Category Archives: Real Estate

Dear Realogy: What’s Stopping You?

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This is a brief note that I would have put on Facebook or something, except that such things get lost in the tides of time and Facebook’s rapidly scrolling updates. I want to be able to refer back to this at some later point.

At the recent NAR Leadership Summit, there was a panel of major brokerages and franchises. All of the panelists apparently expressed dismay at the number of MLS’s there are in the United States. Then Alex Perriello (my old boss, back in my CBC days) suggested that consolidation happen through acquisition.

From the Realtor.org story on the event:

Talk of a common platform quickly segued into a discussion of how many MLSs each of the large brokers had to join—and each of the panelists, at some point in the discussion, expressed support for MLS consolidation.

“It certainly makes sense for MLSs to start consolidating,” Peltier said. He suggested several smaller MLSs from the same region could partner to create “a consumer site that does not pick winners and losers,” referring potential clients back to the listing broker’s site.

Perriello caused a stir in the audience when he suggested that MLS consolidation should happen “through acquisition,” with larger MLSs taking over smaller ones that aren’t able to adapt.

“It is an exit strategy for some of them,” he said. “People won’t voluntarily say, ‘Well I think we’ll just close up shop.’”

Perriello reminded brokers that they can leverage a history of cooperation that real estate professionals in other countries can only dream of.

“The majority of brokers around the world do not have the benefits of MLS,” he said. “Competitors don’t even talk to each other much less cooperate with each other.”

Well, as someone who has actually spent time and energy and taken major professional risks to drive MLS consolidation via acquisition, only to run into the brick wall that is MLS governance in the 21st century, I have a suggestion in the form of a question.

What’s stopping Realogy from making offers to MLS systems today?

In Q2/2014, Realogy posted $1.5 billion in net revenues, with $269 million in EBITDA and $68 million in net income. Realogy also posted $198 million in free cash flow in the three months from April through June. It’s also a public company, who can offer stock in any acquisition.

I’ve heard Alex and others from Realogy complain about the MLS, about how many there are, about the need to consolidate, etc. etc. for a few years now. So here’s my suggestion.

Start buying the MLS yourself.

You have the cash. You have stock to offer in any deal, so the seller (usually an Association) has upside to look forward to. You’re part of the industry. You have deep talent in managing businesses. Go make an offer, especially in those large metropolitan areas where the NRT is active.

Start with MRIS in the DC area, which is a for-profit entity owned by twenty-some Associations. Offer them $150 million in cash and another $150 million in restricted Realogy stock so that those shareholder Associations can enjoy the upside of Realogy’s stock price rising.

Why not? What’s stopping you?

To those who say that the MLS can’t be owned by a brokerage, since its competitors would flee… there are three major MLS systems I know of (and others likely exist) that are broker-owned: MLS PIN in the Northeast, FMLS in Atlanta, GA, and NWMLS in the Seattle area. All are broker-owned, and the competitors have not fled the system. But if competition is going to be an issue, that’s easy to solve as well.

Offer to sell to brokerages in the affected MLS area shares in a new company that owns the MLS. So Realogy invests $300 million (in the hypo above), forms RealogyMLS to own MRIS, then sells $200 million worth of shares in RealogyMLS to other brokerages. Done.

If you need someone with actual experience in trying to do such a thing, I’ll be waiting by the phone. Or not, as the likelihood of actual action is probably in the neighborhood of the Jets winning the Superbowl this season with Geno Smith at quarterback.

The fact that this seems fanciful should alert us all to just why MLS consolidation remains a favorite talking point, but not an actual action point. We might all wonder why that is.

-rsh

My God, I Love These Videos…

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Look, if you’ve been a regular reader, you know that I don’t do “blogging for clients” type of junk you’ll find elsewhere on the real estate web. My clients are my clients, I don’t talk about them, what I do talk to them about is between me and them, and this blog here is my personal thing where I get smart or ridiculous or whatever. But in this case, I think you can forgive me for writing about a client.

I’ve been working with TREPAC (Texas Real Estate Political Action Committee) for a while now on their consumer-facing efforts, and one of the concepts that the team came up with (credit to SGS) was to run a contest showcasing why Texans love their Texas homes. I must confess that I had very high expectations, but… some of these videos have exceeded all of them.

Let me share some of my personal favorites (I’m not a judge, so my opinion doesn’t mean jack diddly squat) and then make a couple of observations for the industry folks to think about.

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A Couple of Brief Notes on Realogy

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I’m busy writing, but thought it worthwhile to take a few minutes to make a couple of observations about Realogy. I mean, it’s only the most important brokerage and franchise company in the industry with over $4B in annual revenues….

On “Project Flanker”

First, with regards to this story on Inman… I’ve already told the writer, Paul Hagey (@InmanHagey), who does excellent work in the article, that he should chat with his headline writer. :) Paul writes:

The nation’s largest real estate brokerage, NRT LLC, is preparing to launch two new search portals that are aimed at reducing the company’s reliance on leads from Zillow, Trulia and realtor.com, attracting homebuyers by offering access to a complete set of MLS listings in markets where NRT operates, plus bells and whistles like automated valuations.

