I know some folks think I’m a Realogy homer. Well, given that’s where I got my start in the industry, maybe I’m a little bit guilty of that whole “cut me and I bleed blue” thing. But I think I’m actually calling things as I see them; I’ve been plenty critical of Realogy when they’ve done something deserving of criticism, and I’m complimentary when they’ve done something right.
The newest Realogy initiative that’s making waves is HomesForSale.com, a “national” portal for the NRT, Realogy’s company-owned brokerage operations. I mentioned it and some screenshots yesterday, when I was really talking about some issues that the MLS probably needs to address. Since then I’ve seen all sorts of discussion about HomesForSale, about NRT, etc. etc. both publicly and privately.
Almost all of the commentary thus far has been negative. The main thrust of such criticism is something like this:
If this is the best that Realogy can do to compete against Zillow and Trulia and Realtor.com, it’s farcical. There’s nothing innovative or new here, and the site isn’t even mobile responsive, and the color scheme sucks too!
Or something along those lines.
Thing is, I think this line of criticism is almost wholly unwarranted, because it is based on a misunderstanding of the strategy behind HomesForSale. I actually think HomesForSale is a nice move, one that could fail of course like any initiative, but it’s solidly grounded in strategy.
Let’s get into it.
Background: Project Flanker
The first thing to note is that HomesForSale.com is the realization of something Realogy’s been working on for a while, codenamed “Project Flanker”. I wrote about Project Flanker back in August of last year. You could click through, but for sake of time, let me excerpt a big part of that post:
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.
That was last year. What about this year?
The Strategy Behind HomesForSale.com
In the transcript to the 2014 earnings call, we find this exchange:
Michael Dahl – Credit Suisse
Got it. Okay. Second question, also the agent commission split on the NRT side, I think it improved year-over-year for the first time in a little while or at least all year. So how much of that was may be you lower – just a mix with Zip coming in at lowers split rates or how much was some of the initiatives that you guys have talked about for the past several quarters and any thoughts, sorry if I’ve missed it, but on what’s the split rates will look like for the year in 2015?
Richard Smith – Chairman, Chief Executive Officer and President
Again, we expect them to be flat to 2014 and 2015. The split movement in Q4 was more about where the business was done. You know anything kind of East to the Mississippi has better split from West of Mississippi and there was just the shift, there was slight shift in volume towards the East of the Mississippi. So that helps splits in the fourth quarter.
So nothing – long-term and we’ll discuss this on Investor Day, I mean the way we are going to manage splits because it’s very competitive out there. There is – for NRT, it’s very competitive on this splits is really shifting more of the business to lead generated business that has better economics and that’s how, over the long-term, we’re going to – we plan to mange splits because you can’t fight the reality of the local markets because you’re going to lose your best agents if you do and we want to keep them.
So the way we’re going to do it is really just shift more of the overall business to lead generated business with better economics and that’s going to keep splits under control for the foreseeable future. That’s really the strategy. That was the Zip strategy, it’s a strategy for all the initiatives that NRT has underway to really generate more leads – generate better leads to agents and hopefully get the closure rate on those up and that will helps – that will be a much bigger impact on splits over time than trying to fight the local battles. [Emphasis mine]
A bit later in the call, we get this exchange:
Ryan McKeveny – Zelman and Associates
Great, thank. And maybe just one more as it ties a little into that topic potentially but just any update in terms of the Zillow-Trulia merger and any potential impact that you guys see from the combination versus those companies being separate?
Richard Smith – Chairman, Chief Executive Officer and President
No, I mean there is, there are some marketing channels. So we have not seen nor do we expect any material change in how we can do business with them or how our franchises do business with them. So as we’ve said in the past, to the extent they continue being a good marketing venue then our franchisees, their agents, and also our agents will use it as a tool to generate incremental leads. So we see that only improving over time, not getting worse. So the combination probably makes a lot of sense for a lot of reasons. So, we are indifferent as to the merger; we just hope they continue to produce good, solid actionable leads.
If this doesn’t convince you that HomesForSale.com is not intended to be a competitor to Zillow, et. al., then well… nothing will. Conspiracy theories are far more fun, after all.
Put it all together and what we have is a strategic roadmap for why Realogy invested time, energy and money into HomesForSale.com:
- The NRT has been under significant commission split pressure for some time. (Longtime readers, especially of my premium reports, already know this.)
- Realogy recognizes that there are very few things they can do about adjusting those splits in their favor. “You can’t fight the reality of the local markets because you’re going to lose your best agents if you do and we want to keep them.”
- The one and only non-controversial way to manage splits is through referral fees from leads provided to agents by the brokerage (so-called “broker overrides”)
- Even in cases where there is no broker override (i.e., the lead is sent to the listing agent), the fact that NRT is providing leads for free to its top listing agents helps the NRT in recruiting and retention.
Realogy is happy with Zillow, Trulia and Realtor.com because they are “good marketing venues” for Realogy’s franchisees, their agents, and the NRT’s agents. Keep in mind that Realogy has invested millions into its LeadRouter platform, which takes a Zillow lead and routes it… presumably with the broker override attached as well. (In most cases, the routing happens only after the listing agent has had a shot at responding to the lead, with the broker setting the rules for when/how that happens.)
So why Project Flanker? Who is Realogy flanking?
Answer: Realogy isn’t out-flanking Zillow; it’s out-flanking other brokerages.
The industry tends to forget this reality when the “Z-word” is mentioned. People done lose their minds and start talking about “brokerages vs. portals” or some such. Can we not forget that brokerages compete against other brokerages first and foremost? Coldwell Banker isn’t trying to recruit a top producer away from Trulia; it’s trying to recruit her away from Re/Max or Keller Williams or HomeServices or some local boutique. Can we remember that agents compete against other agents first and foremost, whether in trying to get listings or trying to get buyers to work with them? I have heard of agents going on competitive listing presentations, but never once have I heard that Zillow was in there trying to get the homeowner to list with them.
