Syndication vs. IDX By the Numbers: A Response to Sam DeBord

Reader, thinker, and frequent commenter Sam DeBord has written a rebuttal over at GeekEstate to my declaration of vindication re: IDX = Syndication:

IDX creates efficiency for brokers, which increases financial profitability for the group as a whole.  Syndication is a less-efficient platform in terms of overall brokerage profits.  Real estate is, on an annual basis, similar to a zero-sum game.  There are only so many transactions, and commissions, that will occur based on the market.  Financial profitability is dependent on earning as large a portion of that commission pool as possible.

Read the whole thing.

I think Sam’s written a thoughtful rejoinder, and introduced a hitherto unexamined argument: that IDX increases financial profitability for brokerages. I’d like to delve into that a bit.

Preliminary Matter

As a “set the stage” type of a deal — call it throat-clearing — I need to make sure to take up one concept that Sam uses throughout his post. There are phrases like “broker sphere” and “group as a whole” and so on and tends to lump all brokers into the same bucket.

If this “brokers as a collective unit” thing is necessary for Sam’s argument, then well, we have philosophical differences that make further exploration very difficult, if not impossible.

I don’t buy the “brokerage collective” or “brokerage community” or any such attempt to lump all brokers into the same bucket because such a move ignores (a) the enormous differences between brokerages, and (b) the fact that each brokerage is competing with every other brokerage out there.

The differences are not merely size. They encompass vastly different business models — 100% shops, traditional offices, franchisees, independents, tech-brokerages (Redfin anyone?) and brick-n-mortar firms and so on and so forth. In fact, “brokerage community” would include “paper brokerage” models where the company generates most of its profits from referring out leads generated through… you guessed it, IDX.

As a matter of plain fact, no brokerage would pay the office rent and payroll of another brokerage. There is no revenue sharing amongst brokerages, the way that NFL teams share revenues with each other. There is, in short, no “community”, no “collective”, no bucket: these firms all compete with each other in the marketplace.

Having clarified that…

Since we are comparing the profit-impact of syndication vs. IDX, let’s build some simple models all using the same set of facts.

The Buyer Leads Per Listing is an estimate, based on conversations with Zillow and Trulia executives, who have suggested that the average listing generates between 20 and 30 listings, with some generating far more and some far less, depending on things like number of photos, timing, etc. etc. So unless we get better data, we’ll go with 25 leads generated per listing.

The “Expected Value” is based on the assumption that 5% of the leads turn into a transaction. Maybe that number is too high, maybe it’s too low, but based on conversations over the years with brokers and agents who do syndication, that seems in the ballpark to me.

So, with that background, let’s get into the scenarios.

Syndication, Free

Sue Selleragent, who works for WeListHomes REALTORS (WLH) takes a listing for Blueacre. WLH syndicates that listing to Zillow without upgrading it. There is no cost to WLH. Because it is a non-exclusive listing, Zillow sells placement on WLH’s listing to buyer agents. As is often the case, Sue is always listed as the Listing Agent, and three other local Zillow Premier agents appear on the listing.

We have this:

The Expected Profit for WLH from this listing is $4,613.

Syndication, Paid

Now, what if WLH pays to make the listing exclusive? That would make the listing a “Featured Listing” in Zillow parlance, and no other agents can be advertised on there. Reality is, in many cases, the cost of the exclusivity is passed on to the agent, or the agent buys that from Zillow directly. Since I’m not privy to the costs that large brokerages, such as NRT, pay to have all their listings exclusive, let’s use the standard ARPU figure of $359 for cost of making a listing exclusive. Whatever the price is to brokerages doing this for all their listing, it’s going to be lower than the retail price paid by one Premier Agent.

We get this:

The Expected Profit rises dramatically, as now, no other agent may appear on the listing. All 25 of the buyer leads go to the brokerage, and given the assumptions about close rates, the economic value is huge.

Now, let’s turn to IDX.

