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It used to be that sustained unprofitability was the name of the game in the real estate technology space — whether a company actually made more money than it spent wasn’t immediately important. But the shift in the housing market has meant that tech companies now actually have to show a profit and they’re increasingly looking to a specific source for it: agent commissions.
That’s according to real estate tech expert and strategic adviser Mike DelPrete, who spoke at Inman Connect Las Vegas Wednesday in a session called “2022 WTF.”
“We are in the midst of a massive financial reckoning in the real estate tech space,” DelPrete told attendees.
“Some of the biggest real estate tech companies out there are bleeding money, hemorrhaging huge amounts of cash.”
The session prompted considerable schadenfreude from some attendees, indicating the hostility that some companies with cash to burn — “that is incredibly difficult to compete with,” DelPrete noted — have generated in the real estate industry. When DelPrete pointed out that iBuyer Opendoor has lost more than $1.6 billion since 2017, someone in the crowd laughed gleefully, prompting the audience at large to laugh.
“If you like that, you’re going to love what’s coming up next,” DelPrete joked. He showed a slide of Zillow’s losses over the years, prompting cheering from some attendees.
“Before Zillow shut down its iBuying operation last year, it managed to rack up $1.5 billion dollars in losses,” he said.
“And Compass has lost over $1.7 billion since 2016.”
No one cheered Compass’s losses. But DelPrete cautioned the crowd not to expect the demise of Zillow and Opendoor anytime soon.
“If you’re hoping for them to go away, keep hoping,” he said. “They’ve got over $2.5 billion each of cash in the bank. They’re gonna be totally fine. They can last this out.”
But in an era where real estate tech companies are having to pivot toward sustainable business models, they’re now going after “one unrivaled source of revenue and profitability” that is going up even as the market shifts because of rising home prices: agent commissions.
“This is this natural resource underground like a reservoir of natural gas and … everybody’s trying to tap into it because that’s the one way to make money,” DelPrete said.
Zillow, for instance, is planning to generate an additional $1.5 billion in revenue in their Premier Agent program, according to DelPrete.
“That’s effectively doubling Premier Agent revenue by 2025,” he said.
Zillow, like its rival Realtor.com, will do this through “next gen lead gen,” wherein the company qualifies leads and then collects a portion of the agent’s commission when there’s a successful transaction.
Compass’s plan is to generate more revenue by paying agents less money of their commission, according to DelPrete, who cited Compass’s own investment deck.
“In their words, that is ‘improving economics with agents,'” he said, prompting laughter from attendees.
“They have a demonstrated track record of increasing this 1 percent a year. If you’re an agent with Compass, their plan to profitability is to pay you as a percentage less money over time. These are their words. These are not my words.”
The audience began murmuring as DelPrete continued, moving on to Opendoor. “Opendoor’s got this track record of reducing buyer agent commissions they pay for the homes they buy and then sell,” he said. “In Atlanta, they started out at 3 percent. They’ve kind of tried 1.5 [percent] and then settled at about 2.25 percent. This is a way that this company can save tens and tens of millions of dollars every year.”
DelPrete showed a slide of a quote from Keller Williams co-founder Gary Keller: “We’re losing so slowly, we think we’re winning.” To do nothing is risky, DelPrete said, but he stressed that companies that are currently making money, such as eXp, aren’t winning with technological innovation, but rather because of agent count.
“The growth of those companies is tied directly to the growth in their number of agents,” he said. “Their success story is a recruiting success story. And that’s because technology doesn’t sell houses, agents do.”
DelPrete also warned that companies like Compass and Opendoor are embracing exclusive listings in an attempt to gain market share.
“These are inventory on the private Compass platform that will never get listed on Zillow or Redfin,” he said.
“You literally have to call a Compass agent to get access to these listings. If that doesn’t scream 1990s, I don’t know what does.” Attendees chuckled.
“As of last week, that was about 2,700 listings — about 15 percent of their total listings,” he continued.
“And in some of their biggest markets like San Francisco and New York, that number is getting closer to 40, 45 percent. This is not just for movie stars, and rock stars, right? This is for a lot of their customers.”
Opendoor Exclusives are “off-market homes you can’t find anywhere else” that the company owns and markets for two weeks before listing them in a multiple listing service.
“Effectively Opendoor is transitioning into the nation’s largest for-sale-by-owner operation,” DelPrete said.
“This program is currently in three markets in Texas. Almost all of Opendoor’s listings in Austin are going exclusive first and about half the listings in Houston are going exclusive first. And perhaps most importantly, about 40 percent of their sales in July in Austin were sold exclusively. These are homes that never hit the MLS.”
When Opendoor does this, they don’t pay a buyer agent commission, according to DelPrete.
“But what we’re seeing here as these companies gain market power, we’re moving from an open ecosystem to a series of walled gardens,” he said.
“Think about Zillow’s mission, to turn the lights on, increased transparency. What we have right now are some people with dimmer switches kind of fiddling around trying to actually turn it down. You got to remember what’s good for the company is not always good for the consumer. What happens in that space as these companies gain market share?”
DelPrete stressed that “massive amounts of venture capital” pouring into real estate means new business models going after, not disrupting agents, but getting a piece of the agent commission pool.
“Agents are still central to the transaction,” he said. “But in 2022 the stakes are higher than ever before. There’s a lot of change, and that change is happening faster than ever before. There’s a lot going on in this space. And that is 2022 WTF.”
Attendees laughed and applauded.
