The ground is shaking under the residential real estate brokerage industry’s feet. Brokerages big and small, independent and franchised face daunting challenges as venture capital and technology shift the rules that have governed the industry for decades. You know this from the increasing stress of P&L statements and by watching the vast streams of money flowing into the industry; we at T3 Sixty know it from the hundreds of hours of research we pour into the annual Swanepoel Trends Report, which analyzes the top trends shaping our industry for the next two years. With the 2020 edition released on December 2, the 220-page report, available at t3trends.com, cuts through the industry’s noise. It pinpoints the industry’s key challenges, presents how iBuying, modern brokerage finances, venture capital and much more are shaking the industry to its core and provides the information brokers need to make informed, smart decisions, which are more critical today than perhaps ever before.
2020 STR Table of Contents
- Trend 10: Inside the Class-Action Antitrust Lawsuits
- Trend 09: Data Security: The Overlooked Brokerage Threat
- Trend 08: Redefining the Edge of the Real Estate Transaction
- Trend 07: MLS in Jeopardy: Can the Industry Pull Together?
- Trend 06: The Diminishing Financial Viability of Traditional Brokerages
- Trend 05: Compass: Building a Modern Traditional Brokerage from The Ground Up
- Trend 04: Keller Williams: Confronting the Innovator’s Dilemma
- Trend 03: Zillow: Accelerating the Transformation
- Trend 02: Inside the VC’s Mind
- Trend 01: The iBuyer Revolution: Redefining the Real Estate Transaction
No other study provides more comprehensive insight and knowledge to help brokers understand the massive changes currently shaking the industry and how to take proactive steps to prepare for what’s next. Below we summarize some of the report’s top trends.
The report identifies iBuying as the industry’s top trend in 2020. The powerful new model, in which companies merge finance and technology to streamline the real estate transaction, brings a proliferating number of options for real estate sellers and buyers and is spreading rapidly through the country with a growing number of companies. The model has evolved since Opendoor introduced it to the world in Phoenix in 2014. Now in 20 markets, Opendoor showed that removing the stress and uncertainty from selling a home has great appeal to consumers. In 2019, Zillow Group jumped all in with the model, essentially reorienting its company around improving the real estate transaction with its iBuying service, Zillow Offers, at the center. But Opendoor and Zillow are far from alone. Many large brokerages and franchisors, including Realogy and Keller Williams Realty, have introduced their own iBuying offerings, including a growing number of startups. As the iBuying service matures, startups and companies are expanding and tweaking the model. Many models now serve buyers as well as sellers by either providing them with streamlined financing for all-cash offers or by purchasing a home on their behalf with cash and then negotiating financing with them after the fact. In addition, companies are placing increased focus on synchronous sellers — those sellers looking to sell and purchase a new home. The model has great appeal, but it has not yet proved profitable. T3 Sixty analysis of Opendoor’s Denver activity from late 2018 to September 2019 revealed the company lost $1.67 million on the 216 homes it purchased, which does not include payroll, marketing or other operating expenses. [ninja_tables id=”42345″] Zillow Group’s numbers reveal the same negative margins. But that’s not the point. Like many other industry-changing models, these firms, and others employing the iBuying model, are betting that if they respond to the clear consumer demand for a simplified real estate transaction, they will win in the long run.
