The ground is shaking under the residential real estate brokerage industry’s feet. Brokerages big and small, independent and franchised face daunting challenges as venture capital and technology shift the rules that have governed the industry for decades.
You know this from the increasing stress of P&L statements and by watching the vast streams of money flowing into the industry; we at T3 Sixty know it from the hundreds of hours of research we pour into the annual Swanepoel Trends Report, which analyzes the top trends shaping our industry for the next two years.
With the 2020 edition released on December 2, the 220-page report, available at t3trends.com, cuts through the industry’s noise. It pinpoints the industry’s key challenges, presents how iBuying, modern brokerage finances, venture capital and much more are shaking the industry to its core and provides the information brokers need to make informed, smart decisions, which are more critical today than perhaps ever before.
2020 STR Table of Contents
- Trend 10: Inside the Class-Action Antitrust Lawsuits
- Trend 09: Data Security: The Overlooked Brokerage Threat
- Trend 08: Redefining the Edge of the Real Estate Transaction
- Trend 07: MLS in Jeopardy: Can the Industry Pull Together?
- Trend 06: The Diminishing Financial Viability of Traditional Brokerages
- Trend 05: Compass: Building a Modern Traditional Brokerage from The Ground Up
- Trend 04: Keller Williams: Confronting the Innovator’s Dilemma
- Trend 03: Zillow: Accelerating the Transformation
- Trend 02: Inside the VC’s Mind
- Trend 01: The iBuyer Revolution: Redefining the Real Estate Transaction
iBuying Evolves
The report identifies iBuying as the industry’s top trend in 2020. The powerful new model, in which companies merge finance and technology to streamline the real estate transaction, brings a proliferating number of options for real estate sellers and buyers and is spreading rapidly through the country with a growing number of companies. The model has evolved since Opendoor introduced it to the world in Phoenix in 2014. Now in 20 markets, Opendoor showed that removing the stress and uncertainty from selling a home has great appeal to consumers. In 2019, Zillow Group jumped all in with the model, essentially reorienting its company around improving the real estate transaction with its iBuying service, Zillow Offers, at the center. But Opendoor and Zillow are far from alone. Many large brokerages and franchisors, including Realogy and Keller Williams Realty, have introduced their own iBuying offerings, including a growing number of startups. As the iBuying service matures, startups and companies are expanding and tweaking the model. Many models now serve buyers as well as sellers by either providing them with streamlined financing for all-cash offers or by purchasing a home on their behalf with cash and then negotiating financing with them after the fact. In addition, companies are placing increased focus on synchronous sellers -- those sellers looking to sell and purchase a new home. The model has great appeal, but it has not yet proved profitable. T3 Sixty analysis of Opendoor’s Denver activity from late 2018 to September 2019 revealed the company lost $1.67 million on the 216 homes it purchased, which does not include payroll, marketing or other operating expenses. [ninja_tables id="42345"] Zillow Group’s numbers reveal the same negative margins. But that’s not the point. Like many other industry-changing models, these firms, and others employing the iBuying model, are betting that if they respond to the clear consumer demand for a simplified real estate transaction, they will win in the long run.How Venture Capital Works
We all know that venture capital is the underlying force behind the industry’s revolution. But do you know how it really work? There’s a reason why iBuying companies are fine operating in the red for years as they work to build scale, prove a new model and create a new real estate reality. They follow a well-established venture capital playbook. Venture capital companies collect investments from large institutional investors, who deploy just a small percentage of their overall funds to them. These VCs then make investments in promising, but yet unproven startups, understanding that the investment comes with a high risk. Most of these investments fail, but VCs expect that. They just need one company to hit, which can generate amazing returns. Zillow and Redfin are two prominent VC-backed real estate examples that paid off. Redfin’s funding journey provides an example. As Redfin matured, more institutional investors began participating in its funding rounds and fewer VCs, a common occurrence as a company becomes established, has more substantial operating metrics and, in cases where the business looks promising, is viewed as a less-risky bet by investors. For example, beginning with Redfin’s Series F round in November 2013, hedge fund Tiger Global Management and asset management firm T. Rowe Price became investors. Before that round, all investors were VC firms. At Redfin’s 2017 IPO, which valued the company at $1.73 billion, four VC firms owned 44 percent of Red n and two other institutional investors owned 17.6 percent. [ninja_tables id="42351"]The Struggle of Traditional Brokerage Profitability
Brokerages employing a traditional model don’t need to be told about the struggles in their P&L statements; it is abundantly clear. Many modern traditional brokerages, even if humming on all cylinders, achieve profit margins in the range of 4 to 6 percent; many see lower margins. Compressing agent commissions and splits that increasingly favor agents stand as two main downward pressures. To provide insight into exactly where the traditional model is failing, T3 Sixty outlined 33 key brokerage business metrics in eight categories:- Agent growth
- Staff and offices
- Production
- Income
- Cost of sales
- Operating expenses
- Capital expenses
- Overall financials