great job at keeping the mobile experience simple and easy by following best practices and keeping the form as short as possible. My hope is that next year the forms will be even easier for users to complete. And if you're wondering just how important leads are, just ask Zillow.

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Before entering the high-octane world of real estate tech strategy, I was a product guy. My master's degree was in human-computer interaction, and I spent the first years of my career as a user interface designer. So I'm passionate about great design!

Opendoor's pivot to agents

According to a report on Inman, Opendoor is launching a new preferred agent partnership program where it is co-listing a growing portion of its for sale properties with partner agents.

Why it matters: This is a significant pivot for Opendoor, aligning it closer to agents in a major way. It signals that working with the traditional industry -- rather than trying to disrupt it -- is an important part of its growth strategy.

Working with agents

Opendoor's new preferred agent partnership program brings the company much closer to agents. As opposed to the company's hallmark of buying and selling direct to consumers, with a do-it-yourself open home model, this latest move represents a big pivot.

Before this program was announced, the way Opendoor sold its homes was fairly uniform: it would list direct without an agent, offer self-guided tours, brand everything Opendoor, and not pay seller agent fees since it was selling direct. But things have changed:

An unknown question is how Opendoor is compensating co-listing agents. There are three possibilities, listed in order of likelihood:

• The agent receives a referral fee (likely 1 percent) for representing Opendoor.

• The agent receives a fixed fee ($1,000) for representing Opendoor.

• The agent receives no direct compensation, but benefits from potential leads while hosting open homes.

Why the pivot?

This is a big move for Opendoor, and it would only make a change if there was a business benefit.

Opendoor is moving towards an agent-centric model, where it's co-listing and co-branding with a traditional real estate agent (and the traditional process it is aiming to disrupt). That's a non-trivial shift. And assuming Opendoor is compensating co-listing agents as outlined above, there's a significant economic shift as well.

Opendoor is in the business of buying and selling houses. So any pivot must enhance that capability, leading to two possible reasons for the change:

• Sell more houses, faster.

• Attract more agents representing sellers (buy more houses).

For a co-listing arrangement to make business sense, it must enable Opendoor to buy or sell more houses. Either its existing process isn't quite where Opendoor wants it to be, or there's an external reason to cozy up to agents...

The Zillow factor

There's one other factor to consider, and that's the relatively recent arrival of Zillow to the iBuyer game. As a reminder, Zillow's angle is to include agents in each step of the process, using its premier agent network to represent all sides of the transaction.

Opendoor's latest move puts it squarely at parity with Zillow in terms of agent involvement and the value proposition for agents.

Now, if you're an agent, the benefits of working with Opendoor are the same as working with Zillow. For Opendoor to make this degree of change, and give up image and economic value in order to appeal to agents, it must really want to work with agents!

Strategic implications

There's a long history of would-be real estate disruptors that attempted to disintermediate the traditional industry, only to change their minds and pivot back.

It's hard to go against real estate agents. There's just so many of them, and psychologically consumers want to keep using them. Many disruptors start with anti-agent tendencies but eventually come back to the fold. It's easier and more profitable to work with the industry than against it.

This is not a full-scale retreat on Opendoor's part; far from it. But it's the strongest signal yet of the importance of agents to its current growth strategy.

2018 Global Real Estate Portal Report

2018 Global Real Estate Portal Report from Mike DelPrete

Download PDF version (10MB).

Looking for more? Download and watch my Global Real Estate Portal Intelligence Briefing, a 60-minute webinar to dive deeper into the key highlights, trends, and insights from my latest report. I'll walk you through the key takeaways and observations from my research, in addition to answering questions.

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

Recently, several large incumbents have announced big consumer plays aimed at Zillow: Rocket Homes' new consumer portal, and Keller Williams acquiring SmarterAgent as part of its consumer strategy.

Why it matters: Zillow benefits from practically unbeatable network effects in the consumer space. Both of these moves ignore basic strategic principles of playing to your strengths, and picking battles you can win.

