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The cooling housing market means that agents and brokers are going to have a tougher time competing with each other and with real estate tech companies with gobs of money at their disposal, according to real estate tech expert and strategic adviser Mike DelPrete.
DelPrete uses data to keep his finger on the pulse of where new tech trends are heading and what that means for new business models and major companies, such as Zillow, Redfin, Opendoor, Keller Williams and eXp Realty. He’ll be speaking at Inman Connect Las Vegas in August and gave Inman a sneak peek into his thoughts on how the changing market will impact agents, tech firms, iBuyers and Power Buyers.
The following interview has been edited for length and clarity.
Inman: How does the cooling market impact what you cover?
Mike DelPrete: We’re going from a time of plenty to one of less plenty. I don’t want to say scarcity because I think a lot of the views in the media stories are kind of circling around this hype of “the real estate market is going to contract substantially.” It will definitely contract compared to last year, but last year was a crazy outlier. It was just like anybody could go out there and get a real estate license and make a ton of money selling homes. So we’re just kind of getting back to normal.
So what do you think the impact will be?
I think the biggest thing is this return to rationality for these big players. I was on stage at Inman in 2019, and I was talking about this new competitive advantage for all these real estate tech companies: sustained unprofitability. Business models didn’t make money. They didn’t make sense. They didn’t have to make sense. Nobody cared. They could lose tons of money. What I said around that was ‘red is the new black.’ I think that’s the biggest change. There’s a return to rationality. Every company out there, more than ever, has to demonstrate a credible path to profitability, which is a self-sustaining business where they make more money than they spend. As individual human beings that makes sense to us, but for a lot of these real estate tech companies that have never been profitable, that have never made money, that’s a big reckoning going on.
Do you think that’s why we’re seeing layoffs at some of these companies that have been venture-funded or public companies?
Yes, absolutely. The companies out there that are losing a lot of money need to cut their expenses. Sadly, layoffs are one of the ways they can do that.
What do you think that says in terms of where these companies are going?
For some companies, it’s going to make them more efficient. It’s going to enable them to do more with less and continue to expand their product or service in new markets in a faster way. For other companies, it’s going to limit their ability to grow. It’s effectively cutting power, taking gas out of the fuel tank. If you have less resources, less people, less ability to grow your business, it’s going to slow you down, which can come and get you into this dangerous zone where the market is slowing, you need to cut your expenses, but by doing so, you’re slowing your ability to grow and compete in the market. It’s a bit of a catch-22. That could be really dangerous for companies, especially in an environment like this.
How do you think the cooling market will impact the agents on the ground?
What’s gonna happen now is there’s gonna be increased competition for clients. Homebuyers and homesellers are going to be a treasured, rare resource. There’s gonna be less of them. So people are going to be fighting more to get the attention of a potential homeseller or a potential homebuyer. You can’t just sit around and wait for the phone to ring. Agents have to go out there and work even harder to get the smaller number of homebuyers and homesellers out there. And there’s billions and billions of dollars from these real estate tech companies that have been invested into new models, new services, new ways to help these buyers and sellers and new advertising. Hundreds of millions of dollars on TV ads, radio ads, all of that trying to attract a dwindling number of potential customers.
[Agents are] gonna have to fight harder than ever before to get in front of potential customers first and to be able to build the best relationship with them. There’s fewer customers and they’re going to be competing against more and more agents but also more and more big, heavily-funded real estate tech companies that are fighting tooth and nail to grow their revenues, to grow their profits. So it’s going to be a bit of a dogfight.
Everybody said when companies like Opendoor came out, “Just wait until it’s no longer a seller’s market, then how are you gonna survive?” And in one of your most recent columns you were talking about Opendoor’s buy-to-list premium and how that was going down. Since iBuyers came on the scene a few years back, how do you think they’ve evolved?
Opendoor is doing just fine, thank you very much. They’ve become a public company. They’ve raised tons of money. They have a couple billion dollars of cash in the bank. They’re making more money than ever before because of the hot market, on that home price appreciation. For the first half of this year, they’ve been able to sell homes for a lot more than what they bought them for. I’m talking like $40,000, $50,000, $60,000. Fifteen percent. That’s a huge premium. For anyone who’s saying, “Oh, if the market turns then Opendoor really suffers,” the evidence doesn’t really support that. If the market slows down a little bit, then maybe it’s 2018 or 2019. Opendoor existed in 2018 and 2019. You can look at the numbers; you can see how they’ve done. They existed. They might charge consumers a little bit more on a service fee. They’ve certainly become more efficient as a business and bigger since then, so I think there’s plenty of runway to go for a company like Opendoor and iBuyers in general to be able to serve different types of markets. There’s still an opportunity there. The value proposition of an instant sale still holds true. It’s just like the proposition of buy-before-you-sell or a cash offer. These are interesting new products and services that appeal to people in all types of markets.
So you’re thinking that the market is not going to change all of a sudden to veer toward buyers; so it’s not gonna be that drastic?
It’s both fast and slow. The market’s changing really fast, but how fast can a gigantic cargo ship turn? It’s gonna take a while to get there. I still see value for the service that iBuyers offer in any type of market — this market, the market six months ago, a year ago, a year from now — because the proposition is the same. If you don’t want to mess around with the uncertainty of listing your home for sale, you can sell it instantly. That certainty appeals to a certain amount of people. For those people, I think what we’re seeing is it doesn’t really matter what the market’s like. It doesn’t matter if they’re gonna get one offer or 10 offers or 20 offers. They just don’t want to deal with the uncertainty of that. That’s where the beauty of the model comes into play.
