IBuyer expert and real estate analyst Mike DelPrete explains how market incumbents are stepping up their game to adapt to a shifting business landscape ahead of Inman Connect Las Vegas on July 22-26.
Real estate tech consultant Mike DelPrete’s phone is ringing off the hook from all the venture capitalists who want to blow up real estate. A scholar-in-residence at University of Colorado Boulder, he’s recognized as one of the leading experts on iBuyers.
In an interview with Inman, DelPrete recently offered some insights about where the industry is headed.
Market incumbents are really stepping up efforts to adapt to a shifting business landscape, as Zillow Group tightens its grip on the marketplace, Compass fiendishly buys brokerages, and Redfin keeps playing the long game, he said.
DelPrete will be speaking at the upcoming Inman Connect in Las Vegas. This conversation has been edited for length and clarity.
Over the past couple years, what have been the most overlooked or under-appreciated developments in real estate tech and the industry as a whole?
One of the things I’ve always kind of known, but I didn’t fully realize, was just how how efficient Redfin’s agents are and how efficient its model is, and I think a lot of people don’t appreciate that.
In this world of massive investments and glitzy headlines and all this hype … the key good business fundamentals of having a business model and an operating model that generates exponential improvements over the status quo often gets overlooked, and that’s Redfin.
Their agents [even when including support staff] are exponentially more efficient — four to six times more efficient — than the industry average, and that’s noteworthy. There’s lots of other companies in the space making big claims, talking about agent efficiency. But when you look at the numbers, it’s very small incremental change.
So then why hasn’t Redfin been more successful?
They’re playing the long game. If you imagine a game of poker [with Zillow Group], it’s Glenn Kelman’s turn; they just call [Zillow’s last bet]. I’m putting in the 25 cents just to stay in the game, and then it gets to Rich [Zillow CEO Rich Barton], and he just puts everything in, all the chips are in.
Redfin is playing the long game; they’re at least trying to build a profitable business.
So ‘slow and steady wins the race’ kind of philosophy?
Yeah, slow and steady … they’re playing the long game here, but the ground underneath their feet is shifting faster than perhaps they’ve been used to … it’s that massive investment into the space.
You’re playing the long game, but then suddenly you’ve got Opendoor and Compass and Zillow on the field with a billion dollars to spend … and I think that’s why Redfin has redoubled its marketing, spending more money. They’ve pushed profitability further into the future because they’re like, “Oh man, we need to invest more.”
I wonder why Redfin hasn’t done a follow-on offering …
I don’t know. Conservative by nature? A bit more conservative DNA?
How has the evolution of the industry impacted you as a consultant? As an insider, what are some of the more interesting projects you’ve learned of? Inquiries presumably have increased as venture capitalists have stampeded into real estate. And you’ve become an iBuyer expert …
I wouldn’t want it to become confused with the only disruption going on in the space … but iBuying does represent the holy grail of real estate tech … it’s big. It’s impactful, and it fundamentally does have the ability to change the way people buy and sell houses.
So how has it impacted me? Given that it is kind of that holy grail, ‘Oh, finally, some disruption in real estate,’ it’s been great for me because I’ve studied that space … every week I get more and more calls from people looking to understand it, looking for help … developing strategies going forward.
I was having a conversation yesterday with a company I advise, and what I told them was, “You know I think the title of the chapter of where we’re going right now in the industry and what’s going to define it for the next 12 to 24 months is ‘Incumbents Wake Up.'”
I’m seeing more and more traditional players — maybe not real estate agents or brokers, but people that have a big existing business in the traditional space — not only waking up to what’s going on, but having a real strong desire to understand it and develop strategies going forward … this is not like ‘insert cheesy disruption analogy here,’ like Best Buy or Blockbuster, saying, “Oh, jeez, the world’s going to pass us by.”
Tens and tens of billions of dollars, hundreds and hundreds of thousands of real estate agents — people have been doing this for years. It’s different than Netflix; it’s different from Uber, so them waking up is … it’s not like too little, too late. I think it actually represents quite a big shift in the industry.
The second thing is on the international front. I’m spending more and more time working with international companies and investors that are looking at what’s happening in the U.S. And they’re looking to build that out in their own markets, so whether it’s Europe, South America, Asia — everybody is looking at the U.S.
Everybody is looking at Opendoor and Zillow … that’s really picked up over the last six months.
What do you think the industry will look like in five years? How will iBuyers, brokerages and agents have evolved? Will we see more agents? Lower commission rates?