How Venture Capital Works
We all know that venture capital is the underlying force behind the industry’s revolution. But do you know how it really work? There’s a reason why iBuying companies are fine operating in the red for years as they work to build scale, prove a new model and create a new real estate reality. They follow a well-established venture capital playbook. Venture capital companies collect investments from large institutional investors, who deploy just a small percentage of their overall funds to them. These VCs then make investments in promising, but yet unproven startups, understanding that the investment comes with a high risk. Most of these investments fail, but VCs expect that. They just need one company to hit, which can generate amazing returns. Zillow and Redfin are two prominent VC-backed real estate examples that paid off. Redfin’s funding journey provides an example. As Redfin matured, more institutional investors began participating in its funding rounds and fewer VCs, a common occurrence as a company becomes established, has more substantial operating metrics and, in cases where the business looks promising, is viewed as a less-risky bet by investors. For example, beginning with Redfin’s Series F round in November 2013, hedge fund Tiger Global Management and asset management firm T. Rowe Price became investors. Before that round, all investors were VC firms. At Redfin’s 2017 IPO, which valued the company at $1.73 billion, four VC firms owned 44 percent of Red n and two other institutional investors owned 17.6 percent. [ninja_tables id=”42351″]
The Struggle of Traditional Brokerage Profitability
Brokerages employing a traditional model don’t need to be told about the struggles in their P&L statements; it is abundantly clear. Many modern traditional brokerages, even if humming on all cylinders, achieve profit margins in the range of 4 to 6 percent; many see lower margins. Compressing agent commissions and splits that increasingly favor agents stand as two main downward pressures. To provide insight into exactly where the traditional model is failing, T3 Sixty outlined 33 key brokerage business metrics in eight categories:
- Agent growth
- Staff and offices
- Cost of sales
- Operating expenses
- Capital expenses
- Overall financials
Brokerages have a number of levers to pull to increase their profitability. To uncover these requires a careful analysis of the 33 metrics outlined in the 2020 STR chapter, “The Diminishing Financial Viability of Traditional Real Estate Brokerages,” as vulnerabilities can exist in multiple areas, from staffing, to agent productivity, to office space, to ineffective company closing processes and subpar marketing strategies. Brokerages can no doubt increase their bottom line by growing revenue and lowering expenses around the transaction, but the rapidly approaching new real estate reality will require most to operate efficient ancillary business or implement well-fined lead-generation operations. Review the chapter for more insight on the topic.
Three Real Estate Companies Making Big Moves
With the industry shaking, three companies are undeniably making big moves to address their leaders’ visions about where real estate is headed. Diving into these companies — Zillow Group, Keller Williams Realty and Compass — reveals why they are taking big steps and some details behind their efforts. After building the largest lead generation system the industry has seen, Zillow Group has essentially reoriented its company around transforming the transaction, led by its iBuying service Zillow Offers and its visionary co-founder and returned CEO Rich Barton. [ninja_tables id=”42352″] Keller Williams Realty’s iconic co-founder Gary Keller also came back to execute a company reengineering as CEO in 2019. The company is refashioning itself from a training and coaching company into a technology firm from the inside out. Its technology division, KW Labs, now has over 300 full-time software engineers and is building an artificial intelligence-powered platform from the ground up. KW rolled out the agent-focused portion of the platform, KW Command, companywide in 2019. It had 100,000 daily active agent users in the four weeks through October 17, 2019. The company continues to refine this component of the platform and also has consumer and office versions in the works. [ninja_tables id=”42353″] Like Zillow and KW, Compass has a big vision, fueled by over $1.5 billion in venture capital and younger co-founders Robert Reffkin and Ori Allon. On the back of huge brokerage acquisitions and top agent recruiting, the company has grown into the nation’s third largest brokerage in just eight years. In many ways, the New York City-based firm is simply building a modern traditional brokerage — it operates on a traditional model, but hopes to leverage its scale in individual markets to open up network effects and other strategies to give it a strong competitive advantage and open up other revenue streams, including from ancillary businesses it eventually plans to roll out. The company is working on an AI-powered real estate platform that automates many agent tasks and optimizes their production with new insights. The company opened a new Seattle tech hub in 2019 to support this vision. [ninja_tables id=”42355″] The other half of the 2020 Swanepoel Trends Report covers important industry analysis of the challenges facing the MLS industry, the industry’s latest class-action antitrust lawsuits, the new ability for brokerages to easily support consumers after the transaction and the largest security threats that many brokerages overlook. Get your copy here and stay tuned for the next edition of T3 Insight for more details on the industry’s biggest trends.