A few random, or perhaps not so random, thoughts this morning from three recent news stories.
First, we get a story in the mainstream media by Andrea Riquier of Marketwatch, about Keller Williams entering into the iBuyer space:
Keller Williams, the sprawling national real estate franchisor, plans to launch an instant offer service later this year, another indication of the future path of residential real estate transactions. The embrace of a technology-driven approach to buying and selling by the brokerage most keenly associated with real estate agents points more to the increasingly blurred lines between the two approaches than to an affirmation of one over the other.
Second, we get this Facebook update from JP Piccinini, CEO and Founder of JP & Associates Realtors about… well… more or less the same thing:
And finally, last week, we got a news story about Zillow suing Compass over hiring its employees away allegedly for the purpose of trying to steal Zillow’s intellectual property. But in that story, we get this interesting counter from Compass:
Compass, however, disagrees with Zillow. In a statement to Inman, a company spokesperson said that “you cannot break a non-compete by leaving to go to a company that does not compete with you.” [Emphasis added]
What I wanted to reflect on today was this idea of “a company that does not compete with you.” Seems to me that taken together, the three stories above are pointing to a clear shift in the grounds of competition. Companies that did not compete against one another are jumping into various rings.
I’ll have to think more about why that’s happening and what the consequences are, but let me think through some of the big picture issues with all of you.
The Old Way: Apocrypha
I have heard second and third-hand stories over the years that nonetheless ring true with me. These stories relate meetings between Zillow and Trulia on the one side, and Re/Max and Realogy on the other. As these companies were hashing out various deals, supposedly both Dave Liniger, former CEO of Re/Max and Richard Smith, former CEO of Realogy, told Zillow and Trulia, “We can be partners today, but if you ever cross the line over into our side of the world, we are enemies.”
“Our side of the world” meant franchising and brokerage. So as long as Zillow and Trulia remained in the business of selling ads to real estate agents, Re/Max and Realogy did not consider them as competition, but as partners. But if Zillow and Trulia started taking referrals from agents, started recruiting brokers and agents, or selling its brand in exchange for royalties, then it was war.
So the old modus vivendi, was that Zillow, Trulia, Realtor.com, and all other portals swore up and down that they are not brokerages or franchises, they did not want to be brokerages or franchises, and kept assiduously to their side of the line. Consider the care with which Zillow went into its iBuyer program: making sure to use an agent on all of its transactions, recommending to potential sellers and buyers that they use an agent (preferably a Premier Agent), and so on.
Not that such care mattered all that much in the court of public opinion, of course. For the past several years, we have been treated to the would-be-amusing-if-it-weren’t-so-sad spectacle of Zillow (usually through Jay Thompson) talking about how it loves brokers and agents, wants to make brokers and agents more money, and how indispensable the broker and agent are to the “most important transaction of your life”, to be met by a legion of brokers and agents talking about how Zillow competes against them and is looking to put them out of business.
Maybe that day that the Zaterade crowd warned of is finally here… but not because of Zillow, but because of brokers and franchises.
The New Way: Grand Mêlée
Consider how Compass in its response to the lawsuit says it does not compete with Zillow, but… it did open an engineering hub in Seattle and hired a serious tech executive from Microsoft and Amazon to run it. That Compass is a brokerage matters, but then again, Redfin is also a brokerage and I doubt anybody anywhere would believe it if Glenn Kelman claimed that Redfin wasn’t competing against Zillow.
Then consider how Keller Williams famously pivoted to being a tech company. Now it is entering into iBuyer. What more does KW have to do to make it clear that it is competing against Zillow and Opendoor and Redfin and so on?
Rich Barton more or less laid out the iBuyer business as being the future of Zillow. $20 billion a year business in buying/selling homes vs. ~$3 billion a year in Premier Agent… that’s a pretty clear statement of intent, isn’t it? Yet, Realogy is kinda-sorta in that game now, and KW is joining that, and even smaller players like JPAR and agent teams and boutique brokerages everywhere are getting into the iBuyer game.