Evaluating HomesForSale.com
If we understand these strategic realities, and then understand why Realogy did what it did, then we evaluate HomesForSale.com in the proper context. It is not and was never intended to compete against Zillow; Realogy has said so publicly a number of times.
It is and was intended to compete against other brokerages. From that standpoint, I think HomesForSale.com is a strong effort. Granted, there’s nothing on HomesForSale.com that is earth-shatteringly innovative. But then, there’s nothing on any major brokerage website anywhere that is particularly innovative either.
Design/beauty is in the eye of the beholder, and while I can see areas to improve and tighten and all that on HomesForSale.com, look at its competition:
I rather think HomesForSale.com looks cleaner and better than the other major brokerage websites it’s competing against. YMMV of course.
But even if BHHS and Long & Foster up their game design-wise, the one advantage that the NRT is trying to leverage is that the generic URL makes the website seem like a neutral portal, not a brokerage website.
Combine that appearance of neutrality with the massive footprint of the NRT companies, and HomesForSale.com has a legitimate shot at being the #1 brokerage-related website of them all. It doesn’t need to beat Zillow; it just needs to beat the other brokerages in the NRT markets.
Reminds me of the story of two men who come upon a bear. As the bear roars and starts charging, one of them start putting on running shoes. His friend says, aghast, “What are you doing? You can’t outrun a bear!” The man responds, “I don’t need to outrun the bear; I just need to outrun you.”
Valid Criticisms/Questions about HomesForSale.com
Having said all that, there are a couple of valid critiques and questions about HomesForSale.com. One comes from James Dwiggins, CEO of Nexthome, which means he’s not exactly a neutral observer:
They have just built a website to attract buyer eyeballs in each local market where their agents are, using their members access to the MLS data, essentially paid for by their members commissions, and now they turn around and sell any leads they get from that website back to their members for a 35% referral fee. I’m sorry, but I don’t see what they did as anything but being in competition with their customer. Re/Max has moved away from this model, Keller Williams has already started to as well, and personally speaking, both of our franchise brands provide all leads – regardless of whether it’s our members listings or not, for free. To me, what they are doing is a highly flawed business model, which their competition will exploit and shows them just holding onto the past.
This is a valid critique, but I think it’s a critique of the underlying strategy of Realogy, rather than a critique of the website itself. After all, Richard Smith says that Realogy is shifting to a lead-generated business with better economics. That’s the strategy. He believes that this will have a bigger impact on splits over time than trying to fight “local battles” whether against Keller Williams, against Nexthome, or against some small boutique.
I do, however, think there is an important hair to split here. There is a difference between providing leads to listing agents for a referral fee on their own listings, and providing leads to random agents for a referral fee. I can’t think of too many brokerages that want to charge an agent a referral fee for a lead on one of her own listings, but I can think of quite a few that do charge a “brokerage override” to a random buyer’s agent for a lead provided by the brokerage.
I think it’s safe to say, given how Leadrouter is typically implemented, that NRT is not charging a fee to the listing agent on leads from her own listing. But should the listing agent turn down the lead (“It’s not worth my while”) or fail to respond promptly enough (usually 15 minutes, from what I hear), then that lead can be sent to some other agent in the office. And that lead can and does carry the override.
The second part of James’s critique is why any agent would pay such a high referral fee to the NRT for an un-incubated lead. I have no answer to him on this front, except to point out that “paper brokerages” have been doing this exact thing for years and agents are happily paying out 25% referral fees to folks who merely route the bare lead to them.
Another valid question is how the NRT is getting around various MLS rules governing IDX usage. According to James, his local MLS requires that the website be branded as the local brokerage/franchisee.
Again, I have no answer on this point, and perhaps NRT will clarify how they were able to put this “portal” together with MLS IDX data. But a couple of things do occur to me.
- Maybe the MLS rules are why HomesForSale.com is NRT-only, instead of being extended to franchisees. Perhaps the NRT as an actual brokerage, with appropriate licenses and MLS membership, can do things like this whereas a franchisor (which is technically a “third party” non-participant) cannot.
- If you’re a local MLS, and the NRT is in your market, do you really want to piss them off? Remember that the NRT isn’t everywhere; it tends to be concentrated in higher price point urban/suburban markets where it then tends to dominate. To take one example, while Long & Foster and Weichert are very strong in the DC Metro market, it isn’t as if MRIS wants to go to war against Realogy without clear and convincing need.
Preliminary Conclusion
I’m sure we’ll talk more about HomesForSale.com, about Realogy, about NRT, and about portals in days to come. But my preliminary conclusion about this new effort is that it’s very, very solid. Again, it doesn’t need to compete against Zillow; it was never intended to compete against Zillow. It merely needs to compete against local brokerage websites, and on that front, HomesForSale.com is very strong.
It also fits in with Realogy’s strategic vision and strategic need. The NRT generates the lion’s share of Realogy’s revenues. In 2014, the NRT brought in $4 billion of the $5.3 billion in revenues. But its profit margin is pretty slim ($193 million in EBITDA for 2014, or 4.7%). Without question, commission splits are the major expense for the NRT, so anything that Realogy and NRT can do to improve its margin picture is a huge win for the whole company. (A 1% improvement = $40 million.)
Industry practice and industry history show that agents are more than willing to pay large referral fees on the back-end, even as they don’t want to write a check up-front to Zillow. And the reality is that even as agents fight for every dollar on the commission split, many of them gladly pay very large percentages as broker overrides for leads.
As in all things, time will tell, and execution is the key. But for myself, I rather think HomesForSale.com is a good move for Realogy.