IDX Scenario

For this scenario, I’m assuming that WLH does not syndicate to any portal. It has a brokerage website, for which it spends $99/mo for the IDX plugin. (We’re going to ignore, for the time being, the cost of setting up and operating that brokerage website, which is most certainly not free. But I exclude it because a brokerage has to have a website whether it syndicates or not, does IDX or not.) Here’s what we get then:

I think I’m being incredibly generous by assuming that 10% of buyer leads actually come to WLH using IDX only. A typical MLS market of any size is going to have hundreds of brokerages, and thousands of agents, all of whom have IDX websites. The idea that somehow, one out of ten buyers find themselves onto WLH’s website to submit an inquiry is… well, as I said, it’s very generous.

With that, the Expected Profit of WLH plummets to $2,826. I don’t call that an improvement. Nor do I consider that “efficiency” by any accepted meaning of the term.

WLH is going to get the sell-side benefit in every single scenario. But by doing IDX only, it’s essentially giving away all of the buyer leads that the listing generates to everyone else who has an IDX website.

Ah, But… IDX Let’s Me Profit From Other People’s Listings

The obvious counter is that while it may be true that WLH will lose most of the expected buy-side benefits of its listing, WLH gains far more by being the buy-side agent using someone else’s listings via IDX. So the thinking is that even if WLH’s expected profit goes from $12K to $2.8K, WLH more than makes up for that from all of the buyer business it generates from buyers on its website searching IDX and submitting leads.

There are a number of issues with this argument.

First, WLH would have to get those buyers onto its website in the first place, out of hundreds or thousands of other IDX-enabled broker/agent websites. How is it managing that? (And now, we may need to talk about cost of operating the brokerage website, if WLH is spending tens of thousands of dollars on SEO and marketing and advertising to beat out the other IDX websites in the market. One relatively small but profitable broker in SoCal told me last year he was spending $50K a year for his brokerage website, and that he may just take that money and spend it on Zillow instead for a higher ROI. That’s not me; that’s an actual on-the-street broker.)

Second, the vast majority of agents are not listing agents. The 80/20 rule in the industry is even more heavily slanted towards the Elite Few when it comes to strong listers. Even NAR’s own numbers suggest it:

• 1 million REALTORS
• 5 million home sales = 5 million listings
• 5 listings per year per REALTOR = fewer than one every other month

Yet, the existence of top producers across the country who are taking 2-3 listings (or more) every month suggests that most REALTORS aren’t taking any listings ever, except for the one or two that fall into their laps throughout their entire career.

Ergo, the vast majority of brokerages are not major powerhouse listings brokerages. Some markets, like Houston, tends to be very dispersed with even the largest brokerage having single-digit percent market share. Other markets, like Minneapolis, have three brokerages who dominate the market.

In other words, larger brokerages with large number of listings would benefit financially from doing mutual syndication deals with other large brokerages with large numbers of listings, and cutting out the hundreds of two-listings a year Buyer Brokerage firms who provide nothing to the IDX pool, but take plenty out of it.

Third, and closely related, is the problem of “paper brokerage”. There are a number of companies and of individual agents who have an IDX website, who generate leads off that website, then refer it out to an actual working REALTOR for a 25% referral fee. These are not leads from a longstanding client with whom the referring agent has a relationship; this is just a lucky lottery ticket of some buyer who happened to have ended up on the agent site, sent in an inquiry, and got handed over to another agent. $359 that Zillow charges seems like a cheap deal compared to paying the 25% referral fee on a $9,000 GCI. Why that is in anybody’s best interests has yet to be explained to my satisfaction.

Fourth, there is simply no data available on stats like “revenue from IDX-sourced buyer leads who came to my website solely because of IDX, instead of one of our listings” that I’m aware of. By the way, if Buyer X ends up on WLH’s website because of its listing on Zillow, but then decides the house isn’t worth it, does an IDX search on WLH’s website since he happens to be there, and then sends in an inquiry… that’s ROI from the Zillow listing, not from IDX. But we don’t have that kind of tracking stats on most agent/broker websites (if any).