Network effects and wide moats

In his best-selling book Zero to One, Peter Thiel provides an elegant definition of network effects: “Network effects makes a product more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too.”

Online marketplaces such as Craigslist, LinkedIn, 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.

Businesses that have the benefit of network effects are incredibly difficult to displace. As Tren Griffin writes on a16z, "Nothing scales as well as a software business, and nothing creates a moat for that business more effectively than network effects."

Zillow benefits from the power of network effects. By developing the most popular means of searching for real estate, it attracts buyers and sellers in a virtuous cycle. It has cemented an incredibly strong position with a near-impenetrable moat from competition. This is Zillow's key strength.

Comfortably number one

Logically, the most likely competitor to challenge Zillow's dominance is realtor.com. It is the runner-up portal backed by a multi-billion dollar international media company (News Corp) that also owns several top portals around the world.

But as I've shown in the past, Zillow's ever-important traffic dominance remains constant, undisturbed by realtor.com or anyone else.

If anyone could dislodge Zillow's dominance, it would be realtor.com. But it hasn't; not for lack of trying, but rather an understanding of network effects and the futility of such an effort (remember, it owns the top portal in Australia and knows the power of network effects better than most). News Corp doesn't want to overtake Zillow because it knows it's impossible.

Strategy basics: play to your strengths

Sound strategic planning requires two key elements: leveraging your strengths, and playing where you can win.

A business should build its strategy around an understanding of its key competitive advantages and operational strengths. Those strengths should be applied in areas where it can win (typically where its competitors are weak).

To illustrate this point further, the following chart looks at four examples of Zillow and realtor.com smartly leveraging their strengths and exploiting their competitor's weaknesses.

Less experienced strategists can be reactionary. They see a threat and attempt to counter it, on a battlefield where they are at a distinct disadvantage to a competitor. Keller Williams and Rocket Homes have done just this; choosing to do battle with Zillow on its home turf, where it is strong and they are weak.

Keller Williams and Rocket Homes

Zillow's strength lies in its massive consumer reach through its search portal. This business benefits from strong network effects and has a wide moat to protect it from competition.

Keller Williams is building a new consumer-facing app to "compete directly with search giants like Zillow and Redfin." Rocket Homes is launching a portal to "rival Zillow," which will "let consumers search for homes and apply for loans."

In their efforts build end-to-end homebuying platforms, both businesses have decided to go from positions of strength (mortgages and agent reach) to ones of weakness (consumer listing portal). It's the most difficult battle possible.

What Rocket Homes and Keller Williams are missing in their end-to-end platforms -- the consumer search portal -- is nearly impossible to deliver because of Zillow's dominance and the power of network effects. There's a certain futility in going after Zillow (or Facebook, or Ebay, or Craigslist).

Strategic implications

Keller Williams and Rocket Homes (part of Quicken Loans), are both incredibly large and powerful businesses; Keller Williams has the largest network of agents, and Quicken Loans is the largest retail lender in the U.S. But in the changing world of real estate, they aren't playing to their strengths.

All businesses should know their strengths. Deeply understand your competitive advantage and what value you offer -- and focus on that. 

By going directly after Zillow, Keller Williams and Rocket Homes demonstrate a fundamental misunderstanding of the power of network effects. There's simply no purpose for these new consumer portals to exist, because they don't meaningfully benefit consumers.

In the accelerating race to build end-to-end real estate ecosystems, businesses should focus on leveraging their strengths to gain advantage over competitors and deliver true value to consumers.

Zillow, Opendoor, and controlling the consumer journey

Last week I conducted the iBuyer Intelligence Briefing -- a conference call on the latest iBuyer news, trends, and insights -- with listeners from around the world.

After the call, one particular question lingered: Which part of the industry controls the starting point of the real estate transaction, portals or iBuyers? Who has the advantage, and what are the implications for iBuyers?