What about how a cooling market will impact Power Buyers, since they’re basically offering to help you buy a home with cash?
For Power Buyers, the value of a cash offer will go down a little bit, but it will still be more valuable than a contingent offer. A cash offer still is more valuable no matter what market, no matter how many offers. It is undeniably a more attractive offer. The other side of what Power Buyers do — the idea of buy-before-you-sell — that has tons of value. It’s the same as the iBuyer. This idea of selling instantly and replacing all this uncertainty with certainty. The idea of being able to buy your next home before you have to sell your existing home, it just makes sense. That resonates. There’s going to be a small percentage of people who generally prefer that model. A lot of people would say it’s superior to the traditional process.
That’s why we’ve seen such strong traction in the Power Buyer space, with more and more companies offering that. I think we’ll continue to see that with a changing market.
There is one thing about Power Buyers that I feel like I don’t know very much about, which is how much they charge. When iBuyers came on the scene, everybody was talking about how it charges this big fee that was sometimes higher than what agents charge. But I feel like there’s not as much talk about what Power Buyers charge. Is there anything you can offer on that?
There’s a lot of different flavors of Power Buyers. Some of them work directly with consumers, like Orchard. That is a company that advertises direct to consumers and they charge a real estate commission, which is the same as what an agent or brokerage would charge. [It’s] Brokerage 2.0 where they offer the same services, but it’s all wrapped around a Power Buyer buy-before-you-sell process. So the fees for those direct-to-consumer Power Buyers are basically the same as what a real estate agent would charge. And then there’s Power Buyers that are more agnostic. They work with agents. They’re more of a power-buying-as-a-service where they go to agents and offer this. Companies like Knock and Homeward. Companies like that will charge a small service fee. The consumers can end up using their own financing, but typically if they use the Power Buyers’ mortgage arm, it’s “free.” One way to think about it is as a lead gen channel to originate mortgages. If you can write mortgages for people you can make a ton of money. That’s what these companies are doing. They’re saying, “Hey, we’re gonna let you do a cash offer. We’re gonna do buy-before-you-sell. By the way, we can also finance the whole thing for you with our mortgage arm.” It’s just leading customers into that funnel.
Another major issue in the market right now is affordability, with mortgage rates going up and home prices still increasing, if not as much. The companies that you cover, do they play any role at all in terms of easing affordability?
No role yet, but I would definitely like to see them play a bigger role going forward because affordability is probably the biggest pain point in real estate right now. It’s not too much of an intellectual leap to think about a cash offer [or] this instant sale financed with someone else’s money speeding it up. There are companies that’re starting to do that. I would expect over the next 12 months, more and more companies to start thinking about that and hopefully start providing products and services that are meant to address some of the crippling affordability issues we’re seeing.
Do you think that will be in the financing aspect of it or in the bringing-more-inventory-onto-the-market aspect of it?
No, not the inventory. I’d say more of the financing aspect. The easiest way to think about it is if you can’t afford 100 percent of a home, maybe you can afford 75 percent of the home. So you need to get an investor to basically buy the other 25 percent. If there’s a way you can lower your payments so that you can afford most of the home but not necessarily all of the home, I think that’s where alternative financing comes into play.
Are there any big questions that you’re pondering in the industry right now?
Yeah, I’m spending a lot of time thinking about the winners and losers. It’s like if we’re in a game of musical chairs, and the music’s starting to change, and there’s less chairs in the room, who’s gonna get one? Who’s not gonna get one? What are companies doing strategically right now to position themselves to grab market share, to expand, to thrive in this environment? And who are the companies that are structurally positioned to be the most at risk or to lose market share or to lose agents or to lose revenue? We’re going from this time of plenty to a more constricted time. Not everyone’s gonna make it. There’s going to be some pretty big shifts going forward to adjust to the market. So I’m trying to figure out who’s doing what, why they’re doing that, who’s going to be set up to win, and who’s going to be set up to lose.
What sort of structural things do you think are weaknesses that might affect that?
If you’re operating in a time of plenty, and you have basically unlimited access to cheap capital, and you’re spending tons of money on everything, you’re going to be more at risk. That company is going to be more at risk for the changing economic environment that we’re seeing now, where everybody’s tightening their belts. And it’s going to be harder to raise money.
Are there things that you’re seeing that companies are doing that will position them to be among the winners?
Yes, I can’t tell you right now. You gotta wait till August. But yeah, I think it’s the companies that are not putting blinders on and just looking at their business, but they’re looking at the whole chessboard and they understand they’re not alone. They’re not operating in a black box. Everybody’s making moves. Everybody’s making investments. Everybody’s doing new things and cutting out things that aren’t working. So it’s about reading the market and reading the landscape and making smart moves to position themselves well, not just for today and tomorrow, but for six months, 12 months, 18 months from now, in a way that’s really focused on consumers and what they want and how they can provide the most value in an incredibly efficient manner.
Alright, so we’ll get more on that at ICLV.
Hear more from Mike DelPrete LIVE in person — Aug. 3-5 at Inman Connect Las Vegas! Join us.