A Couple of Brief Notes on Realogy

I’m busy writing, but thought it worthwhile to take a few minutes to make a couple of observations about Realogy. I mean, it’s only the most important brokerage and franchise company in the industry with over $4B in annual revenues….

On “Project Flanker”

First, with regards to this story on Inman… I’ve already told the writer, Paul Hagey (@InmanHagey), who does excellent work in the article, that he should chat with his headline writer. 🙂 Paul writes:

The nation’s largest real estate brokerage, NRT LLC, is preparing to launch two new search portals that are aimed at reducing the company’s reliance on leads from Zillow, Trulia and realtor.com, attracting homebuyers by offering access to a complete set of MLS listings in markets where NRT operates, plus bells and whistles like automated valuations.

Maybe I’m dead wrong here, but I can’t see how Realogy is outflanking anybody with this new website, even if it’s code-named “Project Flanker”, nevermind Zillow-Trulia. Two reasons, one of which was cited by Hagey in the article:

“It is not intended to compete against the big portals like Zillow or Trulia,” Smith said Monday during Realogy’s second-quarter earnings call. “It is a very different approach to the markets, very smart, I think it is very strategic.”

But to get the full story, one should read the Investor Day transcript as well. This comes right after Bruce Zipf, the head of NRT (Realogy’s company-owned brokerage operations), talked about the “generic URL website” they were working on and a Wall Street analyst started asking about competing with Zillow/Trulia.

Richard Smith:

So that you don’t start modeling a Trulia or a Zillow-like model here. Let me give some color. This is a broker transaction oriented site. We’re creating the opportunity under the radar screen using the URL that’s fairly generic. It will not get the media attention or the financial support that you would expect at Zillow or Trulia because they’re in different businesses.

But this is to be at the point of sale, to be as close to the decision making process as possible, but outside of our traditional URLs like coldwellbanker.com because then in the context of those sites, we have limitations as to what we can do from a consumer perspective. When you’re outside of that, using the URL that is fairly generic and we haven’t disclosed as of yet, you’re approaching the consumer in a slightly different way.

But they’re not up here where the Trulias and Zillows are. They’re media companies and they do a very effective job for us as media companies. This is when that person moves from Zillow or Trulia closer to the decision making process where we think we can cast in that wide net, we think we can capture more of that business.

So the business is not coming to us directly through the relationships, yard signs, all the other things we talked about. We think when they get to the decision making that I actually want to see this house, we can offer an alternative to what’s out there today, again, adding to the 700 plus.

Just given our size and our market share, we think this can be meaningful to consumer, and then we think it can generate incremental leads. So all of what we’ve discussed with respect to that is in all the discussions we’ve had up to this point, the incremental initiatives in NRT that’s working on that I believe we mentioned in the first quarter. It’s contained in the context of all that discussions. So don’t expect big jumps in marketing spend or technology spend based on that conversation. It’s already on our forecast. [Emphasis mine]

The two takeaways here for me are:

1. Realogy sees Zillow/Trulia as an important feeder into this “Project Flanker” website, since Flanker.com (I just named it that) is supposed to be further down the sales funnel. That is perfectly in line with what Spencer Rascoff and Pete Flint have always maintained: that Zillow/Trulia is a media company selling advertising opportunities to real estate peeps.
2. No big jumps on spending = no attempt to outflank. I mean, sure, real estate folks like to believe that since they have the listings, it’s no big deal to attract a consumer audience without spending too much (“Internet advertising is free!”) but… um, no. Given that Zillow and Trulia combined spent a combined $120 million in Q2 (that’s three months, folks) on marketing and technology, let’s not talk about outflanking until Realogy commits real dollars to both marketing and technology.

Seems to me that Realogy’s position is consistent with everything we have heard from brokers, including The Realty Alliance, large independents, and franchised-brokers: they no longer regard the portals as a threat. It’s the MLS they’re concerned about.

The Real Deal

While the real estate industry was completely absorbed by the Zillow-Trulia deal, fact is that Realogy quietly made one of the more important moves in recent years by acquiring ZipRealty. I’m going to have to do more on this at a later date, but read the transcript announcing the acquisition.

For now, let me limit my observation to two points.

1. Some folks, like Citron Research, thinks that the ZipRealty acquisition is about Realogy outflanking (there’s that word again) Zillow. But as we saw above, I don’t see Realogy looking at Zillow-Trulia as competition; I see Realogy looking at them as the top of the funnel, and Realogy wanting to capture the middle of the funnel, where they can get 35% referral fees from the bottom of the funnel (the agents themselves). So… why is this deal important? Because…
2. Now that Realogy has this platform, which Richard Smith described in absolutely effusive language (and trust me, Smith is not an effusive type of a guy)… the pressure is on the other major franchises. REMAX, KWRI, BerkshireHathaway… they’d best step on up if they hope to remain competitive with Realogy’s Franchise Salespeople knocking on every door offering the ZipRealty platform to brokers and agents. The real competition for Realogy are other franchises (for its RFG division) and other brokerages (for its NRT division). ZipRealty’s technology platform is a huge advantage in both. The other guys have to step on up.

Thing is, who’s out there that’s got the proven technology assets that ZipRealty has? As far as I know, there’s only one company: Redfin.

My guess? I think REMAX acquires Redfin, if Redfin is even remotely available for acquisition. Since REMAX is a public company, Redfin may essentially end up “going public” via merger, and its investors reap the benefits of that. KWRI is an unknown, but their investment in eEdge makes me think that they’re unlikely to bid for Redfin. BerkshireHathaway has Warren Buffett money, of course, but if Redfin shareholders want the upside that comes from an IPO… I rather think some sort of a stock-and-cash deal with REMAX is probably more attractive.

Then again, maybe Realogy approached Redfin and was rebuffed, so they settled for the second-best option in ZipRealty. Who knows?

What I know is that one of my Black Swan scenarios just came true. Surely there ought to be some sort of Nostradamus Award for this, no? 😀

Anyhow, gotta get back to work… just thought I’d get these out there. Your thoughts are always welcome.

-rsh