Inman Connect is LIVE Aug. 8-10! Join us for impactful interviews, cutting-edge conversations and networking with thousands of real estate pros. Get valuable takeaways to thrive in a rapidly shifting market. Can’t come to Vegas? Register now for a virtual ticket.
In the 1990s, Blockbuster led the movie rental business with its brightly colored blue and yellow ticket-shaped sign and snappy motto, “Be Kind, Rewind” permeating the pop culture zeitgeist.
When then-newcomer Netflix launched and began offering DVD delivery, Blockbuster eschewed the trend and declared its competitor would surely fail.
Fast forward 30 years and there’s literally one remaining Blockbuster location left in the world, while Netflix is dominating the streaming and movie production industry.
Although the analogy isn’t a perfect fit, real estate strategist Mike DelPrete said the real estate industry is in a similar moment of its own with low-fee business models handily outperforming legacy brands. The trends, DelPrete said, show that low cost doesn’t mean low value and that many agents are being just as or even more productive within a low-fee model.
“For the past couple of years, it’s been rising tides lifting all boats, right? Things have been great. Tons of transactions, tons of business and lots of venture capital in this space. Everything’s been going great,” he told the Inman Connect Las Vegas crowd. “But as Warren Buffett likes to say, ‘Only when the tide goes out, you discover who’s been swimming naked,’ and that’s where we are right now.”
“But I’m super excited about the receding tide. You know why? Because of receding tides reveal sustainable and unsustainable business models. It reveals real product market fit, and it reveals a company’s true intentions.”
DelPrete used Anywhere, HomeServices of America, Compass, Redfin, Fathom Realty, Realty One and eXp Realty as examples of what the data shows about the difference between legacy brands and disruptors as the market continues to course correct. From 2021 to 2022, low-fee brokerages grew their transaction count by 75,000 while legacy brands saw a loss of 164,000 transactions, he said.
“[There are] winners and losers here, and by the way, this isn’t a market that saw 1.1 million fewer transactions than the preceding year,” he said. “To me, that’s a situation where you have one business model that’s overtaken by another. That new business model is powered by some sort of unfair advantage that’s very difficult to replicate for the incumbents and what it causes is an irreversible evolution in the way business is done.”
DelPrete pointed to eXp Realty as the epitome of a successful low-fee business model. During the first quarter of 2023, eXp Realty’s expenses were four to six times lower than its legacy competitors; however, they were able to experience 16x growth and complete more transactions than Anywhere and Compass combined.
“Again, if we look at the cost basis, the OP x per operating expense per transaction, disrupter eXp Realty is 10 times lower than those legacy brands,” he said. “Q2 [results] are out. I was looking at that last night, and it’s about seven or 8x. So it’s going to fluctuate, but the point is, it’s exponentially higher.”
“So there’s your easy-to-define unfair advantage, and that is translating into another unfair advantage, which is allowing these companies to pay out more of the revenue to agents. And you know, before you come up to me in line for coffee and say, ‘Yeah, Mike, that’s interesting. But these companies don’t support their agents, right? They don’t give them as much support.’ I challenge you to look at the data.”
“If we look at the number of transactions per agent on average, the difference between those legacy brands and the low-fee brokers last quarter was 0.05 transactions over three months, that’s statistically insignificant,” he added. “It’s the same, support or not. I mean, we can have a debate about how much support there is or not. These are the results.”
Beyond a growing market share and transaction count, DelPrete said the low-fee model has enabled brokerages to fast-track their profitability. Although many companies highlight their EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA as an indicator of their future profitability, DelPrete said net profit is a better indicator of a company’s profitability.
“With these five companies that I just picked, there’s $2.5 billion in net losses. Everybody’s got a net loss once you boil that down,” he said. “Now this is not to say this is good or bad and there’s one number that’s the ultimate truth. And I’m not trying to disparage anyone for reporting their [Adjusted EBITDA],” he said.
“What I’m trying to do is bring the little transparency into this so when you read something and you read about a company being profitable, I’m just saying hey it depends on which number it is.”
“So just keep your eyes wide open when you’re looking at that, and you’re considering that,” he added. “And by the way, only one company here had a net profit in 2022 — eXp.”
Beyond higher operating costs, DelPrete said companies must learn how to compete where they can win so they’re not wasting money on ancillary services that don’t yield results. He said the current market shift has pushed Zillow, Opendoor, Anywhere, Redfin and several other brands to sunset products and services that were once thought to be key to their futures.
“If you want to take one key strategy, it’s competing where you can win — not compete where you can and compete where you feel like it or lose as much money as possible trying to do everything or build an end-to-end ecosystem,” he said. “Whatever it is, just compete where you can win. And we’re seeing more and more examples of that with this receding tide.”
Once companies figure out where they can win, DelPrete said they have to work on the “last-mile problem,” which is getting their products and services into the hands of consumers. In the shipping and logistics industry, the last-mile problem is solved by delivery drivers and innovative pick-up options, he said. But in the real estate industry, the last-mile problem can only be solved with agents.
“You can generate all the online leads you want, you can throw them into your very expensive technology platform. You can use predictive analytics, machine learning or artificial intelligence… but at the end of the day, you still need to give that lead to an agent and that agent needs to call somebody,” he said. “There’s no way around that. The agent needs to call the lead. They need to have a relationship with a customer.”
DelPrete said he acknowledges the bad blood between agents and companies like Zillow and Opendoor; however, both sides ultimately need each other to be successful.
“This receding tide is revealing more and more that companies need to work with agents, they cannot avoid it,” he said. “And by the way, if you’re a real estate agent, or you’re involved in the business of helping people buy and sell homes, you probably don’t consider yourself a problem. Right? You’re the solution. You’re the last-mile solution.”
“Agents are that unavoidable indisputable, irreplaceable, central part of the transaction.”