Maybe I’m dead wrong here, but I can’t see how Realogy is outflanking anybody with this new website, even if it’s code-named “Project Flanker”, nevermind Zillow-Trulia. Two reasons, one of which was cited by Hagey in the article:

“It is not intended to compete against the big portals like Zillow or Trulia,” Smith said Monday during Realogy’s second-quarter earnings call. “It is a very different approach to the markets, very smart, I think it is very strategic.”

But to get the full story, one should read the Investor Day transcript as well. This comes right after Bruce Zipf, the head of NRT (Realogy’s company-owned brokerage operations), talked about the “generic URL website” they were working on and a Wall Street analyst started asking about competing with Zillow/Trulia.

Richard Smith:

So that you don’t start modeling a Trulia or a Zillow-like model here. Let me give some color. This is a broker transaction oriented site. We’re creating the opportunity under the radar screen using the URL that’s fairly generic. It will not get the media attention or the financial support that you would expect at Zillow or Trulia because they’re in different businesses.

But this is to be at the point of sale, to be as close to the decision making process as possible, but outside of our traditional URLs like coldwellbanker.com because then in the context of those sites, we have limitations as to what we can do from a consumer perspective. When you’re outside of that, using the URL that is fairly generic and we haven’t disclosed as of yet, you’re approaching the consumer in a slightly different way.

But they’re not up here where the Trulias and Zillows are. They’re media companies and they do a very effective job for us as media companies. This is when that person moves from Zillow or Trulia closer to the decision making process where we think we can cast in that wide net, we think we can capture more of that business.

So the business is not coming to us directly through the relationships, yard signs, all the other things we talked about. We think when they get to the decision making that I actually want to see this house, we can offer an alternative to what’s out there today, again, adding to the 700 plus.

Just given our size and our market share, we think this can be meaningful to consumer, and then we think it can generate incremental leads. So all of what we’ve discussed with respect to that is in all the discussions we’ve had up to this point, the incremental initiatives in NRT that’s working on that I believe we mentioned in the first quarter. It’s contained in the context of all that discussions. So don’t expect big jumps in marketing spend or technology spend based on that conversation. It’s already on our forecast. [Emphasis mine]

The two takeaways here for me are:

  1. Realogy sees Zillow/Trulia as an important feeder into this “Project Flanker” website, since Flanker.com (I just named it that) is supposed to be further down the sales funnel. That is perfectly in line with what Spencer Rascoff and Pete Flint have always maintained: that Zillow/Trulia is a media company selling advertising opportunities to real estate peeps.
  2. No big jumps on spending = no attempt to outflank. I mean, sure, real estate folks like to believe that since they have the listings, it’s no big deal to attract a consumer audience without spending too much (“Internet advertising is free!”) but… um, no. Given that Zillow and Trulia combined spent a combined $120 million in Q2 (that’s three months, folks) on marketing and technology, let’s not talk about outflanking until Realogy commits real dollars to both marketing and technology.

Seems to me that Realogy’s position is consistent with everything we have heard from brokers, including The Realty Alliance, large independents, and franchised-brokers: they no longer regard the portals as a threat. It’s the MLS they’re concerned about.

The Real Deal

While the real estate industry was completely absorbed by the Zillow-Trulia deal, fact is that Realogy quietly made one of the more important moves in recent years by acquiring ZipRealty. I’m going to have to do more on this at a later date, but read the transcript announcing the acquisition.

For now, let me limit my observation to two points.

  1. Some folks, like Citron Research, thinks that the ZipRealty acquisition is about Realogy outflanking (there’s that word again) Zillow. But as we saw above, I don’t see Realogy looking at Zillow-Trulia as competition; I see Realogy looking at them as the top of the funnel, and Realogy wanting to capture the middle of the funnel, where they can get 35% referral fees from the bottom of the funnel (the agents themselves). So… why is this deal important? Because…
  2. Now that Realogy has this platform, which Richard Smith described in absolutely effusive language (and trust me, Smith is not an effusive type of a guy)… the pressure is on the other major franchises. REMAX, KWRI, BerkshireHathaway… they’d best step on up if they hope to remain competitive with Realogy’s Franchise Salespeople knocking on every door offering the ZipRealty platform to brokers and agents. The real competition for Realogy are other franchises (for its RFG division) and other brokerages (for its NRT division). ZipRealty’s technology platform is a huge advantage in both. The other guys have to step on up.

Thing is, who’s out there that’s got the proven technology assets that ZipRealty has? As far as I know, there’s only one company: Redfin.