If you have that data, by all means, send it my way so I can compare and run some analytics.

Some Thoughts

The only way to argue that IDX is more efficient and more profitable than Syndication is to argue from a collectivist perspective. That is, keeping all of the commissions from all of the transactions within the “brokerage sphere” is more efficient since no one who doesn’t have a real estate license could possibly make any money.

Problem is, brokerages are for-profit businesses whose owners want to live in nice houses and drive nice cars. As the numbers above show, WLH pretty clearly benefits financially when it just does Paid Syndication without IDX. Why would the broker-owner of WLH decide to gift $10K of value to other brokerages in his marketplace if he can pocket that for himself? Isn’t he in business to make money for himself and his family? Isn’t everyone?

Sam writes:

With IDX, the winners are always brokers.  Broker #1 makes a commission when his listing is advertised via IDX and sold.  Broker #2 creates profits by generating IDX leads, and either having her agents represent the buyers or referring them to Broker #3.  Broker #3’s agent represents the buyer, earns a commission, and pays Broker #2 a referral fee.  The commissions are all going to brokers, and they’re either taking home paychecks, or reinvesting them in the brokerages.  Agents are at least just as well off as they were before, if not better, when their brokers are making money.

Are Broker #2 and Broker #3 helping Broker #1 pay for his office rent? Staff salaries? If not, why exactly does Broker #1 want Broker #2 and #3 to make more money?

Sam DeBord is the Managing Broker for Coldwell Banker Danforth in Seattle. It’s a very large and successful brokerage, with over 350 agents. Should CB Danforth lose 300 of those agents to Keller Williams, and have its revenues and profits drop by 95%, do they rest easy in the knowledge that the “brokerage sphere” continues to make money? After all, all those agents leaving CB Danforth are going to another brokerage to generate commission income for those other Broker #2 and Broker #3. Since no evil “third parties” are making any money when a CB Danforth agent moves to KW or RE/Max, do we assume that all brokers are perfectly sanguine and don’t care much about recruiting and retention?

Of course not. Brokers care deeply about recruiting and retention. One might argue it’s their principal activity these days.

So if agent movement within the “brokerage sphere” is not something that Broker #1 looks at with a relaxed view, then why is dollar movement via IDX within the “brokerage sphere” any different?

Sam also writes:

Syndication brings a new entrant into the “who’s getting paid” category.  The advertising portal is now taking the profits from the generation of the lead.  Broker #1 lists the property and makes a commission on the sale.  Broker #2 doesn’t generate income in this scenario.  Broker #3 pays the lead acquisition fee to the advertising portal, instead of to a broker.

But if I’m Broker #1 — WLH in the examples above — I don’t care that Broker #3 paid lead acquisition fee to Zillow or did not. What I care about is that my Expected Profits went from $4,613 (Free Syndication scenario, where Broker #3 can buy ads on my listing at all) to $2,826 (being extremely generous) for the IDX scenario.

If I’m Broker #1, why do I care that some evil third party made money from Broker #3? Am I upset and angry that Broker #3 took some of his commissions and bought an iPad thereby sending money to that evil third party Apple, Inc.?

Syndication = IDX

Bottomline is that both syndication and IDX are subject to the same ROI calculations and business decisions process by the listing brokerage. If the cost of syndication exceeds expected ROI, then brokerages will stop syndicating. If the cost of IDX exceeds expected ROI, brokerages will stop doing IDX. There is no meaningful difference between the two, except for that “All for One, One for All” rhetoric that has never been true and never will be true as long as brokerages are all trying to succeed for themselves and their kids, instead of the other guy’s brokerage and his kids.

And… as it turns out… without more data, syndication — particularly the Paid Syndication model — without IDX turns out to be the most profitable for the listing broker by the numbers, by the assumptions, and by the models above. All of those could be incorrect or wrong, and if you spot such errors, please let me know so we all can strive towards the truth.

-rsh