Keller Williams Concierge: New Wine in Old Skin

One of the more interesting things that happened last week was news that Keller Williams will roll out a new “concierge” program in California, Georgia and Texas. Designed to compete against similar offerings from Compass (note that KW says they pay no attention whatsoever to competitors, but I do think the lady doth protest too much), the new KW Concierge would front the cost for repairs, renovations, staging, painting, etc. to get a home sold for the most money in the least amount of time. The seller would repay the loan at the closing from the proceeds of the sale.

From the Inman story:

“We will front the finances required to allow a homeowner to make improvements and modifications to their home to maximize their listing value,” [Josh Team, President of Keller Williams] said. “They only have to pay that back when their listing sells.”

I think this is a very good move by KW. It will help KW agents (kinda sorta) fend off competition from Compass agents on listings, and therefore help with recruiting and retention.

But there is a critical difference between the two programs which is worth looking at, because it is the difference between playing by the old rulebook of real estate business and playing by the new rulebook of real estate business. I understand why companies like KW continue to play under the old rules, but it points to a fundamental weakness of traditional real estate companies that they must address if they are to remain competitive in the new landscape emerging around them.

The Importance of Concierge

Until recently, when I had a chance to have a couple of long conversations with Compass agents, I did not realize just how important Concierge was to Compass’s value proposition. The industry likes to bash on Compass because of its signing bonuses, low introductory splits, and so on. “They’re just buying agents!” is the common refrain. I confess that I kind of wondered as well.

In speaking to actual Compass agents, however, it quickly becomes apparent that they think that the most valuable tool that Compass provides is the Concierge program. It allows the Compass agent to walk into a listing appointment knowing that she has thousands or tens of thousands of actual dollars she can offer to the seller if they list with her. I’ve heard that the official Concierge program guidelines are supposed to be capped at 3-5% of the home’s value, but agents routinely report that Compass corporate will approve far higher limits depending on the property and the situation. So in one case I’ve heard of, the amount of money the Compass agent was able to offer the seller was north of $90,000. Not a single competing agent could offer that kind of a special renovation loan.

So it makes perfect sense for KW to offer its own Concierge pre-sale home improvement financing program. It lets KW agents not have to walk into a listing appointment with empty hands, when they know that Compass agents are going to be bringing a wheelbarrow of cash with them.

(As far as I know, Redfin’s Concierge program is a bit different, in that Redfin will pay for staging, painting, minor landscaping, etc. but not all the way to actual renovation work, like a new kitchen or a new bathroom… which the Compass program definitely does and the KW program likely does given the language above of “improvements and modifications”.)

But there is a small but all-important difference between the KW Concierge and the Compass Concierge.

The Critical Difference

The difference seems like a minor one at first, and so it got only a brief mention in the Inman story about the KW Concierge rollout:

Currently, a small amount of interest is charged for upfront costs, but the goal is to get that fee down to zero.

This is one of those small differences that make all the difference in the world.

In contrast, the Compass Concierge program proudly touts, “No hidden fees, no interest charged—ever:”

See, that tiny difference makes all the difference.

Speaking as a consumer, when Compass offers me money to do renovations with no fees and no interest… it’s a no-brainer. It doesn’t matter how small the interest payment would be for the period of the renovation/home improvement. 30 days or 45 days, it’s still using your money for free. That feels like you are investing in me and my home, because… well, you are. I assume that you’ll make that small interest back from the commission you’re charging me, and I’m just fine with that.

Conversely, when KW offers me financing with a “small amount of interest”, that’s not a no-brainer. Now I have to consider whether the price of your money is worth it or not. I might shop the deal around. I might think about using my own cash instead of paying you to use your money.

But more importantly, that no longer feels like you are investing in me. No, it feels like you’re just trying to sell me some money, in exactly the same way that banks, credit card companies, auto loan companies, or any other consumer finance company wants to do. It almost doesn’t matter how low the interest is: it still means that I have to pay to use your money, which means you’re going to make a profit (however small), and your agent is still going to charge me the full commission. That feels different.

Is it better than some other company’s agent who can’t offer me jack-diddly? Of course it is. And if I can’t get a Compass agent interested in my house, will I consider the low-interest offer from KW? Of course I will.

But the point is that it will feel different to the consumer, because it is different to the consumer: free vs. nominal fee is a real difference.

Plus, we know that KW knows that there is a real difference, since KW has a goal to drop that small amount of interest and make it 100% competitive with Compass’ offering. They know just as well as we do.