I think the key theme is consumer choice. Whether you’re an iBuyer or a portal or a traditional broker … consumers are going to understand they have a choice; it’s not just one way to buy and sell a house … it was agent or for-sale-by-owner, and for-sale-by-owner has kind of this negative stigma … but now there are more options, and I don’t think they have that negative stigma, and in fact, they have this high-touch experience associated with it. It’s not We Buy Ugly Houses; it’s Opendoor.
Who knows — maybe your bank or your mortgage provider will give you an instant offer on your home. It’s going to get blurry where these choices all come from. Who knows, maybe we’ll see Opendoor agents in five years.
Same with Zillow. You’ve got Open Listings [a discount brokerage owned by Opendoor] and you have Zillow Premier Agents. What’s going to stop them from … making it official? Oh, this is my Opendoor agent. Oh, this is my Zillow agent. Why not?
I can think of why not for Zillow.
I think Zillow probably cares less about not disrupting the industry now than it did last year or five years ago. I’ve talked about this before.
They have a walled garden. They don’t want to work with all real estate agents. They want to work with the best, and they want to work with their Premier Agents.
Those groups that spend tens of thousands of dollars a month — that’s a very small percent of the total agent population, and I think Zillow cares about those agents, and they really don’t care about everybody else. They don’t need to. That’s not their model. They just want to work with the best agents.
The thing to realize about that, especially with their iBuyer program, they’re only partnering with a very select group of agents. It’s one brokerage per market … they get compensated with a reduced commission.
So instead of 3 percent to list a home, it’s 1.5 percent, and it’s pretty easy to do the math out of the quarterly results and figure that out for yourself. This isn’t rocket science, but nobody is talking about it. If you want to talk about what’s going to drive agent commission compression, there’s lots of possibilities … one of them is Zillow, and Zillow’s iBuyer, which has reduced the total commission from 5 [percent] to 6 percent to 4.5 percent.
What if Zillow came out with a reduced commission offering to consumers for working with its partner agents?
I’ve talked to a lot of people around the world, and hundreds of companies are doing this, and I think discount brokerages, they are leaving money on the table. Consumers are willing to pay. They’re willing to pay for a service. They don’t want to cheap out when it comes to selling their home.
When you’re talking about a traditional sale, there’s not really a push to reduce commission.
But when you’re talking about instant offers, an iBuyer, there’s absolutely a reason to reduce the commission.
It really is the single biggest cost to iBuyers. You look at Zillow’s margins on their iBuying business; they’re horrible, and the biggest cost is they’re paying agents basically 4.5 percent on every transaction.
If you look at Opendoor and Offerpad, their biggest cost is paying the buyer’s agent commission when they sell a home … that’s exactly why Opendoor bought Open Listings — because that’s a way for them to reduce that cost. So I think iBuyers are going to be driving those commissions down.
Purplebricks appears to have face-planted in the U.S. So has SRE Matrix. They’ve joined a long list of other tech-focused, low-fee brokerages that have fallen by the wayside. REX might have made some inroads. What are the biggest reasons high-tech, low-fee brokerages almost always fail? And what would need to change for them to succeed?
With Purplebricks specifically, it’s marketing dollars. So when Purplebricks came to the U.S., they had a big war chest, but it wasn’t enough. Purplebricks showing up with $100 million — “Oh, that’s big, that’s great. They can do something.” But the difficulty with the U.S. market is that it’s so big.
For a discount brokerage model to work in the U.S, you need 10 times the ambition. You need 10 times the capital.
Purplebricks also, I think, they made execution missteps. They spread themselves pretty thin. They … launched in the wrong markets … they built up a team from scratch, and the U.S. market is big and complicated. Each state is wildly different.
How do you think Zillow Group’s relationships with its partner agents will evolve over the next two years?
It’s either Zillow’s way or the highway.
You’re either on the ark [Noah’s Ark], or you’re not. You have to play by the rules or not. They have the ability to dictate terms because they have the power. They have the eyeballs, they have the buyer leads, and now they have the seller leads. So if you want to play ball, you can get in line and get on the ark.
That’s different than a couple years ago. A couple years ago it was more the media angle — “Let’s sell as many ads to as many agents as we possibly can.” Now it’s like, “Screw that, let’s just work with the best because that’s really all we need to execute on our strategy.”
Tell me about the moving parts of what a Zillow Group-facilitated transaction will look like in two years.
Everybody is talking about these end-to-end ecosystems, and you know completing the entire transaction in one spot and selling people mortgages. Like people have been selling people mortgages for decades; it’s not necessarily something new.