Now, to be fair, most such brokerage-based “iBuyer” is nothing of the sort: it is merely a variation on the “Guaranteed Sale” programs of the past, which are just lead-generation vehicles. The difference? Price and conditions. If the price is 1-3% below fair market value (as per Mike DelPrete), with very few terms beyond the actual condition of the property, then that’s an iBuyer. If the price is more like 10-20% below fair market value, with a bunch of hoops that the seller has to jump through before the iBuyer actually cuts a check, that’s a bait-and-switch investor-backed lead-generation deal.
But still, the added noise would be a thorn in the side of the real iBuyers at least for a while as consumers need to sort through the bewildering array of offers and terms and conditions and so on.
Of course, we can’t ignore longstanding initiatives like Broker Public Portal and Upstream and whatever else out there. Brokerages have been crossing the line over into the technology world forever, largely because they sort of have to in the 21st century, but there has long been a strong push to compete against instead of partnering with actual self-proclaimed technology companies.
At the same time that the brokerages are crossing over into the technology and iBuyer space, we can’t ignore the fact that technology companies are doing more and more in the traditional franchise/brokerage space either. Opendoor’s Agent Partner program isn’t recruiting per se, but it is a referral-based program that has long been the domain of brokerages (because you need a brokerage license in order to receive referrals in the first place). Redfin has the longest running such program, but then, Redfin has always been a brokerage. Which brings us to Zillow and Zillow Flex, which is… well… a referral-based program, exactly the kind that Dave Liniger and Richard Smith supposedly warned Spencer about.
Finally, it isn’t as if all of the existing competition goes away. Zillow will still be competing against Realtor.com and Redfin and Opendoor and whoever else. Keller Williams and Re/Max and Realogy will still be competing against each other and every other brokerage out there.
All in all, what I’m seeing is a new modus vivendi in which everybody competes against everybody else, and it really isn’t clear where the line between “brokerage world” and “technology world” is drawn… or that there is such a line at all. It’s two melees merging into one grand melee.
Dar al-Hab in Real Estate
I’m not entirely sure what the result is. I’ll have to do some more thinking about that in greater detail.
But it does seem to me that real estate is entering a new phase, a dar al-hab (“House of War”) in which everyone is at war with everyone else. That doesn’t mean cooperation and collaboration won’t happen, since real estate has long been all about competitors cooperating in certain ways while fighting viciously in other ways.
I suspect that there will be numerous alliances made and broken, unthinkable partnerships and unexpected rivalries come and go. It will be a few years, perhaps, before we see who emerges on top.
More I think about it, more hopeful I am about the grand melee. Why? Because who wins will be determined more or less by how much they are able to win the consumer over. Ultimately, once you merge all of the competition into one grand melee, the winners will be those who can offer a better consumer experience, win consumer loyalty, build a relationship with buyers and sellers, and give them what they want, when they want it, at a fair price.
That doesn’t seem so bad now, does it?
-rsh
8 thoughts on “Competition in Real Estate is Changing”
ROB,
It seems like this Internet thing is killing off “traditional” everything.
Thanks,
Brian 🙂
Organized RE is going to continue to be steamrolled by outside innovation.
Part of the reason is, is the MLSs are too cheap to actually pay for quality tech. They do not even begin to pay even close enough to cover the cost’s to upgrade, or dramatically improve an MLS tech vendors offering at a regular pace. Realtors are left with using whatever resource/tool the last aging ‘consultant’ holdover from the MLS ‘listing book’ days gladhands/backslaps into an MLS contract.
Exciting times. Exciting times.
Zillow v. Compass won’t be the last lawsuit involving restrictive covenants. It always sounds worse on paper…but I can read through the BS. In the brokerage world, there is a model of recruiting by dangling carrots or offering something better than what the agent currently has. Realogy’s SEC doc says “competition is fierce”. In some cases, brokers might be over promising and under delivering along with requiring restrictive covenants in a contract (now think about how this scenario might end). These clauses are carefully crafted with the interest of only one party. Jonathan Pollard, a non-compete attorney, fights fiercely for low-wage employees down in FL. Here are my takeaways I have learned from reading his blogs as well as other prominent employment attorneys (including one attorney that helped write the new non-compete law here in MA):
1. It’s not always about the enforceability. Many attorneys drafting these restrictive covenants know the terms are broad and likely not enforceable. Are the geographic limitations reasonable for the worker to still earn a living? Time/scope reasonable? Why are these clauses drafted broadly if likely not enforceable? I know, do you?