The Old Rules vs. the New Rules

I think the fact that KW knew that and still rolled this program out is actually more significant than the small difference between “free vs. nominal fee.” Because it points to the old rules mindset vs. the new rules mindset.

One of the most oft-heard criticisms of virtually all challengers to the traditional real estate models is that they’re not profitable, they’re not making any money, and they’ll all go away once investors get tired of putting money into a losing proposition. We have heard that complaint about Zillow, about Redfin, Opendoor, Offerpad, discount brokerages, alternative brokerages like REX, and anybody else who threatens the old way of doing things.

And to be sure, that criticism is 100% valid. No company can just go on losing money forever and ever and hope to have investors keep pouring money into a bottomless pit. There has to be some kind of a path to profitability.

If you hold to the old rules, which says that any business venture must first be a business and therefore generate a profit (or at least not lose any money), then making interest-free loans to get listings is a terrible idea. You essentially have to write off the opportunity cost of that money (which could have been earning you interest for those 30-90 days until the closing) as a type of marketing expense. With the razor-thin margins at brokerage and at franchises, especially one like KW where the franchise fee is capped, it is nonsensical to do anything like that.

More rational would be to charge at least some kind of low money-market account type of rate for that money so you’re not actively losing money with each listing.

That is the path that KW took and is taking. It is extremely sensible, and one would normally nod one’s head and say, “That’s a good businessman right there, that Gary Keller.”

The new rules, however, are different. The new rules say that capital is cheap and plentiful, and what matters is growth and market share. Compass is playing by those new rules, spending like a drunken sailor on leave in Bangkok, because they understand that getting to their magic goal of 20% market share in top 20 markets by 2020 is worth whatever small opportunity cost they’re leaving on the table by making interest-free loans.

Uber did over $11 billion in revenue last year; it has yet to post a profit. Tesla is losing money hand over fist. AirBnB might or might not be profitable depending on the metrics, and whether you trust the company’s memos.

You are free to pooh-pooh those companies as well, since many of us have lived through the first Dotcom bubble and where are those companies now?

You know who is making profits? Realogy. Realogy posted $70 million in net income in Q2, paid dividends, paid down debt… and their stock price dropped to record lows.

Here’s the thing: suppose Compass charged for those Concierge loans. Just how much revenue could they have generated from that? According to RealTrends, Compass did 34,644 transactions in 2018; let’s be generous and say half of that was from listings. 17,322 listings. Let’s be further generous and say that each and every one took out a $20K Concierge loan at zero interest. Say that Compass decided to play by the old rules and charged a 2.0% interest rate instead of giving away the money for free. Over a 90-day period, that’s about $92 in interest earned on a 1 year term. Compass might have left $1.6 million on the table by deciding to give away the money for nothing.

Wouldn’t you pay $1.6 million to have sellers feel like your agents are investing in them? To have agents clamor to join you to get access to such a program? To give your agents the ability to beat out the competition?

How much of Compass’s growth can be traced to the fact that it offers this incredible “no fee, no interest-ever” program to its agents? We don’t know, of course, but we do know that Compass is worth over $6 billion while Realogy is worth about $500 million.

That’s playing by the new rulebook.

The Age of Capital

In the January Red Dot, a 2018 retrospective, I wrote:

The new basis of competition is based on deploying huge amounts of capital, which means that access to capital is the key to success. Everything that the companies that will dominate the future of real estate will do will be based on and around acquiring and deploying large amounts of capital.

I stand by that statement.

Keller Williams did the smart business thing… by the old rules. Because it either did not have or chose not to go after access to capital.

Compass did the dumb business thing by the old rules because it raised billions of dollars in equity, not debt, and knew that it could spend that capital to launch seemingly idiotic (by old rules) programs that lose money on purpose in order to drive consumer awareness, differentiation, brand loyalty, transaction and sales volume growth… all of which drive agent recruiting and retention, which drives transactions and sales volume, which drives… you get the point.

What brokerages, agents, teams, and franchises in the real estate industry of today need to realize is that the rules have changed. It isn’t that the old rules are obsolete, because they are not. But they have to put into the proper context, and read from the perspective of the new rulebook. Yes, profitability and a path to profitability remain important as ever, but you might need to ask “What am I willing to pay for growth?” and follow through to the conclusions.

If you cannot follow through because of a lack of capital, then the answer isn’t to keep trudging along; it is to try to get access to capital, which requires a growth story not a profit story in 2019.

And as you launch your own programs, whatever they are, you need to ask whether you’re doing it to make a profit or to grow your business. At some point, the two will converge, but these days, they will often diverge. Make your decisions accordingly.

-rsh