I don’t know what the hell it’s going to look like. How is it any different than what’s going on right now? Is it an app? Is it online? Is that all it needs to be?
The pieces are out there. The pieces have existed for a while … Zillow is not the first company to come up with the idea of selling people mortgages, and this vision of … online, one place, one person you call, one email address, one dashboard — that’s great … that’s different, that’s new. But the component pieces have been around for a while.
What kind of role will middlemen play in the industry? Referral site HomeLight has gained traction. Clever Real Estate, which sends referrals to agents who are supposed to provide full service for a 1 percent fee, says it’s growing fast. Zillow Group is moving toward a referral fee model.
I think the power is going to centralize with the people who are near the top of the funnel, and that’s the portals like Zillow and realtor.com and Redfin, and that’s the brokers and the agencies who have hundreds of thousands of agents in people’s living rooms and kitchens.
I think it’s going to be tough for [standalone referral services] over the next five years because of everybody else. They’re investing billions of dollars to be this one-stop shop … Keller Williams, companies like Zillow, Redfin.
If I’m going to look for an agent in my neighborhood, wouldn’t I just do that at Zillow because I’m there anyway? Am I going to download a new app to do that?
What company do you think will grow the fastest — Zillow, Redfin, Opendoor or Compass — and why?
Measuring growth by revenue — we can’t do that anymore because Zillow and Opendoor, these iBuyers, they’re accounting for home prices in their gross revenues.
So if you want to look at that revenue, so you have to think of their gross margins, and their gross profit. You know, Zillow is going from a business with 90 percent gross margins to a business with 7 percent gross margins — that’s huge.
If I read one more press release talking about Zillow’s year-on-year revenue growth, I’m going to lose it because that is no longer an interesting or accurate representation of that business growth.
I think Zillow has this unrivaled competitive advantage, which has the eyeballs, the consumers go to their website. What is that like — the bit and bridle for the horse. They’ve got their hands on the reins … much, much greater than anyone else in the space. And they can pull those reins around, and they can get consumers to go in any kind of direction they want to.
Compass’ whole M.O. is growth via acquisition, via acquisition of agents, teams and brokerages, so if you’ve got a billion dollars burning a hole in your pocket, they’re literally buying revenue.
So their revenue growth is much higher than any of those other companies because that’s their growth strategy. If Zillow could have a billion dollars and would use that to just buy existing revenue generation businesses, their revenue would skyrocket, too.
Do you think Compass has a clear path to profitability?
I think Compass has clearly been quoted in the press saying they don’t … their COO said something like, “We just don’t have a plan to make money” … it was a couple months ago, and it got published in a couple different places.
I think Compass’ line of sight to profitability is unclear, and they’ve been quoted that they’re not focusing on profitability in the short to medium term, and I think it’s also been clear from their public statements that they’re still experimenting. They’re still trying to figure things out in terms of what future profitability might look like.
But what about Opendoor? It has a big operational head start on Zillow.
Well, you know Zillow has hired executives from the biggest single-family rental companies … the people heading up Zillow Offers have done this for tens of thousands of homes out there. Building up operational expertise is very important. It’s critical. But I think it’s less a competitive advantage than the consumer eyeballs that Zillow has.
It’s not a scarce resource, you can hire people from Invitation Homes. Opendoor’s investors, they’re great, and they’ve helped them raise a lot of money. That’s all great, but you know you’re not going to find Keith Rabois fixing up houses in Phoenix.
Their investor network can only take them so far … it’s about customer acquisition costs, and it’s about fixing up houses and selling them as fast as you can.
What would you say to agents who are tired of having heard for the past 20 years that they face imminent threats or that the industry is undergoing a fundamental transformation? I might be jaded. Would you?
I’d say stop reading Inman.
Can you elaborate?
It’s kind of back to what I said before … yes, there’s a lot of noise. Yes, there’s a lot of hype, and yes, it’s hard to cut through that and calibrate your thinking. That’s true now and that’s been true for the past 20 years.
However, what’s different about 2019 is the massive amount of capital that’s been invested in this space. It’s just exponentially higher than anything we’ve ever seen in the past, and the net result is that a lot of that money is going to get spent to educate consumers with marketing or advertising or billboards.
[There are] new disruptive players like Purplebricks or Homie or REX, so consumers are going to get educated in a way that’s exponentially greater than it’s ever been in the past.
So you’re going to have consumers starting to ask the question: Why are you charging me this? Do you do instant sales? And that’s something you can’t ignore.
The fundamentals have been around for a while … but the new thing is the capital. The huge amount of capital being invested in the space.
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