2. Non-compete laws are not intended to stifle ordinary competition. It’s about protecting a company’s goodwill, proprietary information, and trade secrets.
3. Confidentiality agreements are the NEW non-compete. It’s all about the trade secrets. Even if the so-called trade secret can be googled online or found on the previous employer’s website, the courts are VERY VERY slow. Unethical employers know that workers will be tied up before they can prove that this trade secret is not being protected (and not a secret). Do NDAs cover up misdeeds of the company? Is there an expiration? If you need an example, read about Elizabeth Holmes and her tactics.
4. Workers have become collateral damage in this ultra competitive landscape between the brokerages/franchises. Any worker signing a contract with clauses should be aware of what tortious interference means. Workers should also expect that even if you can win an injunction, a bigger risk is the old employer threatening suit against a worker’s new employer and claim that the new employer “interfered” with the employment contract= worker may be fired (even if you had solid legal justification for quitting old broker). So now your out of a job. Some employers recruit unethically but usually those same employers recruiting unethically are the same ones filing these tortious interference suits and enforcing non-competes (I read and follow lawsuits). Ethical employers lose too (especially if new employer is getting sued for simply hiring someone after they already quit). This is where the facts really matter (and becomes gray). Did the employee take a job that competes with their old job? Does the employee have any knowledge at this new job that will cause harm to the old company and create an unfair advantage? Do the companies compete (Zillow v. Compass)? Did the employee resign and then go find another job AFTER resignation (meaning did new company REALLY interfere)? WHY did the worker quit? Oh, how’s your lawyer compared to big pocket corporate lawyer? Big pockets matter even if your case is solid. Does your new employer back you? When you read these lawsuits…..think about what damages can the old employer prove that created an unfair competitive situation.
5. Workers NEVER win (even if workers do win). Middle class and lower class have no shot against big corporate pockets. So you “win” your ability to “continue to work” aka injunction denied, the worker still has to pay for a legal bill. The average non-compete case is not cheap. Congrats, you just won….well nothing. And here is your big legal bill.
6. No lawyer (and I mean NO LAWYER) will take on an independent contractor’s case on a contingency basis. If you have an arbitration clause, it don’t matter what the old employer did to you or what laws they broke. No one will take your case unless you have bucks to pay. Congrats to you, if you wish to spend your hard earned money/savings on expensive mediation.
7. My last point (and I feel the most important point): What trade secrets did the worker use that gave the former employer an unfair advantage? Are there damages the old employer can prove? I’ve read a case where the employee downloaded all of their clients. Just because they possess these lists, did the employee actually use these lists? Can the former employer prove that their former employee caused them damage by USING these lists. One judge stated the client is only a client of the broker (employer) when the customer is in the process of a home transaction….free game otherwise.
I feel passionate about open and free competition. I know agents have jumped ship often and chase dollars (and can understand the owner/brokerages perspective). Thank you if you read down this far!! I am not an attorney, and these are my opinions.
PS. I wrote this late last night, so I will be the one to point out I made a few grammatical errors=”You’re”. I’m not a writer.
My last comment: Will the FTC expand their task force to promote open competition to include real estate “tech companies”? Probably not, unless of course consumers start filing complaints. The FTC is making some great progress on non-poach agreements in franchises and recognizing monopolization through unfair and unethical business practices. Sometimes intervention is needed for the honest & ethical broker, otherwise we have many bad behaving firms trying to compete. https://www.lexology.com/library/detail.aspx?g=fc373364-626b-4ba9-85b7-17f28fb01863
Recently at Inman Disconnect, the breakout session I attended began with what was supposed to be a statement of fact. And it went something like this.