My guess? I think REMAX acquires Redfin, if Redfin is even remotely available for acquisition. Since REMAX is a public company, Redfin may essentially end up “going public” via merger, and its investors reap the benefits of that. KWRI is an unknown, but their investment in eEdge makes me think that they’re unlikely to bid for Redfin. BerkshireHathaway has Warren Buffett money, of course, but if Redfin shareholders want the upside that comes from an IPO… I rather think some sort of a stock-and-cash deal with REMAX is probably more attractive.

Then again, maybe Realogy approached Redfin and was rebuffed, so they settled for the second-best option in ZipRealty. Who knows?

What I know is that one of my Black Swan scenarios just came true. Surely there ought to be some sort of Nostradamus Award for this, no? :D

Anyhow, gotta get back to work… just thought I’d get these out there. Your thoughts are always welcome.

-rsh

Special Guest Post: James Dwiggins on Zillow/Trulia

The following was posted on Facebook by a friend, James Dwiggins, earlier today. James is not only a very smart guy — also one of the tallest guys in the industry — he’s also the CEO of Nexthome in San Francisco. Because this is long, detailed, and worthy of saving past what Facebook thinks it ought to be, I repost it as a special Guest Blog, with his full permission.

The original thread may be found here. I’ve taken the liberty of minor formatting for legibility but have not otherwise edited this. The image/photo to which the comments were attached is at the top.

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I’ve been traveling the past week so I haven’t been able to comment on the Zillow/Trulia buyout and I know many of you have asked for my thoughts.

Let’s set the stage first: Trulia was founded May 1st, 2004 and according to CrunchBase, they received 32.8M in venture funding before going public. Zillow was founded in January 2005 and according to CrunchBase, they received 92.5M in venture funding before going public. Both companies set out to change the way consumers search for real estate online and make money off the advertising revenue.

According to NAR, in 2001, homebuyers used Realtors 69% of the time when purchasing homes. In 2013, that number is now 88% of the time. While homebuyers continue to search more and more on non-real estate company sites, ironically they are also using Realtors more as well. My take: finding a home online is the easy part and constitutes about 5% of the entire home buying process.

The hard part begins once you want to make an offer and actually purchase it, which consumers understand to some degree. If they didn’t, those numbers would not be increasing like they have and lots of alternative models that past several years that tried connecting buyers and sellers online would have succeeded. In fact, almost all of those companies have failed. I’ve attached the actual chart showing the increase in Realtor usage from the 2013 NAR Profile of Home Buyers and Sellers.

With regards to everyone worrying about Trulia and Zillow becoming a real estate company or franchise. We all need to understand that this is not their model whatsoever or for their shareholders sake, shouldn’t be.

At the end of Q1 2014, Zillow had 52,968 premier agent subscribers. At the end of Q1 2014, Trulia had 66,700 premier agent subscribers. As everyone knows, their business model depends highly on having real-time listing data on their sites which is provided by brokerages and agents who in many cases are paying for premier placement.

If they became a real estate company, you could almost guarantee two things: 1.) 52,968 & 66,700 premier agents subscribers would likely stop advertising on these sites, destroying their revenue, and eventually the companies as well… and 2.) If Zillow and Trulia were real estate companies, they wouldn’t want competing agents advertising on their sites either. That would be allowing competitors to take away buyers and sellers from their own agents which makes no sense. It’s exactly why every real estate company and franchise doesn’t allow its competitors to advertise on their sites now. That would be counter productive to making money.

In other words, I can’t possibly see how Zillow and Trulia becoming a real estate company would make any sense whatsoever so we should stop worrying about this. If we as an industry are scared of this idea, then we should be paying closer attention to Redfin who is trying to make this kind of model work to some degree. They are not the first and they certainly won’t be the last.

Are Zillow and Trulia dominating the online real estate space and will they continue to grow? The short answer is yes… until either “organized real estate” starts listening to consumer needs and builds something they actually want and will use, or another outside entity creates it. Lots of companies create game-changers and then lose the throne. Think AOL, Netscape, Internet Explorer, IBM. It can be done and it will happen again including our space.

In closing, this is just two major online portals consolidating their businesses in a market that is fast becoming oversaturated as it is. They have just over 110,000 combined subscribers in an industry that has 200,000 potential subscribers at best. They’ll combine resources, streamline operations – (job consolidation) and hopefully become profitable. Please feel free to chime in if you see something different. RobKeith,ImranNobuAaron, I would love to get your take on this as well.

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I will add my thoughts in the comments.

-rsh

As the Real Estate World Turns

There is something about Zillow that brings out the melodramatic in the real estate commentariat, both of the professional variety and often more hilariously, of the amateur variety. The big bombshell from yesterday, of Zillow acquiring Trulia, has brought out some of the finest performances in a drama and in a comedy.

It’s an odd thing to see both massive over-reaction and huge under-reaction. But such is life in the funhouse that is the American real estate industry.

I’d like to look at a few and just… well… comment, I guess. I don’t know if I have much useful stuff to add, except snarky maybe. Though to be honest, sometimes, snark can be useful!

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