Zillow's lead generation machine

Zillow announced its Zillow Offers program in Phoenix earlier this year, and started buying houses in May. It is heavily promoting the program across its site. While looking in the Phoenix market, a prominent message is displayed on all active for sale listings.

And if a visitor looks at an off-market listing (like their own home), this is the call-out at the top of the listing.

In its latest quarterly results, Zillow revealed how effective the promotion was: "Since launch, we have received more than 10,000 offer requests from potential sellers." And: "...in Phoenix, for example, we are seeing about 15% of all dollar value that's being sold in Phoenix any given month." That translates to about 1,600 offer requests per month.

Opendoor is on record saying that more than "one in two sellers who received an Opendoor offer" will accept it. It's currently buying around 300 houses per month in Phoenix, so that's about 600 offers made per month.

There's a difference between an offer being requested, and an offer being made. What's clear, though, is that Zillow is generating a massive amount of offer requests each month, at volumes that rival (and exceed) Opendoor.

Most importantly, Zillow's leads are coming with zero incremental customer acquisition cost, while Opendoor and other iBuyers must advertise directly to consumers to generate leads.

The Zillow effect

The ultimate question is whether Zillow's entry into the market is having an effect on Opendoor. Is Zillow soaking up demand from consumers, to the detriment of Opendoor?

The chart above shows a clear picture: the number of homes that Opendoor is purchasing in Phoenix has plateaued. But there are two possible explanations for what's going on:

• Zillow is having an effect on Opendoor's traction in Phoenix by soaking up consumer demand.

• Opendoor is slowing its buying activity for other reasons (we've seen this before).

It's too early to say if Zillow is having a direct effect on Opendoor's business in Phoenix. Opendoor may slow its buying activity for a variety of other reasons, namely a potential market slowdown.

But what's clear is the leading position Zillow holds in the consumer journey and its massive reach give it a competitive advantage in acquiring customers -- which has long-term consequences.

Strategic implications

Back in February, I wrote the following: "The most logical response from a major player such as Realogy or Keller Williams would be to launch their own iBuyer program." Which is exactly what happened last week. More competition is coming to the market.

As incumbents, portals, and other new entrants enter the iBuyer market, they have the potential to soak up consumer demand and adversely effect Opendoor's business.

But for Zillow in particular, the evidence is clear: Real estate portals are in pole position to capture consumer demand for iBuying services, because they are at the start of the consumer journey. Will other global portals follow Zillow's lead?

Zillow will beat its Q3 homes revenue guidance

With September wrapping up, we can look at the latest iBuyer numbers out of Phoenix and see how Zillow is doing.

Why it matters: Based on the data in Phoenix alone, Zillow will beat its Homes revenue guidance of $2 - $7 million. But other indicators, including a lower-than-expected margin and higher purchase prices, are worth watching.

Q3 Revenue beat

During its last earnings results, Zillow provided Q3 revenue guidance for its Homes unit of $2 - $7 million. Based on our proprietary data set for Phoenix, Zillow sold 30 properties in Q3 for $9.3 million in revenue. So in Phoenix alone, Zillow will beat its revenue guidance.

Thirty sales over three months is a modest amount. By comparison, Opendoor sold 26x that number in the same period. Zillow is clearly still in its ramp-up period and has some ways to go.

This result highlights a few other observations:

• Guidance is hard. Zillow is still finding its way in this new endeavor, and is having to constantly readjust its assumptions. It’s a positive sign, but clearly highlights how new to this business Zillow is.

• Zillow's full-year revenue guidance of $20 - $40 million in Homes revenue is achievable (it simply needs to sell the same number of houses in Q4 to hit the low end of that range), but a lot depends on traction in other markets. I would expect Zillow to revise this guidance during the next earnings call.

Buying momentum up

In Phoenix, Zillow continues to expand its operations on a month-to-month basis. The number of homes purchased is increasing by about 40% month-on-month — to over 60 in September. By comparison, Opendoor is buying around 5x as many houses in that same period (solely in Phoenix). Zillow is clearly serious and committed to this new initiative.