“The entity that controls the real estate business today will be different than the one that controls it tomorrow. By design, they will absolutely be different parties”. I raised my hand and – I claimed that I disagreed.
My belief is one that this industry has been in denial about almost since its inception. I stated that the party that controls the business today will be the same party that controls it tomorrow. And that party is the consumer.
Mix, match, integrate, innovate, offer everything and anything you are able to in order to exceed the demands of the consumer and you will win control. All of it. THat’s what all good companies do everyday and all day. With the exception of residential real estate. They are different, but not in a good way. They believe the following.
Stay the course, fight all those that refuse to do the same, resist change at every opportunity and you will have no worries with the exception of this one.
Change will happen without you.
Tricia very interesting stuff! No market is changing faster than Dallas, where Compass swept in and literally cleaned up the high end agents. Here is my story on JP’s newest partnership!
https://candysdirt.com/2019/04/24/exclusive-jp-associates-to-launch-instant-offer-platform-for-jpar-agents/
Competition can be healthy only if, the consumer wins. The main problem in the residential real estate is, it`s leaders are ignorant. They sit on piles of money and care only on their vacations, fancy dinners and fat salaries.They are old fashioned people who see the world in different glasses.I am sure that more changes will come to the residential real estate and many real estate agents will need to choose a different occupation.The commission structure will change and will be based on achievement only. People will buy homes from companies who own the homes and this is where the iBuyer comes into a business model. KW and many other brokerages are entering this iBuyer game, as it is giving another option to the consumer to sell homes. It is all about the consumer.
Bert, I came across this article and it reminded me of your comment above. Hollywood accounting appears to have some similarities to Real Estate accounting. “Piles of money” yet the margins of big real estate companies are shrinking (so I’ve been told). The lifestyle of some owners/brokerage execs seem to be the same. Compensation of execs still high even when the stock is low.. Margins growing smaller? Sound familiar? Just like Hollywood movies make no money? “How can a movie that grossed $475 million on a $32 million budget not turn a profit? It comes down to Tinseltown accounting.” Hollywood also has above line and below line accounting. Apparently from everything I have read the “above the line” accounting is highly controversial, even within the accounting profession. “Actress Lynda Carter on The Late Show with Joan Rivers commented ‘Don’t ever settle for net profits. It’s called creative accounting'”. So why is the real estate industry so accepting of this creative accounting? I mean, just because this sophisticated accounting is written in two-three sentences in an agent’s ICA agreement, everyone is all good? Or is it that agents don’t fully understand this creative accounting and agents are all on their own island. Or do agents not receive pay stubs with breakdown? How can an agent question the math, when the math is never provided.
Rob Hahn knows I’ve been stuck on this accounting (emphasis on stuck). Other issues exist too. HEAVY recruiting practices (emphasis) by firms offering higher splits to lure agents away may start to be questioned by brokerage owners who are having agents recruited away and the recruiting firm not being transparent about “Hollywood accounting”. I mean, how are these lucrative recruiting bonuses being funded by some firms? Maybe by Hollywood accounting aka franchisee accounting aka royalties paid from agents (but don’t call them royalties). In my non-legal opinion, it’s only a matter of time before ANOTHER suit with the current recruiting practices. Except this time it will be the small to medium brokerage firm who just had their office pillaged by another firm offering “higher splits”. However, those so called “higher splits”, may not be what was advertised or communicated to the agent. Agent(s) quit, sign on, and then find out that the 70% split “promised” in all the recruiting meetings/calls failed to mention that it’s not really 70% due to creative accounting. Is this considered improper means? How is this not a violation of Sherman Act Section 2? Agents=the commodity; agents=the client (so I’m told). “Section 2 prohibits acquiring or maintaining (and in some cases attempting to acquire) monopoly power only through improper means.” https://www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-section-2-sherman-act-chapter-1
Hollywood accounting article:
https://www.theatlantic.com/business/archive/2011/09/how-hollywood-accounting-can-make-a-450-million-movie-unprofitable/245134/
I’m a non-lawyer simply seeking answers on what I feel is “smoke and mirrors”. T.Y!
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