Unsold inventory

One of the potentially worrying indicators, however, is the amount of unsold inventory Zillow has in Phoenix. While the number of properties it is buying is increasing, the number sold is low.

To-date, Zillow has purchased over 150 properties and has sold 30.

In September, the ratio of homes bought to homes sold is 0.14 — down from 0.34 in August. Comparatively, that ratio for Opendoor is 1.01 and 0.95 for Offerpad.

Clearly Zillow is still ramping up its operations so it’s natural to expect a lag between buying and selling properties. But even accounting for a 90 day holding time window, the September number should have been larger (I would have expected a buy:sell ratio closer to 0.50). All eyes are on October.

There are a number of other interesting indicators worth watching:

• A lower-than-expected margin (the difference between what Zillow buys and sells a house for).

• A median purchase price that is materially higher than its iBuyer peers (but is starting to drop).

Is Compass really a tech company?

Earlier this month, The Real Deal published an excellent article about Compass. And the article included one of my favorite things: numbers.

Why it matters: Opinions aside, the latest numbers allow us to compare Compass to its peers, and really answer dual questions: Is Compass doing anything novel in the industry, and is it really a technology company?

Comparing growth rates

I'll be comparing Compass to two of its peers: Redfin and Purplebricks. Both businesses, which I know well, represent the most successful new models in real estate that are changing the way people buy and sell houses. They are successful in terms of overall revenue and transaction volumes, demonstrating market traction at scale.

Overall revenue growth for all three firms is growing impressively. It's undeniable that Compass' revenue growth is accelerating.

The core of the Compass business model is making acquisitions. Armed with $800 million in venture capital, it is aggressively buying up agents and brokerages.

Transaction volumes are all increasing. Again, Compass' projected growth in 2018 is impressive, but that's what happens when you buy market share. By comparison, Redfin and Purplebricks are growing organically.

Is the Compass model novel?

The Compass investment thesis centers around technology. It claims that it is a tech company (with tech company valuations), and is building the "first modern real estate platform" that provides "real estate agents tools that increase efficiency."

The data has yet to prove out this thesis. Starting with another tech company, Redfin, the numbers show that it is clearly a more efficient business than Compass -- because its operating model is different.

For Compass 2018, I've included two numbers: 7,480 is the total current number of employees, while 4,800 is the midpoint between 2017 and 2018. Given that Compass is growing so quickly, it makes sense to look at both to calibrate the comparison.

The data above is total number of employees. If we look at overall agent efficiency, as I did earlier this year when comparing Compass, Redfin, and Purplebricks in the U.K., the contrast is more pronounced.

The evidence shows that, at best, Compass agents may be incrementally more efficient than the industry average, but Redfin and Purplebricks agents are exponentially more efficient.

Compass' growth strategy is novel: raise a massive amount of capital and use it to acquire market share. But the operational model of the business is fundamentally the same as every other traditional brokerage -- as the data around efficiency shows. It's not really changing the industry in the same way that Redfin, Purplebricks, or Opendoor are -- it's just moving market share around.

Is Compass a technology company?

Analysis I conducted in early 2018, as part of my Emerging Models in Real Estate Report, showed that -- roughly speaking -- about 10 percent of the staff of global leaders was technical. Compass was the outlier at 4 percent.

Using the latest data (7,480 total employees and a 200-person tech team), that percentage has dropped to 2.7 percent.

Even if you calibrate for Compass' fast agent employee growth through acquisition, the overall percentage is still considerably lower than its peers.

Strategic considerations

There are a few final points to consider when looking at Compass:

• Being a tech company is not a binary thing, but what is clear is that Compass is less of a tech company than its peers.

• As opposed to Purplebricks and Redfin, Compass' customer is the agent. The technology it is building is for agents, not consumers.

• True, exponential efficiency gains come with technology combined with a novel operating model. Technology alone won't deliver it.

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Inside Compass: A Strategic Analysis

• Growth Strategies

• Brokerage or Tech Company?

• Valuation

• Sustainability

• Endgame

Opcity, lead conversion, and the journey down the funnel

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

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

Lead generation vs. lead qualification

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

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

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

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

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

Providing a superior experience, to everyone

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

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

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

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

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

A big revenue opportunity

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

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

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

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

Implications for real estate portals

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

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

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

Strategic implications

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

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

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

Analyzing the top portals' financial results

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

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

Revenue growth comparison

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

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

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

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

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

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

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

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

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

Catching the leaders

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

The evidence suggests that the answer is a resounding no.

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

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

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

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

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

Mixed results in adjacent revenue streams

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

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

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

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

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

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

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

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

Strategic implications

These latest financial results highlight a few key takeaways:

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

How Psychology is Holding Back Real Estate Tech

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

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

It's the psychology, stupid

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

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

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

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

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

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

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

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

The role of technology

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

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

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

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

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

Strategic implications

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

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

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

A Deeper Look at Zillow's Instant Offer Numbers

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

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

A quickly growing business

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

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

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

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

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

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

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

Moving fast

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

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

Strategic implications

A few takeaways to keep an eye on:

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

Real time data

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

Zillow's Strategic Shift

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

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

A major move into mortgages

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

Why? Two reasons:

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

Closer to the transaction

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

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

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

A strategic shift

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

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

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

Premier agent growth as catalyst 

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

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

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

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

Strategic implications

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

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

Rightmove's Growth Continues to Slow

Rightmove announced its half-year financial results today, with revenue growth continuing to slow (down to 9.7 percent).

Why it matters: This is a continuation of the "Rightmove dilemma" of a narrow strategy with slowing growth, and no other revenue streams. It's neither good nor bad, but a fact that investors (and my readers) should be aware of.

A narrow strategy with slowing growth

Rightmove, the U.K.'s leading real estate portal, is a company that I frequently analyze. It is a global leader in the field with a unique, focused strategy.

In my latest report, The Future of Real Estate Portals, I discuss the Rightmove dilemma extensively. Unlike many other portals, it has not diversified its products or revenue streams beyond the core listing advertising business.

The strategy has served the business well for the past decade, but the strategy is beginning to show limitations. Revenue growth is slowing, and today's announcement shows a continuation of that trend.

The two key numbers

The key narrative is growth, with two key numbers: revenue growth and ARPA (average revenue per advertiser) growth.

Once an additional decimal is added, Rightmove's results show annual revenue growth of 9.7 percent (which it rounded up to 10 percent). This is the lowest number in years, and is the first time it has dipped below 10 percent.

Because Rightmove has not diversified its revenue streams, revenue growth is almost entirely driven by ARPA growth (how much it is able to charge its customers). This number, too, is dropping.

ARPA growth for the half-year is down to 8.3 percent, and is projected to stay at that rate for the full year. Once again, this is the lowest number in years. Rightmove can only raise its prices so much.

Implications for Rightmove

This is not the demise of Rightmove. It is still an incredibly strong business, with nearly-impregnable network effects that will likely protect its core business for years. The dilemma is about growth, and the right strategy to match its ambitions. Its growth prospects are challenged.

Rightmove is bumping up against the glass ceiling of price rises; growth is slowing. Slowing revenue growth is leading to tighter cost control, which could inhibit its ability to invest for the future.

Rightmove has not diversified its revenue streams. Nothing new is taking up the slack in the revenue slowdown. It has been promoting new premium features and new products for over a year, but they are not stopping the decline in growth.

Implications for real estate portals

For other real estate portals, there are a number of takeaways to this story:

• Despite your market dominance and powerful network effects, there is a limit to how much revenue you can extract from your customers each year. It will slow over time.

• Additional premium products and services take more effort to build, and are valued less by your customers.

• Continued revenue growth comes from diversification into adjacent revenue streams.